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Thursday, January 12, 2017

FINANCIAL JENGA: What Really Caused A $1.0 Million Dollar Payday To Tumble?


Exactly 550 days after signing a deal on May 18, 2015 with the head of its management company for the construction and lease of a new building, the Grand Traverse Academy’s board of directors ultimately scuttled the arrangement on November 18, 2016, opting instead to seek its own construction financing from an investment firm specializing in high-yield, distressed municipal debt. 

The Grand Traverse Academy’s deal with MDN Development, LLC (formed on June 18, 2015 by Mark Noss, head of Full Spectrum Management, LLC) would have obligated the Traverse City charter school to pay MDN Development hefty monthly lease payments for at least two years before exercising a one-time right to purchase the building from Noss. 

Although crucial behind-the-scenes details of the deal have never been made public, (a for-profit company paid by a charter school, even one operated by the same company that operates the school, does not have to disclose spending details or how much profit its managers make), official documents obtained from Lake Superior State University’s Charter School office by a Freedom of Information Act request reveal the efforts the Grand Traverse Academy’s board of directors undertook to ensure the Noss-funded deal closed—a deal that had the potential to deliver a seven-figure profit to its developer and his partners. 

Today's post, the first of a three-part investigation of the abortive attempt by the Grand Traverse Academy's board of directors to have Mark Noss finance the construction of the Traverse City charter school's long-planned expansion, reveals the shocking lengths it employed to deliver this multi-million dollar project to Noss' MDN Development—including a willingness to sign a second mortgage securing the Academy's obligation under the lease with MDN Development to Traverse City State Bank.


Just a few months into a two-year deficit elimination plan, the Grand Traverse Academy board looked to Mark Noss for a solution that would enable the school to construct a 29,000 square foot expansion, a seven-figure expense it was unable to finance.

The school was driven into deficit during the 2013-2014 school year. Steven Ingersoll's so-called prepayments, rebates and contributions resulted in conflicting claims about how much the company owed the school and how much the school owed the company in management fees. (During his sentencing hearing testimony, former board president Bradley Habermehl pegged Ingersoll's debt to the school at $5.0 million, an amount Habermehl revealed the board “had agreed to excuse”.)

At the start of each fiscal year, (beginning July 1, 2007 and continuing for six years through the fiscal year ending June 30, 2013), Grand Traverse Academy's former manager Steven Ingersoll withdrew his entire annual Smart Schools Management, Inc. fee from the school’s bank account before it had been earned—and before he was contractually entitled to receive it. Although based on a percentage of the GTA board’s approved preliminary budget figures, Ingersoll’s management fee was necessarily “adjusted downward” after actual budgets were calculated at the end of each year. 

Ingersoll booked the overpayment amounts on the GTA’s balance sheet as either an “accounts receivable” or a “prepaid expense”, claiming them as “assets” and concealing the school’s shaky financial condition. 

The scheme was supported by then board president Mark Noss, who explained it in a September 17, 2014 Interlochen Public Radio interview: “There were times when the resources were just not there. So Smart Schools basically pledged or rebated that money back, saying ‘at some point in time we will repay what we’re calling a prepaid expense.’” 

However, Ingersoll never really repaid the difference between the amount he’d advanced himself (“what we’re calling a prepaid expense”) and the actual management fee he should have received.

So how did the receivable grow from $538,864 on June 30, 2007 to $3,551,328 on June 30, 2012 if Ingersoll, as he’d, booked each year’s fee overpayment as a receivable and paid it off at the beginning of the next fiscal year? 

Simple: after Ingersoll paid the previous year’s receivable balance using Michigan state aid money provided to the Grand Traverse Academy, he then transferred that money back days later from the Academy’s bank account to one of his Smart Schools accounts, and created a new, and even larger, receivable balance. (Ingersoll  admitted the multi-year scheme on December 9, 2015 while testifying during his federal sentencing hearing). 

Struggling with a deficit and sinking enrollment figures (the school's student population peaked at 1,231 during the 2013-2014 school year and has steadily declined since then), the Grand Traverse Academy board of directors met on May 6, 2015 at 7:30am and voted unanimously during that special meeting to approve a construction/lease deal with Mark Noss and his property management arm, MDN Development, LLC. 

With occupancy expected by November 1, 2016, the initial monthly lease payment was $22,000, rising a year later to $30,000 per month. The agreement included a one-time purchase option of $3,500,000 on November 1, 2018.

However, construction costs rose, along with the lease payments and purchase option price. 

On February 2, 2016, the Academy board signed a revised 20-year lease agreement with Noss that would have required the school to make $30,000 monthly lease payments beginning in February 2017. The lease payments would have increased to $38,000 by the second year. The purchase option price also jumped, going from $3.5 million to $3.9 million. 

Tomorrow, in part two, exclusive deal financing details, including the Grand Traverse Academy's massive short-term debt, the denial by Oak Ridge Financial's August 2016 refusal to loan the school nearly $3.0 million in a State Aid Note, and the continued enrollment slump.

1 comment:

  1. My question, does he have something on each one of these board members or is he paying them off? The only way to have an unbiased board is haha not possible with this group of money grubbing white collar thrives.