For-profits converting to nonprofits to escape government scrutiny?

Some question if a genuine change is happening when considerable profit can still be made below the surface


[Editor’s note: This story has been updated to reflect comments from Grand Canyon University and clarify the University’s in-process conversion.]

As the government cracks down on for-profit institutions, some schools are choosing to convert to nonprofits to avoid the heat. However, they also are facing renewed criticism for what some say are the same profit-making tactics, different name.

Of course, not every for-profit institution focuses on making money over the actual needs of their students, but the concern is there–primarily thanks to the government’s recent scrutiny of for-profit colleges and federal student loan schemes. Mainly, that scrutiny stems from the fact that despite their focus on career-training, many graduates have proven unprepared to secure fruitful careers in today’s job market, which has left them unable to earn enough money to actually repay the government, forcing them to default on their loans.

For example, according to a recent New York Times report, the Obama Administration estimates that “about 1,400 programs that enroll 840,000 students would fail” new standards of gainful employment, which could lead to governmental sanctions and even a cutoff of federal student aid and loans for offenders.

Thus, going from for-profit to nonprofit has become an appealing option for many owners looking to get out from under the microscope while avoiding losing their accreditation or even closure.

While it is still a relatively new phenomenon for higher education, a number of schools have continued to exist and prosper upon conversion, or during conversion, including Keiser University (now Everglades College) in Florida, the Center for Excellence in Higher Education (an amalgamation of previous for-profit schools) in Denver, Remington College in Florida, Herzing University of Wisconsin, and Grand Canyon University in Phoenix. [Requests for comment from Everglades, the Center for Excellence, Remington, and Herzing were declined as of press time.]

“Many are doing it to evade the rigorous scrutiny of the for-profit sector because if they go nonprofit, they’ll be treated more benignly,” said former George Washington University President and current Rimon Law P.C. partner Stephen Trachtenberg. “It’s perfectly legal, but if I were a regulator for the government, I’d want to be sure transactions were transparent, with negotiations at arms-length.”

But are these conversions more than just a name change? Some say absolutely.

(Next page: What conversion entails and why it’s being scrutinized)

As explained to eCampus News by nonprofit attorney Jeffrey Tenenbaum, Venable LLP partner and chair of nonprofit organizations practice, conversion is a lengthy process, as no company can shift its corporate status automatically in any state.

“Essentially, schools set up a brand new non-profit incorporation,” Tenenbaum explained. “The previous owners often become the new officers and directors…and go to the IRS to file a 1023 form to gain tax exempt status.”

Even though converting means a loss of actual ownership and more constrained options for making money, ultimately, even nonprofit organizations can be run in a businesslike manner.

“What happens if you follow the money?” Trachtenberg questioned. “If you follow it, it turns out [previous for-profit owners] own a for-profit school now sold as a nonprofit. They’re paid as well or better, can get rent, provide goods and services…they have their hands in everything.”

“Say a previous owner of the for-profit school owns a building, but the school is not-for-profit now,” continued Trachtenberg. “They can still rent it out to the new school, they might have a stake in the cafeteria or other operations too, and they can still get a good salary. Switching might turn out to be a smart move from their perspective.”

In other words, some conversions may just be a front for keeping the same operation running without really shifting toward better preparing students for jobs.

“As a nonprofit attorney, I do have some concerns – especially from an IRS perspective,” Tenenbaum said. “It depends on how much money is being paid back to the original owners from loan agreements over the purchase of the assets of the for-profit…which can lead to potential issues with their tax exempt status.”

Additionally, converting schools need to get accredited all over again, as well as meet certain standards, all of which takes time. That being said, how much really changes for students in the long run?

“Conversion may well not change anything for students,” Trachtenberg said. “So long as the main goal of an institution, regardless of its format, has been putting its money back to improving the experience of the student, there need not be any noticeable difference for the student.”

The real test that regulatory agencies have to conduct is “whether or not the student is being served – regardless of the format,” he concluded.

Conversion done right

Though the concerns noted above have merit, these are not the case for Grand Canyon University, explained Bob Romantic, the University’s executive director of the Office of Communications and Public Affairs.

(Next page: When converting makes sense)

According to Romantic, Grand Canyon is unique in the for-profit industry in that it has a traditional university campus, including Division I athletics, theater, dance, debate, student government, intramurals, 11 residence halls for students – similar characteristics found at traditional public universities.

“As such, our competition is primarily state universities and other private Christian universities. Being a for-profit puts us at a distinct disadvantage with those schools because we pay in the 40 percent tax bracket while those institutions do not pay taxes. Further, GCU acts much like a nonprofit in that, since we became a publicly traded company in 2008, more than 100 percent of our after-tax profits have been re-invested back into the university.”

Romantic noted that many nonprofits actually make a profit; they just re-invest back into the institution. Grand Canyon also has never paid dividends to our shareholders. Instead, they receive a return on their investment as GCU’s stock price has risen significantly since 2008 (it opened at $12 and is now in the mid-$40s).

“GCU was a nonprofit from 1949 to 2004, at which time it was about $20 million in debt and about to close its doors. Without a large donor base to turn to, the university decided to take on an investor and become a for-profit school in order to keep from closing. From 2004-08, the university worked on getting its financial house in order, and in 2008 went to the public markets in order raise funds to help the university grow.”

That infusion of capital helped GCU grow from less than 1,000 students on its ground campus to 11,000 just six years later, and from 100 acres to 240, he noted. “We’re expecting 15,000 traditional ground students in the fall of 2015 and project to reach 25,000 within 3 to 4 years. During that same time frame, online enrollment has jumped from about 12,000 to 55,000.

Today, GCU is in a very strong financial position, emphasized Romantic, and there is no need to go to public markets for additional capital; meaning that the University was able to consider the possibility of reverting back to its historical nonprofit status.

“That decision has nothing to do with impending government regulations on the for-profit industry. Our president, Brian Mueller, has stated publicly that he understands the need for regulations. However, the regulations should be applied unilaterally to both nonprofit and for-profit institutions. GCU is in good standing with all of the new federal regulations, even at the more stringent level they were first proposed, so those will have no effect on us moving forward.”

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