April 25 — 5:50 pm, 2018

In the convoluted world of charter school real estate, Franklin Towne is both landlord and tenant

franklin towne HS website

The debt of Franklin Towne Charter network is long-standing, incurred through a series of circular real estate arrangements that were used to purchase and construct school buildings and rent the buildings from companies that its CEO created.

A 2010 report from the city controller found these arrangements at nine different charter school operators around the city and described it as a way of “transferring taxpayer-funded assets to non-profits that are not accountable to the School District.” 

The report found Franklin Towne’s high school to be among those nine. CEO Joseph Venditti leased the school’s already-purchased property to a for-profit entity he created, Franklin Towne Holdings LLC, and then subleased it back to the school. He also doubled his own compensation over the course of three years. 

As CEO, Venditti took the building bought by the high school with bonds and leased it to Franklin Towne Holdings. The holding company sub-leases the building back to the school, which pays rent to the holding company. Venditti signed the lease and sublease as both CEO of the school and manager of Franklin Towne Holdings LLC, according to the 2010 city controller’s report. 

Franklin Towne is no longer collecting state reimbursements for rent payments, but a 2014 audit of the high school’s finances found that the same circular leasing arrangement was still in place. According to the audit, this agreement will not expire until January 2033.

Franklin Towne has since expanded to open a K-8 school called Franklin Towne Elementary. Audits of that school found it is in the same sort of relationship with the Richmond Street Development Corp., a nonprofit, which collects rent on the already-purchased school building.

Richmond Street Development Corp. was established by the elementary school in 2009 to acquire land and construct a school building, according to the 2014 audit. And Franklin Towne Charter Elementary is “the sole member of the corporation.” 

The school also “effectively appoints a voting majority of the board” and Richmond Street Development Corp. is “economically dependent on Franklin Towne Charter Elementary School for financial support,” according to the audit. 

The Charter Schools Office’s evaluation of Franklin Towne’s proposed new middle school, which the School Reform Commission will consider on Thursday, would be set up with a similar arrangement. This time, the high school itself would be acting as the landlord by subleasing a portion of the building to the new middle school. 

Venditti is the proposed “incorporator” of the middle school. He is also the CEO of the high school. The high school is proposed to be the management organization for the middle school, as well as its landlord.

$30 million in debt

Both existing Franklin Towne schools and their related real estate companies have run up a lot of debt. The high school has $17 million in long-term debt on two mortgages and a construction note. The elementary school has $13 million in long-term debt on three different mortgages, one of which was taken out just last school year.

Although the high school has been running up debt in recent years, the elementary school has been paying it down. But the quality of the two schools’ debt is different, and that provides insight into why Franklin Towne may want to open an entirely new school and receive the per-pupil payments that come with it.

The elementary school’s three mortgages all mature in August 2018, when they will need to either be paid off in full — which does not seem possible given the school’s cash reserves of just $3.7 million — or refinanced. Balloon mortgages allow borrowers considered high-risk to make low annual payments but require the loan to be repaid in full when it matures after a relatively short period of time.

The high school’s cash reserves are just $1.7 million. Considering this figure and the high school’s own debt burden, it becomes clear that the high school will be in no position to bail out the elementary school, which secures its mortgages by using its assets as collateral.

The 2014 audit shows a mortgage that was secured by the assets of both schools. That mortgage has since been paid off, and newer mortgages and loans have been secured by only the assets of the elementary school.

A new revenue stream, such as the per-pupil payments from opening a new charter school with additional students, could help the company sustain the finances of the elementary school without having its assets seized by the banks.

Tight relationships

Although the elementary school pays more than $500,000 annually to the high school under the terms of its management agreement, it also has a business service agreement for more than $100,000 with a company not named in the audits.

The city controller’s report found that this company was originally Nobel Learning Communities Inc. Benjamin Englin was an executive there at the time, according to the city controller’s report.

However, Englin left to found Omnivest Management LLC, and he took the Franklin Towne business services contract with him. The company specializes in financing the construction of new school buildings for charter schools.

Englin is also the president of Mandrel Construction Co. Inc., the same company that Franklin Towne hired to construct the new high school. Mandrel was paid nearly $1 million for construction of that school in 2008, the same year that Omnivest entered into the business contract with Franklin Towne.

Previous tax filings did not record any payments from Franklin Towne to Mandrel before Omnivest secured the business services contract, according to the city controller’s report.

The Charter Schools Office’s evaluation found the service contract “does not provide for annual evaluation of these services or provide a right to termination for subpar performance.”

Franklin Towne did not revise and resubmit the contract with the application for the new middle school.

Further, evaluators from the SRC’s charter office were concerned about “the assumption that Omnivest, the Charter School’s proposed business manager, and [the high school] would provide support and assistance during the start-up phase through June 30, 2019, at no cost and with no evident reimbursement.”

The Charter Schools Office also found that the overlap of board members between Franklin Towne’s various organizations “create a related party structure that results in potential conflicts of interest.”

In the initial application, four of the five proposed board members for the middle school were also board members of the high school, which the evaluation labeled a conflict of interest. Three of those members have since been removed, but Cynthia Marelia is still the board president of both existing schools and would also chair the board at the new middle school.

The charter office criticized the inclusion of board members who were also on the high school’s board, because it would act as the management company and landlord for the middle school. At first glance, Marelia is the only board member left on the new application who is also on the board of the high school. The new board members added are all on the board of the elementary school instead.

The new application stated that “no member of the proposed board other than the chair would be from Franklin Towne Charter High School,” according to the evaluation by the charter office.

But this appears to be wrong. Omitted from the application is the name of the sixth board member, Nancy Hartey, whose resume was eventually submitted to the office. Hartey is also a member of the board of Franklin Towne High School, contradicting the statement in the application.

The service agreement that defines the high school as the management company of the middle school “also lacked any clear accountability for poor performance by [the high school] as charter manager, and there were no provisions giving [the middle school] the right to terminate the agreement for poor performance,” according to the evaluation.

“This is particularly concerning given that the included organization chart shows the Charter School’s Board reporting to [the high school], the charter management company,” the evaluation reads.

Political connections

Board members at Franklin Towne have deep ties to Philadelphia’s political world.

Marelia, board president of Franklin Towne’s elementary and high schools and potentially the middle school, is the chief of staff for Lt. Gov. Mike Stack. 

Nancy Hartey, a board member for the elementary and high schools and potentially the middle school, worked for years as chief of staff for now-retired Pennsylvania State Rep. Michael McGeehan.

Both Stack and McGeehan are Democrats who represented Northeast Philadelphia. Stack was a state senator from 2001 to 2015, and as lieutenant governor, he is president of the Pennsylvania Senate. Until recently, both were ward leaders in Northeast Philadelphia. McGeehan’s Ward 41 is now run by Connie Dougherty, though three current committee people in the ward share McGeehan’s last name.

Ryan Mulvey, a board member for Franklin Towne’s elementary school, is a legislative aide for State Sen. John Sabatina Jr., a Democrat, and would also be on the board of the middle school if it is approved.

These prominent Northeast Democrats hail from the same faction within the local party, which recently clashed with electricians’ union leader John Dougherty’s faction over the State Senate seat that Stack vacated and his old position as leader of the 58th Ward. The conflict arose when Stack’s chosen replacement to be ward leader endorsed Democratic State Rep. Kevin Boyle in the primary to fill Stack’s old seat, even though Stack endorsed Boyle’s opponent, John Sabatina Jr., who was the eventual winner.

Stack tried to organize a recall to have the Democratic City Committee remove the ward leader who took over his seat but did not endorse his preferred candidate. A similar conflict between the two factions arose over the 170th Pennsylvania House District when Boyle’s brother Brendan vacated his seat and the factions endorsed different candidates to replace him.

Christopher Creelman, a Franklin Towne elementary school board member and proposed middle school board member, is a longtime staffer for Democrats, first serving as chief of staff to the late City Councilwoman Joan Krajewski.

Another trustee, Michele Krajewski, is her daughter-in-law.

Franklin Towne submitted a letter of support for the middle school from City Councilman Bobby Henon, for whom Creelman worked as a chief legislative aide. Henon is aligned with the Dougherty faction, which endorsed him and Mayor Kenney. 

Creelman resigned from Henon’s office less than a year ago amid several resignations within the office during the ongoing FBI investigation into Dougherty, in which the feds raided Dougherty’s home and Henon’s office. At the time, a spokesperson for Henon denied any connection between the resignations and the investigation.

Creelman has since been hired by the Mayor’s Office, which is also using the city’s Law Department to provide legal counsel to Henon’s staff.

Henon works for the union headed by Dougherty. The city councilman’s cell phone was tapped along with Dougherty’s. Dougherty was instrumental in organizing the coalition of labor unions that endorsed Kenney for mayor, knocked on doors, and bought television advertising.

Dougherty has also founded a charter school, Philadelphia Electrical & Technology Charter High School, where board members have similar ties to politicians within his faction, according to the Philadelphia Inquirer, though the names of that school’s board members have since been removed from its website.

Franklin Towne seeks third school after application was rejected in February.

 

 

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