The 20-year term of the contract, and the financial obligation it imposes on the Academy, appear excessive when considering that the use of the facility is to house a charter school whose budget is derived largely, if not entirely, from public funds. In addition to the above-market monthly lease rate ($30,000 per month, then levitating like a séance table to $38,000 monthly by the contract's second year), the lease contains a Purchase Option clause, with a price tag that delivers quite a punch.
The “lessee (the Grand Traverse Academy) may exercise an option to purchase the building, fixtures and premises from the lessor on February 1, 2019 for a sum of Three Million Nine Hundred Thousand Dollars ($3,900,000).”
The approved lease contract also states that the two parties “agree that the 2019 purchase price represents an arm’s length transaction which reasonably balances the purchase price with the loan and associated risk to the lessor.”
Although in my opinion the proposed sale does not meet the requirements of an arm's length transaction (when the parties to a transaction are independent and on equal footing), the stated $3.9 million dollar purchase price is a staggering 40 percent higher than the cost per square foot school construction parameters used by the State of Michigan's Department of Treasury.
(As you can see above in the excerpt from the August 27, 2015 Michigan Treasury policy announcement, the Grand Traverse Academy's new construction would have received the $195 per square foot parameter.)
In other words, if the Academy had shouldered the construction costs for the 12,000 square foot building itself, State of Michigan guidelines project that construction costs would total approximately $2,340,000 — a whopping $1,560,000 less than the purchase price set by MDN Development, LLC on behalf of Mark Noss.
In addition to double-dipping, the appearance of self-dealing doesn't end there.
With this 20-year lease agreement, Noss has effectively neutered the Grand Traverse Academy's negotiating position, locking it into an endless relationship with his Full Spectrum Management.
Who is running this show, and why didn't the Grand Traverse Academy board do its own cost-benefit analysis?
OPEN THE KIMONO: THE NEW BUILDING BY THE NUMBERS
The expression 'open the kimono' actually originated in feudal Japanese times and referred to the practice of proving that no weapons were hidden within the folds of clothing.
Don't get excited, it just means we're not going to withhold any financial details — except those hidden behind the management company privacy wall.
The State of Michigan uses RSMeans construction cost databases, with nearly 75 years of construction data.
Annually updated, RSMeans has “provided detailed breakdowns of labor, tool, and equipment costs to the construction industry for more than 70 years, and their in-depth guides are trusted by companies and contractors at all levels. Their tables provide helpful information on job costs that can let you know if your bids are off the industry mark or in line with what the market expects.”
In common parlance, a gold standard.
The Michigan per-pupil foundation grant allowance is scheduled to increase this fall, with the charter school maximum per-pupil allowance rising from $7,218 to $7,391.
If (and it's not a given by any stretch) the school executes its “many PR plans” and successfully attracts students away from local traditional public schools to the Grand Traverse Academy, it could realize additional annual revenue ranging from $739,100 to $923,875.
But, according to the financially burdensome terms of its new lease, the Grand Traverse Academy would be spending upwards of 50 percent of its additional revenue just to lease the new building from Noss and his MDN Development, LLC. Total rent for the first year of the lease is $360,000, increasing to $456,000 in the second year.
Beginning February 1, 2017 or the first day of the month of actual occupancy of the premises, whichever occurs later, the Academy will be forking over $30,000 a month lease payment, far outpacing the Grand Traverse County's average commercial real estate costs for a single tenant, triple-net leased property.
A triple-net property with a single blue chip tenant in place for twenty years, like the agreement between Noss and the Grand Traverse Academy, is considered a significant capital asset by real estate investment trust portfolio managers.
Investopedia defines a triple net lease as an “agreement that designates the tenant as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance. The lessee has to pay the net amount of three types of costs, which how this term got its name.”
(This type of lease is also referred to as a “net-net-net lease” or a “hell or high water lease”.)
The monthly lease payments jump from $30,000 to $38,000 a month, beginning February 1, 2018, and continuing through the termination of the lease on June 30, 2036.
That's not a typo, the lease ends on June 30, 2036.
But the Grand Traverse Academy has an opportunity to purchase the school from Noss, but only one chance to exercise that option on February 1, 2019.
Pegging the sale price at the princely sum of $3.9 million dollars, the contract states the parties “agree that debt lessor (Noss) shall incur for construction is consistent with market value and reasonably approximates the cost to build. Moreover, the fixed purchase price in 2019 noted above is reasonably related to the current market as of the lease date. The parties agree that the 2019 purchase price represents an arm’s length transaction which reasonably balances the purchase price with the loan and associated risk to the lessor.”
But do you honestly think the Grand Traverse Academy, a charter school still reeling from an estimated $3.58 million loss at the hands of its former manager Steven Ingersoll, will be able to plunk down $3.9 million to buy a building from that manager's successor, and business partner?
And has the board investigated looming bond covenant violations, especially this project's potential for compromising the rights of existing bondholders by effectively using the same property as security? Or have the members considered the impact this arrangement, with financial benefits streaming to Mark Noss, might have on the charter school's nonprofit tax status?
Tomorrow, in the final installment of this investigation, Miss Fortune reveals more shocking financial details, dusting for (and finding) the fingerprints and influence of Steven Ingersoll on this deal.
Who is bankrolling Noss, and how much money could he ultimately share with his investors? And just who are these investors?