Editor's note: Copies of North Atlanta Parents for Public Schools' statement to the media and residents and of Buckhead resident Tom Tidwell's letter to the Atlanta Board of Education are at the bottom of this article.
A group of Buckhead residents against a proposal for Atlanta International School to purchase the campus property it leases from Atlanta Public Schools in Buckhead is gaining ground.
However, at last week’s town hall meeting hosted by Atlanta International to address possible misconceptions about the plan, no one spoke out against the proposal, Headmaster Kevin Glass said.
In May the school announced it may purchase its campus from the district for $6.15 million and buy $2.25 million for International Baccalaureate services, school spokeswoman Courtney Fowler said in an email. The district has a $60.9 million budget shortfall, and one way to make up that deficit is to sell off some properties.
Atlanta International has rented the land from the district since 1995, and its lease expires in 2051, Fowler said. From 1932 to 1991, the district’s North Fulton High School occupied the campus, which includes a building constructed by famed architect Philip Trammel Shutze. The sale could go through as soon as the district passes its 2013-14 budget, which must be approved before the new fiscal year begins July 1.
In a statement emailed to the media last week, before the meeting, the board of North Atlanta Parents for Public Schools, a group of parents supporting North Atlanta High and its feeder schools, spoke out against the proposal and encouraged residents and the media to attend the event.
“In light of the facts as we know them, we believe that selling this property at this time is a fiscally irresponsible decision,” the group said. “As a result, we are encouraging parents, stakeholders and our [school board] to become aware of the facts so we can ensure that a sound business decision for the benefit of all students is made.
The statement came after Buckhead resident Tom Tidwell in May wrote a letter addressed to the Atlanta Board of Education, saying he is against the proposed sale.
“It is a huge mistake to sell the AIS property instead of using reserve funds to bridge the [fiscal 2014] deficit,” Tidwell wrote. “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.”
In an interview last week, Tidwell said the district does not need to sell the property right now.
“One, should they sell the property at all? I think the answer is no,” he said. “They don’t need the money. They’ve got money in the cash reserves. Second, if you’re going to sell it, this is a cash cow for them. They’re going to get 8 percent of fair market for it beginning in 2019, and that could be about $10 million and some feel it could be as high as $20 million.
“The appraisals both sides are relying on are not counting the rent estimate and that causes them to understate the value by millions. The rent is going to at least triple, from low 200s to at least 650, probably along the lines of 800,000. Most people don’t have a clue that’s going on, but most of the people who know about it are against it.”
In an interview May 31, Glass said the school leases the land for $225,000 a year and would like to own its campus property, located in the Garden Hills neighborhood.
Glass also said the neighborhood’s residents would be comforted if Atlanta International bought the property from the district. Though it expires in 38 years, the lease can end as soon as 2036. He added the school has invested $20 million in improvements to the campus since 1995.
In an interview Monday, Glass said the meeting “went very well.”
“[Atlanta International] board Chairwoman Deborah Sudbury and I gave an overview of the history and the facts,” he said. “Board Treasurer Kevin O’Halloran was there as well to answer questions from the audience. Just under 50 people came. It was a mix of parents and folks from the Garden Hills neighborhood mainly. It was generally very positive.”
Glass said no attendees against the proposal voiced their opinion at the meeting.
“Nobody actually spoke out against it, so it’s difficult for me to judge. But I would say the vast majority, 90-plus percent, were in favor of it,” he said. “The [Garden Hills] neighborhood civic association actually wrote to the school board saying they’re for it.”
Glass said he has read the statement the North Atlanta group released.
“I’ve read it and, of course, there will be folks who think you should not [sell] the property,” he said. “But the wonderful thing is we have a free country here where you can express your opinions. From the school’s perspective, we want to be the best neighbor we can be.
“We’ll just see how it goes and there will be multiple rounds of [Atlanta school] board meetings to debate the issues regarding the budget.”
North Atlanta Parents for Public Schools’ statement to the media and residents:
The NAPPS board would like to echo the sentiments in a letter written to the board of education by Morris Brandon [Elementary] parent Tom Tidwell, which you will find attached [the Neighbor has included it below]. 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.
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:
o $6.15 million proposed purchase price
o $2.25 million in International Baccalaureate services to be given over a 3- to 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.
o $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 to $1.6 million per year.
o 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 percent is too high for Buckhead real estate.
o The contract provides for a potential buy out in 2036 with APS paying AIS the depreciated value of capital improvements, and regaining its property in pristine condition.
o There is continued trending for overcrowded schools in the North Atlanta and Grady [high school] clusters, and this property is well situated to serve that need.
o The reserve fund balance of $49.5 million makes a fire sale of this property unnecessary, especially considering the fact that APS has other available properties which do not generate income.
o 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 [Buckhead elementary school] 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 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, con-ducted 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:
Tom Tidwell’s letter to the school board
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 fiscal 14 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 fiscal 2014 is currently projected to be $49.5 million. According to Chuck Burbridge, the target fund balance is 7.5 percent 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, [Superintendent Erroll] Davis said something along the lines of “I know I need $6 mil-lion 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 (The Fed has announced ZIRP will remain in effect through 2015). The other asset is real estate that will begin returning at least 8 percent 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 at least $640,000 and probably higher, depending on the appraised value of the property (some believe it could be worth as much as $25 million currently). 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 it's 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 three to four 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 at least $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 High. 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 million to $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 consumer price index (CPI) rent escalator. Instead of adjusting rent based on annual increases in the CPI-U index, it increases rent a flat 5 percent every five years. This underestimates appropriate rent increase by approximately 10 percent every five years.
The AIS appraisal does just the opposite, increasing rent by approximately 4.15 percent each year which is slightly higher than the historical norm. AIS then discounts this value by 9 percent, which is at the upper end of a reasonable discount rate, which ranges from 7 to 9 percent (APS appraisal used 7 percent, but the average suggested by the literature is 8.13 percent). The 9 percent discount factor has the effect of significantly reducing the value of the property.
The appraisals discount the value of the land by 7 percent (APS) and 9 percent (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 percent, and I would suggest the same is appropriate for estimating the present value of land.
The AIS rate of 9 percent results in a 50 percent lower residual value for the property that the APS rate of 7 percent and about one fifth the value of a 5 percent discount rate. While there can be a good faith debate between 5 percent and 7 percent, the 9 percent rate used by AIS is simply indefensible and has the effect 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 million 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 percent 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
Online petition by residents against the proposed sale of the old North Fulton High property to Atlanta International School: http://www.ipetitions.com/petition/do-not-sell-north-fulton-high-school/?utm_medium=email&utm_source=system&utm_campaign=Send%2Bto%2BFriend