The favorite cause of many of the wealthy founders of New York hedge funds: charter schools. The investment opportunity lies in converting commercial properties to “state-of-the-art-schools” and holding long-term leases or lease options. For instance one investment trust group converted warehouses to schools in Milwaukee and Philadelphia. They plan to expand to other markets including New York and Houston. Investors generate their income from rent and often use a lease option or master lease option to exit the deal.
According to the National Alliance for Public Charter Schools, there are around 5,600 charter schools in the U.S. right now and more than 500 opened last year. More than 2 million kids attend charter schools today and more than 400,000 kids are on a charter school waiting list nationwide.
The return on these properties is around 9-10 percent, according to an analyst quoted in this Bloomberg article. Another company boasts it gets in the low teens. That’s comparable with the November 2011 average of 7% return on commercial investments over $5 million,
Charter schools receive funding from federal, state and local entities just like other public schools, which means limited budgets. In addition, they are held to the same academic requirements as other public schools. The limited funding and academic requirements can put the schools at risk of closure, which can put the investment at risk. So whereas 500 new charters opened, 150 did not reopen this past year for being bad schools.
Charters supported by public funds can see their rents double and triple, as in Albany and Miami. But should a school fail, the proper exit strategy is necessary. Sticking with a master lease is mandatory to make sure the return on investment is secure, even if the school closes.
Depending upon a Charters location, one investing in a poor neighborhood, may be eligible for the New Market Tax Credit. This was formulated at the end of the Clinton years, and allows 39% of the original investment to be credited against Federal taxes. If you build a charter school for 1 million, you get to counterbalance that with a 390,000 tax credit somewhere else. Effectively that makes your cost 610,000 dollars.
As an investment stable near 10% Charter Schools only have one problem. There aren’t enough of them. Which is why, Wall Street is trying to get Delaware to pass the Wall Street Open Up Charter Bill and open up Delaware to Charter school investment, before the this legislative session ends in 7 days.