Jean Rimbach and Abbott Koloff | NorthJersey

A federal grand jury has subpoenaed a Newark charter school seeking information on the purchase by its nonprofit support group of two former public school buildings that were flipped at a markup of close to $10 million.

The deal — financed with state-issued bonds — was revealed in a series of stories by NorthJersey.com and the USA TODAY NETWORK New Jersey that detailed the waste and lack of accountability in charter school real estate transactions, including unexplained costs borne by taxpayers who foot the bill for buildings that are privately owned.

The more than twofold price increase on the pair of Newark buildings purchased in 2018 by the nonprofit Friends of Marion P. Thomas Charter School is a stark example of how costs can quickly inflate with fees and other charges adding to the final tab.

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A federal grand jury subpoena issued to the Marion P. Thomas Charter School shows that on July 17 authorities sought records related to the purchase and renovation of the buildings on Clinton Avenue and Burnet Street, as well as any applications to the state Economic Development Authority, which issued the bonds that financed the $16 million purchase from a developer. A copy of the subpoena was obtained last week by NorthJersey.com and the network through a public records request to the school.

Minutes from a meeting of the school’s board of trustees indicates the Friends group also received a subpoena from the grand jury and provided documents in response.

Abbott Koloff/Northjersey.com

Grand juries operate in secrecy and investigate potential criminal conduct. They may subpoena evidence or witnesses and decide if there is probable cause to bring criminal charges, or an indictment, against someone.

The status and scope of the grand jury inquiry is unclear. A spokesman for the U.S. attorney’s office declined comment, saying only “it is our policy to neither confirm nor deny the existence of any investigation.”

The attorney for the charter school and the Friends group, Bernice Jalloh, declined comment.

Garvey Ince, executive director of the Friends, and Richard Vieser, president of the Friends, referred all questions to Jalloh. The chairman of the charter school’s board, Vincent Rouse, could not be reached.

The state Economic Development Authority did not reply when asked if it had received a subpoena or been asked to provide any information to federal authorities on the two properties or related bond issue.

The transaction that has raised the interest of federal authorities played out in 2017 and 2018, when the Friends signed contracts to buy two former Newark public school buildings for $6 million. The agreement was struck with the Newark Housing Authority which, at the time, was charged with selling a dozen former public schools.

The Friends paid the authority a deposit, but their attorney, Jalloh, has previously said they could not come up with the cash to complete the sale.

The group struck a deal with a developer who bought the buildings instead, and then sold them to the Friends for $16 million. Nearly $6.4 million of that — more than the initial sale price of the buildings — was in fees.

Taxpayers — who once owned the buildings when they were part of the Newark school system — are covering the inflated sales price.

The Friends group is paying back the money it borrowed to buy the buildings with the rent that charter schools pay to use the buildings — money that comes from the public, since taxpayer money covers charter school operating costs. Charter schools are a form of public school.

In effect, one public entity — the Newark Housing Authority — sold a building owned by the taxpayers to a developer, who turned around and sold it at an inflated rate to the charter school's support group, which covers the cost with taxpayer money.

The Marion P. Thomas Charter school rents the Burnet Street building and the Achieve Community Charter School leases the Clinton Avenue building.

The developer, Ian Mount, did not return a call for comment. Companies he created owned one of the buildings for two months, and the other for less than a year. In documents the Friends submitted to the state Economic Development Authority for financing, the group said one building required only "limited renovation" and the other "limited preparation" for occupancy.

Jalloh said the Clinton Avenue building was "in a dire state of disrepair," and that renovation costs came to $2.5 million. However, in Mount's application to the city for construction permits to do work at Clinton, he said he planned an interior renovation that would include work on an HVAC system and the addition of fire alarms and sprinklers. Mount Companies Inc. was listed as contractor. That work was estimated at $765,400.

Abbott Koloff/Northersey.com

Jalloh said the Burnet Street building underwent $850,000 in renovations, maintenance and improvements.

But Mount didn't apply for work permits for the Burnet Street building — a century-old structure that is on the New Jersey Register of Historic Places. State officials said the developer would have needed permission to perform any significant work on the building. Mount told one official with the New Jersey Historic Trust that he was doing "only cleanup and repainting, and making minor repairs” at Burnet Street.

Even adding in the costs supplied by Jalloh, the fees paid to the developer boosted the price by 70 percent.

The sale — and resale — of the buildings were supported with two sets of appraisals, including one conducted for Friends that bumped the value to match the higher sales price.

In 2016, appraisers hired by the Newark Housing Authority reported that the buildings were worth a total of $7.5 million. In the application for financing that the Friends submitted to the Economic Development Authority, letters from an appraiser were submitted showing that the buildings were worth a combined $16 million by mid-2018.

The Friends said the deal was put together with a team of consultants and advisers — one of them with multiple roles in the transaction. David Berkowitz was a financial adviser to the Friends for the bond transaction that ultimately financed the purchase. One of his firms received a commission for the sale of the buildings by the Newark Housing Authority. Another of his firms was paid for title services. He’s also a business partner of Ian Mount, the developer.

Berkowitz did not return a call for comment.

It’s unclear if the grand jury inquiry into the Clinton and Burnet properties will impact other financing sought by the Friends.

The group anticipated refinancing the debt on another property it owns on Sussex Avenue that is also being rented to Marion P. Thomas Charter School. School board minutes indicate that the group planned to ask the state Economic Development Authority to issue bonds for that and a new gym, and expected to have approval by Thanksgiving.

Asked about the status of any new bond financing on the Sussex property, the EDA said the Friends group “has a pending application for bond financing for a project on Sussex Ave., which is on hold while matters related to the prior financing are under review.” The authority did not clarify if it meant the prior financing on Sussex or the more recent bond issue involving the Clinton and Burnet properties.

Without the refinancing, financial records show the Friends group is scheduled to make a $21 million balloon payment related to the Sussex Avenue property in May.

IRS investigation

The grand jury is not the only federal examination into the purchase of charter school properties in Newark.

Financial records show that the IRS sent a “notice of proposed issue” related to a bond that came with millions of dollars in federal subsidies, which the Economic Development Authority issued on behalf of TEAM Academy in Newark. Such notices are sent to “identify areas of noncompliance” with IRS rules, according to the agency’s website.

The IRS was looking into a large discount that enabled a TEAM support group to purchase bonds with a face value of $25 million for $17 million, according to the records. The federal government, using taxpayer dollars, is covering the interest on the higher amount.

The federal bonds that financed Marion Thomas’ Sussex Avenue school also had a large discount, with a support group buying $35 million of bonds for $22.7 million.

TEAM Academy officials denied a public records request for documents related to the IRS review earlier this year, saying they are related to an “investigation in progress by a government agency” and that “disclosure of such records would be detrimental to the public interest.”

A TEAM official did not respond to a request for an update on the status of that investigation.

The school’s support group, Friends of TEAM, has acknowledged in bond documents that the IRS investigation has the potential to lead to a loss in revenue.

State review

The issue of charter school facilities was expected to come up as part of a state education department review of the charter school law, which began more than a year ago. A report, to be based on public input, has not been released.

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The state board of education had the review on its November agenda, but the discussion was postponed. State education officials declined to say when the report would be released.

State law required an independent evaluation of the charter school program after five years but it was never done.

Under the law, the involvement of private groups in the operation and financial support of charter schools, such as Friends groups, was supposed to be among a dozen areas to be reviewed.

Jean Rimbach and Abbott Koloff are investigative reporters for NorthJersey.com. To get unlimited access to their watchdog work that safeguards our communities and democracy, please subscribe or activate your digital account today.