Facility Financing for Charter Schools 101

1. Facility Financing for Charter Schools 101 Steve Saltzman

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

3. The Bicycle Analogy Front Wheel:MISSION Back Wheel:FINANCIAL ENGINE

4. 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 $110 million lent to charter schools nationwide since 1997

5. Two Factorsshould drive your thinking about financial and facilities planning: • How many students you have • The amount of per pupil revenue you will receive • Plan only with money you have either in hand or committed by law • Too many schools get in trouble because they assume their enrollment will grow. If you play optimistically, even a modest shortfall can challenge your school’s ability to honor its obligations.

6. How Much Can You Spend on Your Facility? • Every penny spent on facilities is a penny not spent on instruction or faculty development. • Overspending on real estate can be an enormous distraction from the most important challenge at hand – providing a quality education to young people.

7. How Much $ Do You Have? Get out your “Charter School Budgeting Worksheet 1” and calculate along with me. • How many students do you expect to enroll in year 1? • How much per pupil revenue will you have? Calculate Problem #1: [# of students] x [per pupil revenue] = maximum gross revenue

8. Use a Realistic Revenue Projection • Most new schools suffer 10% attrition from opening day. Calculate Problem #2: [Maximum gross revenue] x [0.9] = likely gross revenue

9. How Much Should I Spend on my Building? Key Rule: Occupancy costs should be no more than 15% your revenue. (This includes maintenance, rent/mortgage payments, insurance and all other building related expenses) Calculate Problem #3: [0.15] x [likely gross revenue] = maximum facilities expense

10. Caution on Facility Spending #1 • Caution: Realtors may encourage you to spend 20% of your maximum gross revenue on your lease or mortgage because this can increase their commissions by as much as 30%. • Spending such a high % of your revenues on facilities provides no margin for error should enrollment lapse.

11. What Size Building Do I Need? Key Rule: You should plan at least 75 square feet per student (100 square feet per pupil is ideal) Calculate Problem #4: [# of students] x [75] = minimum usable space for building [Max facilities payment] / [Min square feet] = max rent/mortgage per square foot

12. 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.

13. How Much Can I Spend on a Mortgage or Lease? • Remember to account for those operating costs we’ve discussed. Typically, they come to about $6/ft2. Calculate Problem #5: [Max cost per ft2] – [ $6 ] = Max mortgage or non-inclusive rent per ft2 Mortgage or Lease Utilities CAM Repair/Maintenance Grounds Security Administration + Insurance = Total Facility Cost [Max mortgage or non-inclusive rent per ft2] x [building size in ft2] = Max mortgage or non-inclusive rent

14. How Much Should I Spend on my Teaching Staff? Key Rule: Your spending on teachers should equal at least 55% of your likely gross revenue. (This includes salary and benefits.) Calculate Problem #6: #Classes x Avg # of teachers/class= # of teachers [0.55] x [likely gross revenue] = teacher staffing budget

15. Caution on Facilities Spending #2: • Caution: Schools that spend less than 55% of their revenues on instruction and more than 15% on facilities have limited budget flexibility: • You can always hire additional teachers or part-time instructors to fill gaps, but you cannot easily eliminate 2,000 unused sq feet of a building. Calculate Problem #6 (part 2): [Minimum teacher staffing budget] / [# teachers] = average teacher salary and budget

16. What’s Left? • After 55%+ for teacher pay, • 15% for occupancy costs, you have: 30% likely gross revenue for student services, administration, and any other costs. Calculate Problem #7: What do you have left?

17. How do I get the Building I Need if my School Starts Small? • Caution: New school leaders face the choice: • Obtain a facility on day one that is big enough to accommodate their final, maximum ideal enrollment [OR] • Lease a temporary facility for the first few years • Either choice holds perils • Many landlords will allow you to create a “ladder-style” deal, where your rent increases as enrollment grows. Again, the peril of ladder-style deals is that schools seldom grow as quickly or smoothly as they wish.

18. 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.

19. Leases • Leases can be very long and technical but you still are responsible for understanding it completely before signing it • Have your own attorney examine the lease with you • Some leases contain “hidden” clauses that will force schools to pay more for their facilities • Learning to understand and negotiate a lease could save your school thousands of dollars!

20. Types of Leases Flat or Fixed Leases • A single rent is set for a definite period of time. Gross Leases • The tenant pays a flat monthly amount. • The landlord pays for all operating costs for the building. • In some cases, the tenant pays for its electricity, heat, and air conditioning. • This type of lease often contains an escalation clause that allows the landlord to increase the rent annually to offset increased expenses. Step Leases (Ladder-Style) • The rent is increased at a set amount on an annual basis during the life of the agreement. • The increase is to cover the landlord's expected increases in expenses. • The increase is based on estimated rather than actual costs. Cost-of-Living Leases • The rent is tied to rises in the cost of living. • The rent goes up with general inflation. From FindLaw.com

21. Types of Leases (con’t) Net Leases • The tenant pays a base monthly rent plus some of the expenses. • The increases are based on actual costs rather than on estimates. • The rent increases at the time that the landlord incurs an increase in costs. • In some cases, the tenant pays rent plus all of the real estate taxes. • If leasing only a portion of the building, the tenant will pay a proportionate share of the taxes. Net-Net Leases • The tenant pays the base rental amount, real estate taxes, and insurance premiums. • The insurance and real estate taxes are allocated among the tenants based on the proportion of space occupied. Net-Net-Net Leases (the most common lease) • The tenant pays the base rental amount plus the landlord's operating costs. • Included in this amount are real estate taxes, insurance, maintenance, and repairs. Percentage Leases • The tenant pays either a base amount and a percentage of gross income or, depending on which is higher, pays a base amount or a percentage of the business's gross income. From FindLaw.com

22. Best Leases for Schools • Depends on age of school and the local real estate market -More negotiating room in depressed markets • Start-up schools will benefit from stable occupancy costs • More mature schools should consider buying their facility, if possible

23. Terms • Escalation clauses • If the landlord’s expenses go up, s/he has the right to increase your rent • Typical for gross leases • CAM (Common Area Maintenance) • If your school is in a multi-tenant building, understand what you’re doing • Leasehold Improvements • Alterations to a leased property

24. What’s in a Lease? It depends! Before you sign anything, understand: • Who pays for: Utilities, CAM, Maintenance, Improvements, Taxes (remember, you are tax exempt.) • If lease-to-purchase, how is the purchase price calculated? • What happens to improvements you make? Can you deduct them from the cost of purchase? • What constitutes “maintenance”? Usually not roof, HVAC, etc. • How can you exit the lease if need be? • Under what circumstances can the landlord kick you out? • [Advice: Have an attorney—on your side—look at the lease. You may have to pay to hire someone, but it’s worth it.]

25. Parts of a Lease • Name of parties involved (usually referred to as “Tenant” and “Landlord”) • Only the parties outlined as “tenant” and “landlord” are legally bound by the contract. Make sure board members and other supporters are not personally mentioned in the lease • Term • Length of lease • Start-up schools should look for relatively short leases with an option to renew at the end of the lease

26. Parts of a Lease (cont’d) • Base Rent and Payment Details • Outlines the minimum amount of rent you will pay • Reveals any possible fees or elevations • Usually the type of lease (NNN, gross, etc) is not explicitly mentioned, but this section will outline which party is responsible for paying which expenses • Make sure the lease clearly explains how expenses and rent elevations will be calculated • Fees • Outlines when bills are due, what penalties will be assessed for late payments, etc

27. Parts of a Lease (cont’d) • Utilities and Service/Conditions/Responsibilities • Should give exact information about paying for utilities, CAM, parking, janitorial, etc… • Repair and Maintenance • Who fixes what (and who pays for it) when something breaks • Alterations and Improvements • Outlines what type (if any) of leasehold improvement you can make • Landlord Liability and Rights • In what ways can the landlord waive responsibility and when are they allowed to terminate a lease

28. How to read a lease • Skim first to identify the exact dimensions of the building (the premise) and the land (property) • Identify the exact date the lease will begin and end and look for any possible lease extensions • Paying rent months in advance of receiving revenues could put your school in a difficult position • Look for clauses about parking, equipment, restricted uses of property, ability to alter the premise, subletting, etc • After you understand the above, have your lawyer thoroughly review the lease

29. Red Flags • Verbal agreements from landlord are not in written lease • Landlord takes no responsibility for repairs • Single-source contracts with realtors

30. Thanks! And good luck! Questions? Steve Saltzman 919.956.4620 800.476.7428 steve.saltzman@self-help.org