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Newark charter school faces threat of management takeover due to loan default

A Newark charter school that defaulted on a loan agreement could be put in receivership or face foreclosure, drastic moves that illustrate the power private lenders wield over some public schools.

In December, UMB Bank asked a New Jersey court to put a receiver in charge of the assets and operations of University Heights Charter School, which educates nearly 700 students across three Newark campuses. The bank, which represents bondholders, said the school previously violated several loan agreements and saw its enrollment fall by 20% this school year, threatening its ability to repay its debt.

University Heights “has failed to meet its obligations to its bondholders,” the bank wrote in a court filing, saying the school owes more than $14.5 million after a forbearance agreement expired and a new one could not be negotiated. If the school is not put under “adequate supervision and management,” the bank added, it could foreclose on the school’s property, “leading to the likely closure of the schools.”

University Heights, which opened in 2006 with the support of Newark’s Bethany Baptist Church, said it never missed any debt service payments and its default stemmed from “technical” loan violations that were resolved. In a brief filed last month, the school’s attorneys said the bank and the majority bondholder, a French firm called Amundi Asset Management, had made “unlawful” demands to control the school’s operations.

“This matter is about private interests attempting to take over a public school in Newark,” the attorneys wrote.

The case, which is set to go before a judge on March 3, highlights the risks involved when charter schools — which are publicly funded but independently operated — borrow money to pay for school facilities.

Unlike traditional school districts, New Jersey charter schools don’t get state money for facilities and can’t raise local taxes to generate revenue. Instead, they often rely on private loans and state-issued bonds to pay for school buildings. When charters struggle to repay their debt or meet loan requirements, they can find themselves at the mercy of lenders.

“The creditors are going to collect,” said Bruce Baker, a Rutgers University professor and expert on school finance. And when lenders take legal action to collect the money schools owe them, he added, “that has direct educational implications.”

In 2018, University Heights used $14.72 million in state-issued bonds to purchase and renovate a building in Newark’s Central Ward to house its elementary school. Under the bond terms, the school owed just over $1 million annually in debt service.

The following year, the school defaulted on the terms of its loan agreement by failing to have adequate cash on hand or a sufficient amount of income. Around the same time, the state placed the school on probation due to low test scores and disorder in some classrooms. The probation was counted as another violation of the loan agreement.

In 2020, U.S. Bank, which at that time represented the bondholders, agreed to hold off on taking action against the school if it met certain requirements. The school would have to submit monthly financial reports, participate in monthly conference calls with the bondholders and bank to discuss its efforts to improve, and make changes recommended by a private consultant.

One of the recommendations was that the school withdraw from Newark Enrolls, the online system families use to apply to most traditional and charter schools in Newark. The consultant, whose LinkedIn profile says he is based in Arizona, wrote in a report that the system disadvantaged charter schools and had reduced University Heights’ enrollment.

As required, the school pulled out of the citywide enrollment system, which meant families would have to apply separately to University Heights. This fall, the school enrolled 685 students, about 170 fewer than the previous year when the school participated in Newark Enrolls.

In legal filings, the school blamed the consultant’s recommendation for the steep enrollment decline. UMB Bank, which took over as bond trustee last September, faulted the school’s marketing plan and said its ongoing probationary status likely deterred some families from applying.

Now, the bank said in its request for a court-appointed receiver, the only way to stabilize the school and protect the bondholders’ investment is to appoint outside management.

University Heights “is unable and/or unwilling to effectively address its management and operational deficiencies and is at serious risk of failure,” the Dec. 13 court filing said.

In its response to the court, the school said it has made big improvements since being put on probation and its budget is in good shape, despite the enrollment decline, due to additional state and federal aid. The school’s lawyer also argued that giving a receiver authority over the school would violate state laws, which reserve that power for the education commissioner.

The bank’s proposed action would “give license to a receiver to control a public body with no accountability yet supreme power,” the school’s Jan. 26 filing said.

Lawyers for UMB Bank and a managing director of Amundi Asset Management, who was cited in the school’s brief, did not respond to Chalkbeat’s requests for comment. Thomas Johnston, one of University Heights’ attorneys, reiterated in an interview the school’s argument that it is on an upward trajectory and receivership would disrupt its progress.

The high-stakes legal dispute between University Heights and its lenders could be a cautionary tale for other charter schools that turned to bonds to pay for facilities. According to a 2020 report by the National Association of Bond Lawyers, when schools default on their loans, lenders might seek “quick-acting remedies,” such as appointing a management consultant or attempting to “intervene directly” in the school’s operation.

David Umansky, the CEO and co-founder of Civic Builders, which helps charter schools develop and finance building projects, said many charter schools go to the bond market to cover building costs. While relatively few schools default on their bonds, he added, lenders must be able to take action if that happens.

Otherwise, schools “are not going to be able to access capital,” he said. “And you need a lot of capital to build these buildings.”

This article was originally posted on Newark charter school faces threat of management takeover due to loan default

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