Atlanta Public School’s plans to sell the old North Fulton High School building to the building’s current tenant, Atlanta International School, aren’t going over well in Buckhead.
AIS officials are responding to two statements opposing the deal, one from North Atlanta Parents for Public Schools and another from a resident, Tom Tidwell. Both letters are reprinted below.
On June 4, officials with AIS invited the community to hear its reasons for wanting to purchase the building it has leased since the mid-1990s.
AIS wants to own instead of rent and said it has no plans to leave its current location.
“It may not always meet our needs, but it certainly meets our needs for the foreseeable future,” AIS board Chair Deborah Sudbury told about 45 residents during a town hall at the school. “We would like to stay in this Garden Hills neighborhood. We would like to stay here if we could. If we are unable to purchase the property, we will have to think about other arrangements … at some point. You have to think about owning your own home.”
Here are the letters from NAPPS and Tidwell:
NAPPS Statement Regarding the Proposed North Fulton Property Sale to AIS
The NAPPS Board would like to echo the sentiments in a letter written to the Board of Education by Morris Brandon Parent, Tom Tidwell, which you will find attached. In light of the facts as we know them, we believe that selling this property at this time is a fiscally irresponsible decision. As a result, we are encouraging parents, stakeholders and our BOE to become aware of the facts so we can ensure that a sound business decision for the benefit of all students is made.
The Atlanta International School is hosting a community forum Tuesday, June 4th at 6:30 pm in their auditorium, and we strongly encourage you to attend to voice your opinion on this potential sale which affects every APS parent and taxpayer. At this juncture, we believe we cannot afford to lose this valuable asset that is centrally located between two ever growing and overcrowded clusters and in effect use public school tax dollars to fund a private school.
Recognized Facts, as we know them:
•$6.15 million dollar proposed purchase price
•$2.25 million in IB services to be given over a 3-5 year time period.
We do not know details of the IB services, whether they are recognized by IBO or if all APS schools will benefit. However, we do know that APS has already invested monies in training of its own personnel to provide such training, and has had an IB program in place 10 years longer than AIS.
•$225,000 yearly rent which is set to increase considerably at the contractually required new appraisal in 2019 to an estimated range of $640,000-$1.6 million per year.
•The sales price is based upon inherently flawed appraisals which do not account for the 2019 re-assessment, and the rate of depreciation of 8% is too high for Buckhead real estate.
•The contract provides for a potential buy out in 2036 with APS paying AIS the depreciated value of capital improvements, the total amount of which is capped in the lease, and regaining its property in pristine condition.
•There is continued trending for overcrowded schools in the North Atlanta and Grady Clusters, and this property is well situated to serve that need.
•The reserve fund balance of $49.5 million dollars makes a fire sale of this property unnecessary especially considering the fact that APS has other available properties which do not generate income.
•Based on the current lease structure, APS will recoup the proposed $6 million by 2026 at the absolute latest and will still own this asset.
In the North Cluster, had our district chosen to sell our “surplus” buildings on Margaret Mitchell Drive and Northside Drive, it is reasonable to estimate (based on recent renovations and property purchases) that APS would have spent well over 100 million dollars to purchase and prepare new properties. Twenty years ago, APS leadership allowed for this long-term lease on its historic property on North Fulton Drive never imagining the explosive growth that has occurred. Since that time we have opened multiple additional campuses for elementary schools, conducted rezoning, are now in the process of finishing a new high school, moving a middle school, and most likely adding a second middle school campus.
Please join us in asking our leadership to do their due diligence, maintain their fiduciary responsibility in ensuring that this decision is financially sound for the long term. As we understand the facts, it does not make sense at this time to sell the North Fulton Drive property to AIS.
The NAPPS Board
Reide Onley Kim Zemmali
Beth Hamilton Caroline Houck
Jane Rawlings Lisa Perlin
Angela Boardman Debbie Whitlock
Roz McClure Amy Shea
Patricia Israel Rush Levitt
Letter from Tom Tidwell
To: Atlanta Board of Education
Cc: Errol Davis
Ladies and gentlemen,
It is a huge mistake to sell the AIS property instead of using reserve funds to bridge the FY14 deficit. It makes no sense to get rid of a unique, income-producing asset in order to keep a fungible asset (cash) that will barely keep up with inflation.
The reserve fund balance at the end of FY 2014 is currently projected to be $49.5 million. According to Chuck Burbridge, the target fund balance is 7.5% of revenue or $42.5 million. If APS uses cash from the reserve fund rather than selling the AIS property, the fund balance will still be at or near its target balance, and APS will hold onto an asset that will produce income and appreciate in value. To quote a radio commercial, “this is the biggest no-brainer in the history of man.”
During one budget meeting, Mr. Davis said something along the lines of “I know I need $6 million today, I have no idea whether I’ll need this property in 25 years.” The premise of this statement is that the only way APS can get $6 million is to sell the AIS property. This is a false choice.
The decision boils down to which one of two assets will APS get rid of. One asset is cash in the fund reserve that will actually lose buying power for at least the next 2 years (Fed has announced ZIRP will remain in effect through 2015). The other asset is real estate that will begin returning at least 8% of its value beginning in 2019 and, at the same time, will appreciate in value. The only difference between these two assets is their respective liquidity. Since APS is nowhere near running out of reserve funds, liquidity is not an issue.
Beginning in 2019, the AIS rent will increase to between $640,000 and $800,000, depending on the appraised value of the property. No later than 2026, APS will have recouped today’s “sale price” in the form of rent payments from AIS.
The AIS property is positioned geographically right where the demographers predict APS will need capacity, and APS has the right to terminate the lease in 2036 (although its impossible to know if and where APS will need capacity in 2036). If APS gets rid of the AIS property and needs similar property in 2036, it will cost 3 to 4 times the current sale price (between $17 million and $31 million). If APS doesn’t need the property in 2036, it will continue to receive annual rent which will have grown to nearly $1 million by 2036. (I can provide back-up documentation for all of these numbers to anyone who wants it). APS can keep the property, receive annual rent and have the property if it needs it, or APS can sell the property, lose the annual rent and then face the possibility of having to purchase land in the future.
Selling the AIS property would be a bad financial decision and it would also be a short-sighted strategic decision. There is not a glut of available land in North Atlanta, as you learned while searching for a new site for North Atlanta H.S. Think about the financial consequences to APS if it had sold the Brandon Primary Center site years ago. Lack of vision has been a problem for APS for as long as I can remember. Now is a good time to change that.
I do not advocate in any way even considering the sale of the AIS property. I cannot imagine a single person with expertise in finance recommending such a sale. However if, I repeat IF, APS is going to sell this property, it must at a minimum get fair market value, which is at least $10-11 million and probably much higher. I have reviewed both of the appraisals, one by APS and one by AIS, and they are both fundamentally flawed. APS’ appraisal states current annual rent is $208,152. AIS’ appraisal states current annual rent is $211,451. They cannot both be right, but more importantly, how can the appraisers differ on such a simple, basic fact that is so easy to confirm? The more significant problem, however, is that neither appraisal takes into account the increase in rent that will occur in 2019. This creates a HUGE difference in estimating value based on the discounted cash flow (DCF) method and causes both appraisals to grossly underestimate the value of the property.
The APS appraisal does not properly apply the annual CPI rent escalator. Instead of adjusting rent based on annual increases in the CPI-U index, it increases rent a flat 5% every 5 years. This underestimates appropriate rent increase by approximately 10% every 5 years.
The AIS appraisal does just the opposite, increasing rent by approximately 4.15% each year which is slightly higher than the historical norm. AIS then discounts this value by 9%, which is at the upper end of a reasonable discount rate, which ranges from 7-9% (APS appraisal used 7%, but the average suggested by the literature is 8.13%). The 9% discount factor has the affect of significantly reducing the value of the property.
The appraisals discount the value of the land by 7% (APS) and 9% (AIS). Both of these rates are far too high for real estate in the heart of Buckhead.
In its simplest form, the discount rate is a measure of the rate of return that an investor would want on its money, and the riskier the investment, the greater the discount rate. Investment in real estate in Buckhead is relatively risk free. We cannot predict the future with certainty but we know that in 25 years this property will be worth more than it is today. The discount rate set forth by statute for use in litigation is 5%, and I would suggest the same is appropriate for estimating the present value of land.
The AIS rate of 9% results in a 50% lower residual value for the property that the APS rate of 7%, and about 1/5 the value of a 5% discount rate. While there can be a good faith debate between 5% and 7%, the 9% rate used by AIS is simply indefensible and has the affect of virtually eliminating any residual value in the land. The premise of AIS’ appraisal is that you can pay $770,000 now and in 2051 you will own the land that they conservatively estimate will be worth $20 million free and clear. This is how family fortunes are made.
If you apply reasonable CPI escalation and discount rates, the value of the property, subject to the leasehold is easily between $10 and $11 million. At a minimum, APS should not accept anything less than that.
Finally, one very important factor to take into account is that once APS sells the property to AIS, the lease goes away and the fair market value goes way up. Comparable sales data suggest a price per acre of undeveloped land in excess of $3 million. That would put the unencumbered value of the 9.2 acre property in excess of $27 million. I guarantee you that AIS has done this analysis. AIS would love to buy the property for $6 million and immediately pocket $15 million or more in paper profits. Then, when the time is right, which could be the day after the sale closes, they could sell the unencumbered property for fair market value and use the profits to build a state of the art school in north Fulton County, which it would then own free and clear. APS is not and should not be in the business of doling out windfall profits.
AIS has a sweetheart deal right now. APS has 100% of the leverage. Unless AIS goes bankrupt, APS has a guaranteed stream or inflation-adjusted revenue on top of an appreciating asset. Please do NOT APPROVE THIS SALE.
As always, thank you for your consideration.
Thomas G. Tidwell