SC Charter School Leadership Summit

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SC Charter School Leadership Summit

• Facilities Financing 101

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Agenda

• Overview of curriculum
• Key advice
• Sources of capital
• Determining how much building a school can afford
• Calculating borrower capacity and the cost of
  debt
• How lenders evaluate charter schools
• Loan process and timeline

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Who is Self-Help?

• Non-profit CDFI founded in 1980
• Mission Creating and protecting ownership and
  economic opportunity for people of color, women,
  rural residents and low-wealth families and
  communities.
• Over 150 million lent to charter schools
  nationwide since 1997

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The Charter School Ecosystem
A successful charter school demands more than
just stellar academics it must be a sound
business enterprise as well.
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Key advice for start-ups or early stage schools

• 1. Find the cheapest, code compliant facility
  you can find to rent in or near the target
  neighborhood and get open. Target is to spend
  15 or less of gross revenue on occupancy.
• 2. Establish a sound academic program.
  Academic performance drives enrollment demand.
• 3. Get business and compliance reporting
  systems in place.
• 4. Recruit board members with diverse skills.
  Train them.
• 5. Bank cash. Lenders will expect a charter
  school to put equity into the purchase of a
  permanent facility.

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Key advice for established charter schools

• 1. Continue to save money for a down-payment.
• 2. Schools should evaluate the amount of
  building they can afford. A charter school
  should spend no more than 15 of its gross
  revenues on occupancy.
• 2. Hire professionals (architects, engineers,
  etc) to help evaluate potential facilities. Note
  that some real estate professionals have a
  financial incentives to find the most expensive
  building to buy or rent.
• 3. Get audits, budget, financial projections
  and organizational documents in order.
• 4. Shop the project to multiple lenders and
  construction companies.
• 5. Continue to build the schools reputation
  and demand.

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Sources of Capital

• Lender
• Traditional Bank
• CDFI Community Development Financial
  Institution
• US Department of Agriculture (Rural schools only)
• Foundation and Government Grants
• Fundraising
• Capital Campaign
• Parents
• Board
• Bonds

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Government Grants and Programs

• Federal credit enhancement for charter school
  facilities program
• USDA grants and loans
• For rural charter schools
• Federal and State-issued start-up grants
• Historic Preservation Tax Incentive
• New Markets Tax Credit

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Charter School Revenue Breakdown
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How much building can my school afford?

• Determine likely gross annual revenue
• -(90 of projected enrollment) x PPR
• Determine max facility expenses
• -15 x (likely gross annual revenue)
• Determine minimum size of building
• - (75 ft2 per student) x projected enrollment
• Determine max rent or mortgage per ft2
• -(max facility expense) (min square footage)
• Determine max mortgage or non-inclusive rent
• -(Max cost per ft2)-6
• Determine max annual rent or mortgage payment
• -(max mortgage or non-inclusive rent) x (min
  building size)

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Example School

• ABC Charter in Anderson, SC is a start-up charter
  school that plans to have 100 students next year.
• The per pupil revenue for this SC charter school
  is about 4000.
• How much building can ABC Charter afford?

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Example School

• Determine likely gross annual revenue
• (90 of projected enrollment) x per pupil
  revenue
• Determine max facility expenses
• 15 x (likely gross annual revenue)
• Determine minimum size of building
• (75 ft2 per student) x projected enrollment

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Example School (contd)

• 4. Determine max rent or mortgage per ft2
• (max facility expense) (min square footage)
• 5. Determine max mortgage or non-inclusive
  rent
• (Max cost per ft2)-6
• Determine max annual rent or mortgage payment
• (max mortgage or non-inclusive rent) x (min
  building size)

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More Than Just Rent Operating Costs

• Though rent or mortgage will be most of your
  facilities expense, it wont be all of it.
• Here are some other items youll need to
  consider. These will not be included in a
  mortgage, and may or may not be included in a
  lease.

Expense Item Typical Cost/ft2/Year
Utilities 1 -2
Repair/Maintenance 1.00
Roads and grounds 0 - .50
Cleaning .90
Security 0 - .75
Administrative .75 - 1.55
Total Operating Expenses 4.5 6.5
Fixed Expenses 1 - 2
Total Operating and Fixed Expenses 6-7
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Calculating Borrowing Capacity

• Occupancy costs should not exceed 15 of revenue
• Total occupancy includes mortgage payment,
  janitors, utilities, maintenance and upkeep of
  the building.
• Note According to one national survey of
  charters,
• 20-25 debt/revenue is not unusual, especially
  in early stage schools.
• Debt Coverage Ratio Total Cash Flow/Total Cost
  of Debt Service ? 1.20
• 6-Csof Charter Financing
• Character, Cash flow/Capacity, Collateral,
  Climate, Credit, Capital/Cash Equity
• Also consider competition

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How do lenders evaluate potential borrowers?

• Organizational Capacity
• Financial Management and Capacity
• Academic Program and Performance

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How do lenders assess organizational capacity?

• Site visits and interviews
• Reference checks
• Comprehensive review of audits, resumes,
  policies, and procedures
• Credit checks on school, leadership, and board
  members
• Performance of school during the loan process

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Why is a good relationship with your authorizer
helpful ?

• Authorizers can serve as references for potential
  lenders.
• Authorizers can provide access to public
  documents, including information not available
  online through open records requests.
• Authorizers are key in the charter renewal
  process.

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What charter schools need to demonstrate

• Governance
• Clearly defined roles and responsibilities
  Authorizer?Board?Management
• Orderly documents, plans, and controls
• 501(c)3 letter, charter, by-laws,
  audits, policies, enrollment plan, security, etc.
• Committed community-centric board
• Well defined roles and responsibilities
• Diverse Skill Sets Attorney, Appraiser,
  Accountant, General Contractor, Engineer, Realtor
• Succession Planning
• Distribution of Power
• No Conflicts of Interest

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What charter schools need to demonstrate . . .

• Academic results
• Solid research-based curriculum, especially if a
  start-up
• B or better on state tests
• Consistent improvement
• NCLB goals met
• Increasing (or stabilized) enrollment and waiting
  lists

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What charter schools need to demonstrate . . .

• Financial Control and Sustainability
• Credit and Financial History
• Report, tax returns, audited financial
  statements, year-to-date results, projections
• Cash Flow
• Positive with increasing enrollment
• Collateral
• Value of school property
• May need to fill gap (other real estate, cash
  pledges in CDs, equipment, personal guarantees,
  etc)
• Cash Equity
• Standard down-payment is 20 or more (community
  development lenders can be flexible)

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What charter schools need to demonstrate

• Project Evaluation/Management
• Internal Capacity
• Key Use of Board
• Professional Capacity
• Realistic Timeline
• Pre-Construction (e.g. need to buy property)
• Construction Process, quotes from general
  contractors
• Realistic Budget
• Minimum 10 contingency

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Loan Process and Timeline . . .

• Pre-Application
• 3 months to 3 years
• Build equity for investment (min 10)
• Acquire construction project capacity by
  retaining qualified (bonded) professionals
• Plan, plan, plan
• Write business plan
• Assemble financial, academic, and enrollment
  records

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Loan Process and Timeline . . .

• Application and Contact
• 4 weeks
• Approval/Commitment Letter
• 4 weeks
• Closing
• 3 weeks to 6 months
• Post-Closing
• multi-year relationship

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5 Key Take-Aways

• Facility budget Max 15 of likely gross revenue
• Teacher staffing budget at least 55 of likely
  gross revenue
• Minimum facility size 75 ft2 per student. 100
  ft2 per student is ideal.
• Be aware of your realtors personal interests.
• Do not sign any single-source agreements.

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Questions? Contact Us!

• Jane Ellis
• Director, Charter School Lending
• Self-Help
• [phone] jane.ellis_at_self-help.org