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If you think charter school facilities financing can be a daunting task, you’re in good company. Most charter school leaders aren’t financial or real estate experts, and for a good reason—you’re focused 100% on educating children. If you’re reading this blog post, you probably feel like finding – and financing – the perfect facility for your charter school seems like a huge, complicated undertaking … you’re definitely not alone.
Across the U.S., facilities are, by far, the greatest challenge faced by charter schools. Planning and financing any facility project is complex, time-consuming, and has the potential to distract your team from its core mission: serving your students. We hope this post provides you with some best practices for planning and realistically balancing your team’s facility dreams with your budget realities, the pitfalls to avoid, financing options, and other key budgetary considerations.
Not Knowing Your Budget
Before you do anything else, understand what you can afford. Take the time to understand your revenue and expenses. Knowing what you can afford for rent will inform how much you can borrow for your new facility or facility expansion.
Not Planning Ahead
Plan at least a year ahead. Any kind of facility expansion will involve quite a lot of effort and likely involve your entire team. The range of burden varies, but moving staff, students, furniture, and equipment is an enormous undertaking. If you’re renovating your current facility, you still need to plan ahead so your programs aren’t disrupted.
When it comes to facilities, most charter schools are faced with a tough challenge: balancing essential requirements, aesthetics, and their budget.
It comes down to strategy: Is it more important to have enhanced facility options or invest in specific programs? If you have a top-tier robotics program, a new lab might be very important. If you’re offering an arts program, having an excellent sound dynamics room or a black box drama theater may be essential to your students’ performances.
Some key considerations:
Must-haves: What do you need to meet your mission?
Any special requirements? Are you running a dropout recovery program or a school for kids with developmental and learning disabilities? Do you need a state-of-the-art science lab or an air-conditioned gym to serve your students and mission?
Aesthetics: Does curb appeal affect enrollment at your school?
The way your school looks can have a significant impact on student enrollment, and enrollment drives operating revenue, which in turn affects the quality of your academic programs. Also, take a look at your competition. If every other school in your area is shiny and beautiful, but yours looks dilapidated and your enrollment is suffering, you may need to invest in improving your curb appeal.
Budget: What can you afford?
Getting prequalified is the key first step in the process of renovating, expanding, or finding a new facility. When pre-qualifying a school, a financial institution will look at a variety of factors, including:
For most, paying 100% cash for charter school facility financing isn’t an option. And even if a school were to have significant cash reserves, it still may not be in their best interest to use it. On one hand, the school wouldn’t be on the hook for interest payments nor would it have to provide collateral, meet underwriting requirements, or undergo time-consuming approval processes. On the other hand, again for most, it would mean that the school’s cash reserves would take a major hit—and that’s money that might be more usefully deployed elsewhere. It could be used, for example, to hire more teachers, buy computers, or reinvest in academic programs.
For stable and mature-stage schools that have plentiful cash reserves, this can be a great option for undertaking a $7 million facilities project without wiping out the savings account. Expect the underwriting process to be thorough and time-consuming—the bank will want to make sure that your school is stable and will still be around decades from now.
In our experience, many charter schools have their sights set on a bond, believing it to be the most advantageous and common funding structure. The reality is that just 12% of charter schools nationwide receive bond market financing; the other 88% of charter schools rely on other funding methods. As with bank financing, the underwriting for bonds is time-consuming and involved, especially if a school has been operating for a short period of time or is waiting for a charter to be renewed. Unlike a bank loan, bonds don’t require a major up-front cash investment. However, bonds can become surprisingly costly, even with low interest rates, because it can take time for a school to accrue the cash reserves they are required to have in the bank for taxes and for the security of the bondholders. All the while, the school continues to pay interest. In addition, bonds usually require an outlay of hundreds of thousands of dollars in legal fees for each party’s attorneys in a (highly complex) transaction. For more clarity, check out this short video on when – and why – to select bond financing.
Many schools begin with a long-term lease and then transition to a bond or a bank transaction after they’ve achieved stable revenue and enrollment. Long-term leases generally require relatively little cash up front. The cost of long-term leases vary based on location and are ultimately spelled out by the terms of the lease, but they can be relatively affordable, especially for newer, smaller schools. The underwriting requirements for a long-term lease are less involved than for a bond or bank transaction, though your board, charter, curriculum, and demographics will be reviewed in detail. No security interest or collateral is required because the landlord owns the building and the land, and the school simply rents it and supplies its own furniture and equipment. That means future operating revenues aren’t held as security interest as they would with a bond or bank transaction. As a result, a school can often get financing for furniture and equipment, which may not be an option with bond or bank financing. Click here to learn more about our long-term lease financing option.
Investors tend to prefer experienced charter schools that have shown that they have stable enrollments, predictable revenues, and good relationships with their authorizers. The first charter renewal is a crucial milestone. If you’re still in the first period of your charter, and your authorizer has not confirmed your success by renewing your charter and extending it for another five or 15 years, investors will consider your school to be a riskier proposition than those who have done so.
Options for Startup Schools
Options for Later-Growth or Mature Schools
To download the PDF: The Ultimate Guide to Charter School Facility Financing, click here.
Since the company’s inception in 2006, Charter School Capital has been committed to the success of charter schools. We help schools access, leverage, and sustain the resources charter schools need to thrive, allowing them to focus on what matters most – educating students. Our depth of experience working with charter school leaders and our knowledge of how to address charter school financial and operational needs have allowed us to provide over $1.8 billion in support of 600 charter schools that have educated over 1,027,000 students across the country. For more information on how we can support your charter school, contact us. We’d love to work with you!Learn More