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Art Institute of Pittsburgh on Penn Avenue in the Strip District. A foundation linked to private equity would appoint new board members at Art Institute campuses, the latest twist in the two-year saga to keep the struggling trade schools open.
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Dream Center, blaming EDMC, turns to foundation with ties to private equity to revive Art Institutes

Lake Fong/Post-Gazette

Dream Center, blaming EDMC, turns to foundation with ties to private equity to revive Art Institutes

The nonprofit group that acquired the Art Institute schools in 2017 wants to sell to another nonprofit with links to a private equity firm, claiming that both revenue and cost projections were inaccurate when it made the deal. 

The Dream Center Foundation, a Los Angeles-based charitable organization, bought the Art Institutes, South University and Argosy University from Pittsburgh-based Education Management Corp. in a $60 million deal — granting the formerly for-profit colleges a new nonprofit status.

But in recent weeks, Dream Center told regulators it can not continue to run the schools and it proposed replacing its ownership with that of another nonprofit called Education Principle Foundation that tax filings show has been run by managing partners at a New York City private equity firm. 

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The move — if approved by federal education regulators and the schools’ regional accreditation agencies — would be the latest twist in a two-year saga over how to keep the century-old chain of art trade schools open after the collapse of its former owner. EDMC is liquidating in Chapter 7 bankruptcy.

Taylor Lank, a third semester graphic design student of Pine Township, exits The Art Institute of Pittsburgh on Thursday, Jan. 31, 2019, in the Strip District.
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Dream Center has recently placed the blame for the financial problems squarely on EDMC.

“Within 60 days of the final closing and after completing the opening balance sheet audits, DCEH discovered that the actual revenues fell far short of the projections provided by EDMC, in an amount in the tens of millions of dollars, while overhead fixed costs were significantly in excess of the EDMC’s representations,” lawyers for Dream Center wrote in an Ohio court filing last week.

The recently discovered “substantial operating deficit” was caused by EDMC’s “minimal new program development, vastly reduced marketing efforts prior to sale by EDMC, a gap between curricula and employable skills for a number of programs, and the lack of capital investment in facilities and technology.”

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EDMC’s financial statements provided to Dream Center showed the schools would pull in $1 billion in annual revenue and make $60 million in adjusted earnings, according to a source close to Dream Center who was not authorized to speak publicly.

Those estimates were quickly proven wrong, the person said. Dream Center discovered the schools were on track for $800,000 in revenue and a loss of $90 million, using the same earnings calculation.

Dream Center “went into a crisis mode,” the person said.

“The decision was, do we just bankrupt it? They didn’t want to be another Corinthian,” a reference to Corinthian Colleges, which filed for bankruptcy in 2015 as one of the largest for-profit college chains in North America.

According to Dream Center’s most recent figures, the Art Institutes enroll about 22,000 students; Argosy University has about 17,600 students; and South University has 14,200 students.

Under a plan submitted to regulators and shared with faculty and staff, Dream Center would sell Art Institute campuses to Education Principle Foundation, which would appoint members to the board of trustees at each school. It’s unclear how many campuses would be sold.

Education Principle Foundation would nominate replacements for board members currently affiliated with Dream Center, who would resign. 

“Other than this one aspect for the initial changes to the board, the foundation will have no additional governance role,” Dream Center wrote.

Education Principle Foundation was initially incorporated as the Colbeck Foundation in 2013, according to tax filings in Delaware. The nonprofit appeared to sit dormant for the last five years — it reported no income or assets and was suspended for not filing required reports by Delaware regulators.

On Dec. 31, the entity was revived under the name Education Principle Foundation, listing its board of directors as the top managers at Colbeck Capital, a New York City-based private equity firm, according to a 2017 tax filing.

Additionally, in its letter to regulators, Dream Center said Studio Enterprise, a Los Angeles-based managed services provider, would provide non-academic services — such as information technology, human resources, financial aid processing and other existing infrastructure — to keep the schools operating without interruption. That agreement took effect Jan. 2. 

Studio Enterprise, working with a group of lenders, would also provide Dream Center with a $6.4 million loan to keep the schools operating. 

Studio Enterprise is a service provider to the for-profit Studio School, a branch of for-profit Hussian College, which is affiliated with Relativity Media. One of Relativity Media’s major backers is Colbeck Capital.

Jason Beckman, managing partner and co-founder for Colbeck Capital, is listed as the Colbeck Foundation’s chairman of the board of directors in a 2017 tax filing. Joseph Colodne, the firm’s other managing partner and co-founder, is listed as the president of the foundation in the 2017 filing.

David Aho, managing director for Colbeck, was listed as the senior vice president of the foundation and Morris Beyda, Colbeck’s chief operating officer, was listed as the foundation’s treasurer.

Calls and emails to Colbeck were not returned this week. 

Dream Center has argued that changes must be approved by regulators as soon as possible because the schools are in big financial trouble. 

As part of Dream Center’s plan, some of its schools — including the Art Institute of Pittsburgh and Argosy University — have entered federal receivership.

Receivership allows the schools to continue operating while Dream Center works “with new financial partners who will be helping restructure the vast amount of debt and overhead we inherited when we acquired the school systems from EDMC,” reads a Jan. 18 email sent by Dream Center to faculty and staff.

Daniel Moore: dmoore@post-gazette.com, 412-263-2743 and Twitter @PGdanielmoore

First Published: January 23, 2019, 9:08 p.m.

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Art Institute of Pittsburgh on Penn Avenue in the Strip District. A foundation linked to private equity would appoint new board members at Art Institute campuses, the latest twist in the two-year saga to keep the struggling trade schools open.  (Lake Fong/Post-Gazette)
Lake Fong/Post-Gazette
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