Charter School Facility Finance Overview

1. August 2, 2012 Charter School Facility Finance Overview PRESENTED BY: B.C. Ziegler and Company | Member of SIPC & FINRA

2. Topics for discussion • Ziegler Overview • Should We Buy or Rent? • How can we finance the purchase/construction? • Tax-Exempt Bond Market Dynamics • Other Considerations when borrowing • Questions

3. PREMIERE INVESTMENT BANK FOR NON-PROFITS • Underwriter of $2.5 billion of financing per year for non-profit schools, senior housing providers, hospitals and churches

4. OUR EXPERIENCE • #1 underwriter of charter school bonds in 2011 • High volume/transaction underwriter Source: Thomson Financial, January 1, 2012

5. ZIEGLER CHARTER school FINANCE HIGHLIGHTS • Sole underwriter of the Renaissance Charter School Series 2011; the second largest charter school transaction issued to-date • Underwrote the first charter school bond in Louisiana in 2011 • Underwrote the first investment-grade charter school bond issue in California in 2006 • Underwrote the first rated charter school bond issue in Arkansas in 2010 • Underwrote the first LOC-enhanced bond issue for a charter school in North Carolina in 2007

6. Facts about charter schools Sources: National Alliance for Public Charter Schools, Center for Education Reform

7. Should We rent or buy? • First decide whether it makes sense to lease or own property • Leasing advantages • Less upfront costs • Available to younger schools • Flexibility to relocate • Many Charter School Developers that specialize in acquiring and leasing buildings • Buyer beware as lease terms can vary greatly. Consult an attorney before signing any documents

8. Should We rent or buy? (Cont) • Ownership Advantages • Equity building over time • No risk of lease renewal • Ability to renovate without permission from landlord • Owning your own site can lead to a better chance of long-term success (Kaufmann Foundation Study based on data from The Center for Education Reform). Closure rates higher for schools that leased property • Ownership/Pride for Staff, Students and Alumni • Do not over-leverage (20% of budget to facilities)

9. How Can I Finance A building acquisition? • Bank Loan • New Markets Tax Credit • Tax-Exempt Bond issue • Private Note from Seller or other

10. PROS & CONS OF most common financing options

11. Interest movement 40-YEAR HISTORICAL INTEREST RATE | 5-YEAR TREASURY BONDS Source: Bloomberg

12. bond market update Topic 3

13. CHARTER SCHOOL Bonds have gained market acceptance • Issuance history indicates that charter school bonds have gained broad market acceptance • Municipal bond issuance increased from $35 million in 1998 to a peak of more than $1 billion in 2007 • Market disruption took a toll on issuance in 2008 and 2009, but 2010 and 2011 showed a strong recovery • 2012 issuance through Q2 is $433 million compared to same period last year when volume was $445 million Sources: EMMA, Bloomberg, Thomson Financial SDC

14. TAX-EXEMPT FIXED RATE MARKET DYNAMICS • Municipal Market Data (“MMD”) is the “AAA” tax-exempt benchmark interest rate for municipal bonds • Tax-exempt charter school interest rates are priced in relation to this rate • Key drivers of the market volatility: • European sovereign debt crisis • Investor fear of systemic municipal debt downgrades and the potential for defaults • Municipal bond fund cash flows that have fluctuated with movements in equity markets • Market fears of a “double-dip” recession in the US Sources: Bloomberg, Municipal Market Data

15. TAX-EXEMPT FIXED RATE MARKET DYNAMICS • MMD currently at 2.90%; all-time low of 2.79% occurred on 7/26/2012 • Volatility in U.S. treasury and municipal rates due to market uncertainty: • Federal Reserve Operation Twist and Quantitative Easing • U.S. budget deficit issues • European sovereign debt concerns • Supply/demand imbalances Source: Bloomberg, July 20, 2012

16. Rating Agencies What is a rating? • A “grade” assigned to your organization and the related debt • The grade is based on an evaluation of your organization by a third party rating agency • Investors rely on the grade to give them some tangible measuring stick when evaluating bonds • Some investors can only purchase higher graded bonds (i.e. investment grade) • Three primary rating agencies in the US • Standard and Poor’s • Fitch • Moody’s

17. S&P Rating Definitions • AAA: An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's. • AA: An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree. Includes: • A: An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories. • BBB: An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. • BB: An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments. • B: An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments. • CCC: An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments. • CC: An obligor rated 'CC' is currently highly vulnerable. • C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations • CI: past due on interest • R: An obligor rated 'R' is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may have the power to favor one class of obligations over others or pay some obligations and not others. • SD: has selectively defaulted on some obligations • D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations • NR: not rated Source: Standard and Poor’s

18. Considerations For a rating • Political climate • Collective bargaining • Strength of authorizers • How many? • Conflict with school districts? • State funding • Equitable with traditional public schools • Annual increases • Facilities funding allotments • Charter renewal and appeal process • Managed growth—state cap

19. DEMAND: WHAT MAKES YOUR School SPECIAL? • Documented waitlist • History of consistent enrollment growth • Student attendance and turnover • Teacher turnover rate - Relationship between administration and teachers • Academic Excellence • State test scores & state accountability rating • Federal requirements – NCLB • Type of curriculum • Competition (Is Charter v. Charter competition in your market yet?) • Classroom size

20. Other Considerations when borrowing

21. FINANCIAL COVENANTS • Debt service coverage ratio = usually 1.1x – 1.2x • Liquidity Covenant • 30 to 45 days cash on hand and/or • Unrestricted cash balance of 5% of prior year operating expenses • Additional bonds test = usually with historical debt service coverage of 1.25x and projected coverage of 1.25x including proposed debt • Covenant violation triggers management consultant

22. Mitigating Construction Risk • Primary goal is to build the building on time and on budget. • Permitting and necessary government approvals • General contractor experience • Guaranteed maximum price contract • Liquidated damages • Payment and performance bonds • Contingencies—usually 3-5% of project cost • Disclosure of Construction Reports • Environmental Study (any environmental risks present?)

23. Top Ten Traits for lower rates • Waitlist Maintain accurate waitlist and purge annually • Enrollment History Ability to show consistent demand in prior years • Academic Performance How do test scores compare to the district, AYP results • Competition Is your program or curriculum unique • Charter RenewalOne successful charter renewal “under the belt” • Board Composition Diversified backgrounds that contribute to the school’s success • School Management Talented management team with clear succession plan • Financial Performance History of excess revenues and growing fund balance • Liquidity A strong balance sheet will lower your cost of capital • Debt Ratios Debt burden below 20%, average debt per student below $15,000

24. Questions? Follow up Contact InformationScott RolfsManaging Director and Group HeadReligion & Education FinanceZiegler Investment BankingPh: 800 797 4272Direct: 414 978 6576E-mail: srolfs@ziegler.comWeb: www.ziegler.com