Issues Abound in For-Profit College Conversions
Readers of this blog are likely familiar with issues surrounding nonprofit hospital conversions. It appears that we may be witnessing a trend of conversions in the opposite direction (i.e., from for-profit to nonprofit form) in another field – education. In Some Owners of Private Colleges Turn a Tidy Profit by Going Nonprofit, the New York Times reports that recent governmental regulations and extensive negative publicity have led some for-profit colleges to opt for a solution quite distinct from going out of business. These schools have chosen to convert to nonprofit corporations. Apparently to illustrate the risk that for-profit culture may (or at least may be perceived to) carry through to the newly created nonprofit entities, the Times presents the case of Florida’s Keiser University. Says the Times:
In 2011, the Keiser family, the school’s founder and owner, sold it to a tiny nonprofit called Everglades College, which it had created. As president of Everglades, Arthur Keiser earned a salary of nearly $856,000, more than his counterpart at Harvard, according to the college’s 2012 tax return, the most recent publicly available. He is receiving payments and interest on more than $321 million he lent the tax-exempt nonprofit so that it could buy his university. And he has an ownership interest in properties that the college pays $14.6 million in rent for, as well as a stake in the charter airplane that the college’s managers fly in and the Holiday Inn where its employees stay, the returns show. A family member also has an ownership interest in the computer company the college uses.
The piece quotes fellow blogger Lloyd Mayer of the law school at the University of Notre Dame as observing the concern that newly formed nonprofit schools “may be providing an impermissible private benefit to their former owners.”
Dr. Arthur Keiser reportedly has dismissed the notion that the conversion of Keiser University raises concerns by stating that transitioning to the nonprofit form was long contemplated and by observing, “We disclosed everything. There’s nothing wrong with it.” However, not all appear convinced. According to the Times, former Education Department official Robert Shireman “filed a complaint with the Internal Revenue Service accusing Mr. Keiser and three board members of violating tax regulations and using the nonprofit ‘for personal gain.’” Keiser is reported to have responded to these allegations by stating that “all the financial arrangements ‘are at fair market value terms and conditions,’ and that the college adheres to ‘generally accepted auditing and accounting principles.’” Further, Dr. Keiser points out that the valuation of the college when sold was supported by “two independent auditors” and that he donated much of the value to the new school.
The Times reports that the structure of the Keiser University conversion is not atypical. Others are reported to have financed the purchase of for-profit colleges through a combination of loans and charitable contributions “to a closely affiliated nonprofit.” According to the story, the newly formed tax-exempt schools also may lease space from the original owners at hefty rents. The piece discusses conversions of Stevens-Henager, CollegeAmerica, California College (all owned by Carl B. Barney), Remington College and Herzing University, and a planned conversion of Grand Canyon University.
JRB