Train-the-Trainer

							SC Charter School Leadership Summit

       Facilities Financing 101
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
 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
The Charter School “Ecosystem”
A successful charter
school demands more
than just stellar
academics – it must
be a sound business
enterprise as well.    Facility               Operations




                                  Academics
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.
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.
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
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
Charter School Revenue Breakdown
                  Ideal Budget Ratios


            10%                    Teaching Budget

      10%
                                   Occupancy Costs

     10%                           Administration
                           55%
                                   Cash Reserves
       15%
                                   Contingency
How much building can my school
afford?
1.   Determine likely gross annual revenue
     -(90% of projected enrollment) x PPR
2.   Determine max facility expenses
     -15% x (likely gross annual revenue)
3.   Determine minimum size of building
     - (75 ft2 per student) x projected enrollment
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
6.   Determine max annual rent or mortgage payment
     -(max mortgage or non-inclusive rent) x (min building size)
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?
Example School
1. Determine likely gross annual revenue
   (90% of projected enrollment) x per pupil revenue

2. Determine max facility expenses
   15% x (likely gross annual revenue)

3. Determine minimum size of building
   (75 ft2 per student) x projected enrollment
Example School (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

6. Determine max annual rent or mortgage
   payment
    (max mortgage or non-inclusive rent) x (min building
    size)
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.
                   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
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
How do lenders evaluate potential
borrowers?
• Organizational
  Capacity

• Financial Management
  and Capacity

• Academic Program
  and Performance
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
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.
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
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
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)
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
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
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
5 Key Take-Aways
 1. Facility budget = Max 15% of likely
    gross revenue
 2. Teacher staffing budget = at least
    55% of likely gross revenue
 3. Minimum facility size = 75 ft2 per
    student. 100 ft2 per student is ideal.
 4. Be aware of your realtor’s personal
    interests.
 5. Do not sign any single-source
    agreements.
Questions? Contact Us!


       Jane Ellis
       Director, Charter School Lending
       Self-Help
       (919) 956-4407 jane.ellis@self-
       help.org