SC Charter School Leadership Summit

1. SC Charter School Leadership Summit Facilities Financing 101

2. 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

3. 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

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

5. 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.

6. 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.

7. 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

8. 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

9. Charter School Revenue Breakdown

10. 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)

11. 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?

12. 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

13. 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 • 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, leadership, and board members • “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 • “B” or better on state tests • Consistent improvement • NCLB goals met • Increasing (or stabilized) enrollment and waiting lists

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 • 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 realtor’s personal interests. • 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!