SC Charter School Conference November 2013

1. SC Charter School ConferenceNovember 2013 Facilities Financing 101

2. Agenda • Key findings of SC CS Facility Landscape Study • Lessons learned • 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

3. Key Findings from “An Analysis of the Charter School Facility Landscape in SC”November 2013 • Over 70% of SC’s charter schools spend operating dollars on facilities. Costs of rent, bond or loan payments range from $473 to $646 per pupil. • SC charter schools are smaller than prescribed standards. Only 26% meet grade level for gross square footage per student. • Few SC charter brick and mortar charter schools have access to underutilized district buildings or local funding sources. • <30% of charters are located in district-controlled buildings; • Only 15% of charter schools (2) in districts that have held bond elections since July 2006 have received facilities funding from bond proceeds; • 41% of SC school districts have not offered co-location; and • 46% disagreed that “the selection of schools that are given the opportunity to use available space for co-location is fair and transparent.”

4. Key Findings from “An Analysis of the Charter School Facility Landscape in SC” November 2013 [continued] • Physical education and recreational options are limited for SC charter school students. • <27% of charter schools serving elementary grades reported that the facility has no playground and no access to one nearby. • 42% of charter schools serving secondary students had neither an on-site gym nor access to a gym nearby to use for physical education purposes. • Over 60% of SC charter schools reported having no play/athletic field and no access to one nearby. 5. SC charter schools in shared facilities face a number of challenges. • Almost 40% of SC charter schools share space with at lease one traditional public school or other type of organization. • 40% of charter schools sharing space report that their students do nothave adequate access to a gym. • 33% of charter schools sharing space report having inadequate access to specialized classroom space, such as libraries, science labs, art or music rooms. 6. 60% of SC charter schools lack a full-preparatory, federally compliant food kitchen.

5. Who is Self-Help? • Non-profit CDFI founded in 1980 • Mission: Creating and protecting ownership and economic opportunity for all. • Over $6 billion lent to low-wealth individuals, businesses and communities, including more than $200 million for charter school facilities nationwide since 1997.

6. The Charter School “Ecosystem” A successful charter school demands more than just stellar academics – it must be a sound business enterprise as well.

7. 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.

8. 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 school’s reputation and demand.

9. 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

10. 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

11. Charter School Revenue Breakdown

12. How much building can my school afford? • 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

13. How much building can my school afford? (cont’d) 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)

14. More Than Just Rent: Operating Costs • Though rent or mortgage will be most of your facilities expense, it won’t be all of it. • Here are some other items you’ll need to consider. These will not be included in a mortgage, and may or may not be included in a lease.

15. 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-Cs”of Charter Financing • Character, Cash flow/Capacity, Collateral, Climate, Credit, Capital/Cash Equity • Also consider competition

16. How do lenders evaluate potential borrowers? • Organizational Capacity • Financial Management and Capacity • Academic Program and Performance

17. How do lenders assess organizational capacity? • Site visits and interviews • Reference checks • Comprehensive review of audits, resumes, policies, and procedures • Credit checks on school, and school leadership • “Performance” of school during the loan process

18. 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.

19. 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

20. What charter schools need to demonstrate . . . Academic results: • Solid research-based curriculum, especially if a start-up • Stanford CREDO study found that charter school academic performance in the first 3 years is predictive of performance thereafter (~90% prob.). • State & federal academic goals met. • Increasing (or stabilized) enrollment.

21. 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)

22. 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

23. 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

24. 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

25. 5 Key Take-Aways • Academic and financial performance, and governance oversight need to be stellar. • Facility budget = Max 15% of likely gross revenue. • Teacher staffing budget = at least 55% of likely gross revenue. • Know the requirements & standards for educational facilities, or hire an expert who does. • Be aware of the personal interests of realtors or other professionals. • Do not sign any single-source agreements.

26. Jane Ellis Director, Charter School Lending Self-Help (919) 956-4407 jane.ellis@self-help.org Questions? Contact Us!