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December 7, 2012

 

DiNapoli: Excelsior Charter School Lease Costing An Extra $800,000 Annually

Board members of the Brooklyn Excelsior Charter School approved the lease of Excelsior’s school building from a related business at a rate almost $800,000 per year above market value, according to a report issued today by State Comptroller Thomas P. DiNapoli. DiNapoli’s auditors also cited that the company that manages the school, National Heritage Academies (NHA), refused to divulge financial records supporting expenses it charged to Excelsior.

“Any entity that runs on taxpayer dollars has to be open and accountable to its community and the taxpayers who foot the bill,” DiNapoli said. “National Heritage Academies violated those principles by refusing to provide access to their financial records and showing taxpayers what they are getting for their money. Excelsior’s board needs to improve its financial diligence and NHA needs to be transparent about how public money is being spent.”

In its operating agreement NHA is entitled to all of Excelsior’s revenues, including state aid, local funding, special education funding, grants and donations. However, NHA officials refused to provide financial records to support the expenses NHA charged to Excelsior, leaving auditors without a way to determine how much of the $10 million in public funding the school receives annually is used to benefit students. For example, NHA officials withheld detailed documentation on how they allocated $1.6 million in back office costs to Excelsior, claiming the allocation methodology was proprietary.

NHA also leases equipment from Charter Development Company (CDC), a wholly-owned subsidiary. NHA assigns the equipment to the various schools it operates and allocates costs to these operations. For the 2009-10 school year, NHA allocated $131,046 in equipment costs to Excelsior. NHA officials also claimed information about those allocations was proprietary and refused to provide it.

Excelsior sub-leases its building from NHA, which in turn leases the building from CDC. The lease requires Excelsior to pay NHA $2.57 million annually in rent and another $660,000 in utilities and maintenance costs. The school’s annual occupancy cost of $3.23 million equals 32 percent of its revenues.

Auditors found that in January 2009, Excelsior’s board commissioned a formal appraisal of the building which determined its fair market rental was $1.78 million annually, or $32 a square foot. Auditors saw records that NHA’s lawyer told the board that amount was insufficient to provide NHA with an appropriate return on its investment.

The board subsequently ignored the appraisal it had commissioned and approved a lease at $46.23 per square foot. As a result, the school is paying $791,572 more per year, or $3.96 million more over the term of the five-year lease to NHA.

The agreement has allowed NHA to recover its acquisition and renovation investment costs in just seven years. It now stands to reap significant profits from the lease agreement.

DiNapoli’s auditors also found instances in which board members violated the school’s by-laws:

  • In March 2007, NHA hired the vice-president of Excelsior’s Board as a consultant to provide training services to community members who were interested in partnering with NHA to launch a charter school in Washington, D.C. He was paid at least $138,000 in 2007. This arrangement continued until the member’s resignation in June 2010; and
  • In June 2010, a board member was appointed interim president while continuing to serve as treasurer. This interim appointee continued to serve in both positions for another 16 months, which the school’s specifically prohibited, until October 2011.

Additionally, auditors were unable to determine whether all of the money collected during school fund-raisers was deposited into the school’s general checking account because the principal could not produce copies of deposit receipts or other substantiation. There was no formal school procedure that required receipts to be issued and copies maintained for money collected from students and at fundraising activities.

DiNapoli's auditors recommended that Excelsior’s board:

  • Verify that expenses allocated to Excelsior by NHA are reasonable and fair, and are based on items that were actually provided to the school;
  • Reevaluate the lease agreement at the end of its current term and negotiate reduced future lease payments that reflect market conditions;
  • Ensure that Board members comply with Excelsior by-laws and policies; and
  • Develop an appropriate policy to control and account for cash receipts from students and fundraising activities.

Excelsior’s response to the audit is included in the report. For a copy of the report, visit: http://www.osc.state.ny.us/audits/allaudits/093013/11s14.pdf


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