Memorandum

To: U.S. Department of Education

From: Carolyn Fast, Jaylon Herbin, Barmak Nassirian, Amanda Martinez, 

Jessica Ranucci, and Johnson Tyler

Date: March 11, 2022

Re: Recent Revisions to the Definition of a Nonprofit Institution in Issue Paper 5

The Education Department’s new Issue Paper 5 on changes of ownership includes 

modifications to the definition of a nonprofit institution that would permit exactly the types of

sham for-profit to nonprofit conversions that the original proposal was meant to prevent. The 

new language would permit institutions to obtain nonprofit status in a conversion deal that 

includes ongoing payments to the former owners if it involves either (1) a “revenue-sharing 

agreement” that is at a “market price” that is “reasonable”, or (2) a contract or lease agreement 

with the former owner that is at “fair market value.” Because valuation is easily manipulated, 

this new language creates a safe harbor for the exact type of deals that have proved problematic

— deals in which the value of the institution or services is inflated at the time of purchase to 

benefit the former owner. 

“Fair value” is easily manipulated

The Department’s latest revisions would endorse exactly the types of for-profit to 

nonprofit conversion deals that have proved to be problematic — transactions that claimed to be 

based on independent assessments of fair value or “market” price, but which have been 

subsequently shown to be based on inflated valuations. For example: 

● Keiser University’s intangible assets were valued at more than $535 million at the time of 

its conversion. The value was later reduced by $250 million. In describing an unnamed 

school in a similar situation, GAO said “While such a loss may arise for unforeseen 

reasons (i.e. shifting market conditions), it could also indicate that the college and its 

assets were knowingly overvalued at the time of the sale to improperly benefit insiders.”

● The conversion of Herzing University was originally owner financed at $86 million. 

When bank financing was arranged instead, possibly at the Department’s encouragement, 

the former owner was paid less than half the original amount.

● Remington Colleges were originally slated to be purchased from the former owner for an 

IOU of $217 million. The note in the financial statements was $134 million and was 

apparently later reduced to $85 million.
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● At the time of its sale through an IOU to the former owner, Community Care College was 

valued at $29 million. The value of the nonprofit school was later reduced by $15 

million. 

Because of the difficulty of objectively evaluating fair-market valuation at the time of 

conversion, the new language would permit former owners like these to obtain Department 

approval of converted “nonprofit” institutions. 

According to GAO, owner-financed conversions are highly subject to manipulation by 

the seller, who has a special relationship with the converting school even if appraisals are 

supposedly arm’s-length. For example, intangible assets — such as the reputation of the school 

or the financial value of being accredited — “are inherently difficult to value,” making them 

highly vulnerable to abuse. By adding a safe harbor for deals based on “fair value”, the proposed 

changes would permit exactly the types of sham conversions that the original proposal was 

meant to prevent. 

Moreover, the new language is unnecessary because the prior version described such 

arrangements with former owners as “generally” indicative that an institution was not a 

nonprofit, while allowing for exceptions. That language gave the Department flexibility, while 

adopting the appropriate general rule that follows GAO’s finding that conversion involving 

former owners “pose a heightened risk of improper benefit.” 

Endorsing revenue-sharing in conversion deals is the wrong approach

Tuition-sharing arrangements create co-ownership situations that blur lines of 

responsibility and accountability and risks operation of a nonprofit institution based on the 

problematic incentives of for-profit owners and investors. When a tuition-sharing agreement is 

part of a change-of-ownership transaction, the institution has not really changed hands at all, it 

has merely established a joint operating agreement.

Prohibiting such arrangements in conversion transactions is the right general approach. If 

there are exceptions that should be allowed, the prior language was a better approach by giving 

the Department flexibility while adopting the appropriate general rule that follows GAO’s 

finding that conversion involving former owners should be subjected to a high level of scrutiny 

given the risk of improper benefit.