SAN FRANCISCO — The California attorney general’s office last summer initiated an audit of the San Francisco Art Institute (SFAI) following a complaint from the financially beleaguered historic art college’s labor union.
SEIU Local 1021, representing SFAI’s adjunct faculty, filed the complaint last April, accusing college leadership of conflicts of interests, self-dealing, and breaches of fiduciary care. “We filed the complaint because we feel we have an obligation as a union to function as whistleblowers and advocates of the public interest,” Nato Green, an SEIU negotiator, said in an interview with Hyperallergic.
Mark Kushner, SFAI’s interim chief operating officer, in a statement said the attorney general initiated what he called a standard “correspondence audit” last summer. An attorney general spokesperson said in a statement that audits by its Charitable Trusts section may result from complaints, staff observations, inter-agency referrals, media coverage, or random sampling.
“SEIU has not produced such filing for SFAI’s review, nor have they provided any information about the alleged ‘self-dealing’, so SFAI has no way to respond to speculative allegations it has not seen,” Kushner said in his statement.
The attorney general does not comment on ongoing audits, but Hyperallergic has acquired documents raising questions about board member self-interest and misuse of tax-exempt bonds that nonprofit attorneys interviewed by Hyperallergic say are within the office’s investigative scope. The documents shed light on the school’s debt-financed expansion into Fort Mason that jeopardized SFAI’s original campus on Chestnut Street and its prized Diego Rivera mural.
“My hope is that whoever started the whole scheme that got the school into crushing debt are identified and held responsible for making the school whole,” Art Hazelwood, SFAI printmaking instructor and adjunct faculty spokesperson, said in an interview. “But making it whole financially wouldn’t be enough — the administration is equally complicit and it’s proceeding in the exact same secretive and hostile way that it always has. I’d like a complete leadership change.”
SFAI laid off most of its staff and teachers and canceled fall enrollment at the outset of the pandemic last March. In July, the school entered technical default on a loan of $19 million secured by the campus and assets including the Rivera mural. Then, last October, the University of California Regents acquired SFAI’s debt, effectively becoming the struggling school’s landlord. (A 19th-century agreement designated the UC Regents remainder trustees for the 800 Chestnut Street property, positioning them to acquire SFAI’s debt in a private pre-foreclosure transaction, as Mission Local first reported.)
More recently, a coalition of arts, preservationist, and labor figures protested SFAI leadership’s plan to monetize the Rivera mural, prompting a landmark designation by San Francisco officials. In January, board chair Pam Rorke Levy resigned, and was succeeded by Lonnie Graham, the photographer and SFAI alum. A board-initiated volunteer committee convened last year to “reimagine” the institution’s future has also dissolved, citing disappointments with board leadership.
As Hyperallergic previously reported, declining enrollment contributed to SFAI’s solvency challenges. SFAI leadership has also cast its troubles as the result of predatory banking. “There was an element of the bank seeing us as a weak sister,” Levy told Hyperallergic last year. Board minutes and other documents, however, show how the board led itself towards the risky loans.
SFAI’s board originally aimed to fund its expansion to Fort Mason using charitable contributions, approving a $24 million capital campaign in 2013. In 2015, then-president Charles Desmarais negotiated a lease on the waterfront facility. By early 2016, though, according to board minutes, SFAI had raised only $1.5 million, a fraction of its goal. Only then did SFAI turn to borrowing.
Board minutes indicate SFAI obtained financing with Shanghai Commercial Bank (SCB) through Joy Ou, a San Francisco real estate developer and SFAI board member from 2013 to 2019. Ou, a Group i and L37 Partners executive, has since 2011 borrowed at least $87 million from Shanghai Commercial Bank for real estate transactions, according to public property records.
With Ou’s help, SFAI entered into a $16 million loan agreement with Shanghai Commercial Bank in June 2016, assuming enormous risk. The loan, according to SFAI financial statements, carried a 5% interest rate and collateralized the campus plus assets, including the Rivera mural appraised at $50 million.
Especially in light of SFAI being “over-collateralized” in the loan, as even Levy, the former board chair, told Mission Local last year, SEIU officials say Ou’s brokerage role deserves scrutiny.
“If there was a plan by financial institutions to infiltrate the trustees of small nonprofit colleges and draw hapless academic administrators into risky financial arrangements to strip them of assets — it would look like what’s happened at SFAI,” Green of SEIU said in an interview.
“It certainly may be a conflict of interest,” Arthur Rieman, managing attorney at the Law Firm for Non-Profits, said in an interview. “It depends whether the broker has material benefit. … ‘I’ll give you a better deal on your loan if you bring me the work for SFAI.’ That would be actionable.”
In a statement to Hyperallergic, Ou said she had no financial interest in the transaction with Shanghai Commercial Bank and that her relationship with the bank was “widely known and disclosed.”
SFAI board minutes from 2016 to 2018 indicate no disclosure or discussion of Ou’s relationship to Shanghai Commercial Bank. In 2017 and 2018, Ou attended only seven of 10 board meetings.
At the same time that SFAI undertook enormous debt to expand, the school also needed to address deferred maintenance at its historic Russian Hill campus at 800 Chestnut Street.
In 2017, SFAI sought bond financing to both repay SCB and repair 800 Chestnut Street. In August, the San Francisco Board of Supervisors voted to approve the issuance of $20 million in revenue bonds underwritten by Boston Private Bank & Trust, including up to $7 million in tax-exempt funds.
The supervisors explicitly approved the tax-exempt portion for “the Tax-Exempt Project, located at 800 Chestnut Street.” However, SFAI’s tax returns and independently audited financial statements indicate the tax-exempt bond proceeds were not only used for the approved purpose. Rather, SFAI used the tax-exempt proceeds to “finance the acquisition of property and refinance existing debt,” the school’s Form 990 reads.
SFAI spokespeople did not respond to questions regarding the bond financing.
The deferred maintenance reached crisis proportions in 2019, when the leaking Chestnut Street roof forced the college to draw $1.9 million from limited cash reserves, hastening its insolvency.
“It speaks to the way they run everything at the school,” Hazelwood said of school leadership prioritizing its Fort Mason expansion at the apparent expense of the Chestnut Street campus. “There’s so much neglect.”
Ofer Lion, a partner at the law firm Seyfarth Shaw focused on legal issues affecting nonprofit organizations, said the apparent misuse of tax-exempt bond proceeds is a “post-issuance compliance” issue relevant to the Internal Revenue Service and the California Attorney General.
“One question is, were the bond proceeds used for a private rather than a nonprofit use,” Lion said. “The other is did the board violate its fiduciary duties by violating the bond covenants.”
Rieman said California attorney general audits of nonprofits can take years, proceeding in secrecy until resulting in a lawsuit or what’s known as an assurance of voluntary compliance. “It depends what they find,” Rieman said. “If they see smoke, they’re going to assume there’s fire.”