New York City’s Education Department is accusing a Staten Island charter school of “artificially inflating” its rent costs to collect more reimbursement from the city – and it’s taking the state education commissioner to court for greenlighting the arrangement, according to legal filings.
In a lawsuit filed last week in Albany Supreme Court, city lawyers allege that Hellenic Classical Charter School took advantage of a state law that requires the city to either offer charter schools space in city-owned buildings or pay for their rent in outside facilities.
The school leased space from a church in Staten Island and then turned over the lease to an affiliated group, which subleased the space back to the school at a price three times as high as what the school originally agreed to pay the landlord. The school then asked the city to reimburse it at the inflated rate, the suit alleges.
The extra rental income was used to subsidize the costs of constructing a brand-new building for the school on the premises, city lawyers claim. Such costs, they said, aren’t covered by the rental assistance law.
The arrangement amounts to “self-dealing…in which the School in effect pays itself an artificially inflated sub-rent and pockets the difference,” city lawyers said.
Lawyers for Hellenic conceded that the dramatic rise in rent was driven by the cost of “improvements” on the facility, according to court documents. But Hellenic’s lawyer, Kevin Quinn, argued that the city has no right under the law to “second guess” the price of a charter school’s rent, and that the reason for the increase is irrelevant.
State Education Department Commissioner Betty Rosa largely agreed.
In an October ruling, she wrote that Hellenic’s financial arrangement was “certainly concerning,” but fell within the bounds of the law.
“That is the system the Legislature has created,” Rosa wrote. “Any change must come from that body.”
This instance, “is merely an exaggerated example of the goal of the rental assistance program: the public financing of New York City charter schools,” she added.
James Merriman, the director of the New York City Charter School Center, a group that advocates on behalf of charters, argued that, much in the way the public subsidizes the cost of public school construction, charters should be able to use rental assistance for the same purpose.
The Education Department’s lawsuit marks the first time the city has brought a legal challenge against the state Education Department over a charter rental dispute, according to a spokesperson from the city’s Law Department.
“There is no evidence that the Legislature intended” for the law to require the city to “cover what this charter school is seeking,” the spokesperson said.
Critics have flagged inflated rental costs for years
The city’s obligation to subsidize charter rents stems from a 2014 state law, passed as former Mayor Bill de Blasio took office. The legislation was meant to shore up protections for the publicly funded, privately run charter schools against a city executive viewed as more hostile toward charters than his predecessor, former Mayor Michael Bloomberg.
The law compels the city to offer a new or expanding charter school space in a public school building or cover the cost of rent in an outside building up to a certain amount. If the rental costs are greater than 30% of what the city receives from the state for a charter school’s enrollment, the reimbursement from the city is capped at that level.
The state reimburses the city for 60% of what it pays for charter rental costs.
The city paid about $75 million for charter rental reimbursements in fiscal year 2023, after factoring in the state’s portion of the payments, according to the city’s Independent Budget Office. Year-over-year growth in the city’s total outlay on charter rental reimbursements has begun to slow as the city nears the state-mandated cap limiting the number of charter schools in operation, the IBO said. But the subsidy will likely continue to tick up in future years as rental costs rise and enrollment at charters increases overall.
Critics have for years alleged that some charter schools are taking advantage of the law by overcharging the city on rent and “self dealing.”
A 2021 report from the group Class Size Matters, which advocates for lower class sizes, pointed out several instances of charters renting space from affiliated organizations with subsequent sharp increases in rental rates.
The report cited an example of two Success Academy charter schools in Hudson Yards subleasing space from the network. In that case, the rent jumped from less than $800,000 in the 2019 school year to $3.4 million the following year, allowing Success to collect more than $3 million from the city in rental subsidies. (The report said Success owned the space, but a spokesperson said they rented it and then sub-leased it to the schools.)
Success Academy spokesperson Jessica Siegel said that even with that increase, the network has lost money on the lease because “facilities reimbursement has covered far less than our total costs including rent and the cost of the necessary renovations we had to incur to make the space safe and functional for learning.” She added that Success asked the Education Department for space in a city-owned building but was denied.
In Hellenic’s case, the school originally agreed to pay the landlord roughly $660,000 in rent during the 2021-22 school year for its Staten Island space. But the school subsequently transferred the lease to an entity affiliated with the school called “Friends of Hellenic,” which then sub-leased it back to the school at a price of over $2 million a year.
Quinn, the school’s lawyer, said using a “Friends Of” entity is a “common practice.”
In response to the 2021 Class Size Matters report, state Sens. John Liu (D-Queens) and Robert Jackson (D-Manhattan) and City Council member Rita Joseph (D-Brooklyn) sent a letter to city Comptroller Brad Lander asking him to audit the Education Department’s charter rental reimbursement payments to ensure they’re based on fair market value.
A spokesperson for Lander said the comptroller’s office couldn’t comment on ongoing litigation.
Leonie Haimson, the founder and executive director of Class Size Matters, called Hellenic’s arrangement “outrageous” and urged the state legislature to amend the rental assistance law “to disallow any self-dealing and ensure that any rents charged to DOE by charter schools are no more than fair market value.”
Rental reimbursement law draws renewed scrutiny
The rental reimbursement law has recently come up in conversations about how the city plans to comply with a separate state law mandating lower class sizes in many schools.
At a town hall in Brooklyn on Monday night, some parents pushed schools Chancellor David Banks on the possibility of moving charters out of public school buildings to clear out more space for district schools to spread out and lower their class sizes.
But Banks warned such a move would ultimately drive up the city’s expenses because of the rental reimbursement law.
“If I take a charter school and move them out of your building so that now you have more space for class size, I now have to pay hundreds of thousands of dollars in rent for that charter school,” he said. “Guess where that money is going to come from ...The funding that we use to pay for your music program and your art program.”
New York City is the only city in the state required to reimburse charter schools for rental costs – a fact critics have long seized on in arguments to repeal the legislation.
But other state legislators want to move in the opposite direction: State Sen. Luis Sepulveda (D-Bronx) and Assembly member John Zaccaro Jr. (D-Bronx) recently introduced legislation to expand the charter rental reimbursement law so it will also apply to charter schools opened before 2014.
Advocates and educators previously told the Bronx Times that charter schools that don’t receive the rental reimbursement have to divert significant chunks of their budget to covering rent and away from teachers and programs benefiting kids.
Michael Elsen-Rooney is a reporter for Chalkbeat New York, covering NYC public schools. Contact Michael at melsen-rooney@chalkbeat.org.
