Build Your Facilities Financing Knowledge - Best Practices for Charter Leaders

Copyright © 2018 Charter School Capital, Inc. All Rights Reserved.
Build Your Facilities
Financing
Knowledge –
Best Practices for
Charter Leaders
California Charter Schools
Conference 2018

2
OUR PANELISTS
Mike Morley
President and CEO
American Charter
Development
Jon Dahlberg
VP of Business
Development & Facilities
Charter School Capital
David Langford
Superintendent and CEO
Ingenium Schools
Kevin Lynch
Senior Director
Cushman & Wakefield

3
AGENDA
• Market overview and impact
• Balancing facilities dreams and budget realities
• Understanding and choosing a funding structure
• Funding approval - keys areas of focus
• Project execution and timing
• Other considerations
Presentation will be available to download at
www.CharterSchoolCapital.org/California2018

Market Overview

5
CURRENT MARKET IMPACT
• Lack of facilities access is an obstacle to growth
– 3 million charter students nationally; 1 million on waitlists
– 7,000 charters in U.S. yet many have suboptimal facilities that hinder
their growth
– With more financing options, charters can expand enrollment
• Money is cheaper than its been, but markets recently “disrupted”
– With rates currently rising, consider locking in long-term
– Refinancing may also be attractive now
• Options for your situation
– Refinance and expansion
– Long-term lease vs. bank funding vs. bond
• Current real estate market in CA (what are trends)

6
PROGRAMS AND REGULATIONS
State and Federal
• Prop 39
• SB 740
• Incentive grant
• State bond program
• Legislative and regulatory developments for charter school facilities

Facilities Funding
Structures

8
CONSIDERATIONS
What can we afford? What is required?
Existing reserves Academic mission
Ongoing % of revenue Growth plan for attendance
Fundraising – public/private Specialty requirements
Funding alternatives Local considerations
Want – Need – Budget

9
FACILITIES BUDGETING
9
$0mm
$2mm
$4mm
$6mm
$8mm
$10mm
$12mm
$14mm
$16mm
$18mm
$20mm
$0mm $2mm $4mm $6mm $8mm $10mm
Annual School Revenue
Facilities Budget vs. School Revenues
10% Facilities Cost/Rev 15% Facilities Cost/Rev 20% Facilities Cost/Rev
PotentialProjectBudget

10
AVAILABLE OPTIONS VARY
Alternative capital sources expand with school/network size and maturity
# of Years of Operation
$ Size of
Financing
Large
Small
0 10+
Developer
Long-term Lease
Bank
Long-term Lease
Bond
Long-term Lease
Bank
Short-term Lease
Long-term Lease
Developer
1st Renewed Charter
$7 -10mm

11
CONSIDERATIONS
• Control versus Ownership
– Control is critical to maintain stability, growth and financial predictability
– Ownership is an investment
• Evaluate total dollars spent not percentage rates
• Cost is not just money, but time and opportunity
– Risk of funding effort failure
– Total elapsed time to complete funding
• Structural constraints and impact on future options
What to consider in a financing structure

12
FINANCING OPTIONS – EX. $7MM PROJECT
Criteria Cash Bank Bond Long-term
Lease
Cash needed to
close
$7m $2.1 – 2.8 ~$200 – 500K $0 – 100K
Annual cost
(example)
$0 $350 – 700K $600 – 800K $630 – 700K
Underwriting None Min. 5 years
Surplus Assets +
Revenue
Min. 3 years
Debt coverage
Surplus Rating?
No minimum
Academic success
Flexible
Security interest None Real estate + all
assets
Real estate + all
assets
None
Growth Options Cash = Build Refinance risk
Rate risk
10 year minimum
Refinance risk
Covenants
Scalable,
Expandable
Considerations /
challenges
Reserves? 20+/-40% equity 5-
20 year term and
amortization
100 % financing
Transaction costs
“Road show”
100 % financing
No amortization
Buy back
Note: $7 million project example; bank assumptions 6-8% interest on debt, 30-40% equity, 10-20yr amortization; bond assumptions 6-9%
interest rate, 18% transaction cost/additional financing, 30yr amortization; lease options assumptions 100% financing, 9-10% cap rate.

13
EXAMPLE - PROJECT $5MM
Security Interest
Growth Options
Underwriting
Annual cost
Cash needed
Comparison for illustrative purposes only. Rankings are based on how hypothetical “School A” might view its options based
on unique attributes and objectives.
Criteria Cash Bond
Traditional
Bank
Long-Term
Lease

14
EXAMPLE - PROJECT $20MM
Security Interest
Growth Options
Underwriting
Annual cost
Cash needed
Comparison for illustrative purposes only. Rankings are based on how hypothetical “School A” might view its options based
on unique attributes and objectives.
Criteria Cash Bond
Traditional
Bank
Long-Term
Lease

15
THE BOND MARKET
• Bond market financing of charters has increased as the charter school market
has grown
• Bonds fit well for larger, more mature charters
• Other alternatives exist today to serve the remaining 88% of the charter
school market
Since 1990s, ~12% of charters nationwide received
bond market funding

Funding Approval and
Execution

17
PASSING THE TEST
• Enrollment
– Stable or increasing enrollment
– Strong demand – waiting list, expanding grade levels, market growth
• School / Leadership History
– Experienced leadership team with proven track record
– Market leading academic performance (local peers, district, state)
• Numbers have to “pencil”
– Sound financial performance and pro forma
– Debt service / lease payment target < 20% of total revenue
– Valuation of target property
• Governance issues
– Diversified board
– Authorizer relationship
– Operational excellence and adherence to internal controls
Funding structure requirements:

18
FACILITY CONSIDERATIONS
• Plan ahead
– Consider programmatic needs (gym, open classrooms, flexible spaces)
– Lock in a stable leadership and management team
– Understand academic performance
– Plan financial performance measures
• Watch the market
– Keep an eye on rates and available products
– Understand the real estate opportunities and challenges
– Have realistic expectations
• Line up internal resources
– Legal, financial and academic
• Prepare for the deal
– Work with a partner
– Charter school experience
– Line up your financing ahead of time

19
PROJECT EXECUTION
Execution requires significant time
 Core
Philosophy
 Space
Programming
 Features
 Budget
 Timeline
 Charter
approvals
 Select team
 Design/build
options
 GC bidding
 Bldg. permit
 Timing; big
bang or
phased
 Locate Site
 Requirements +
restrictions
 Leasing/purchasing
 Acquisition
 Use Permit
 Land prep
 Move dirt
 Raise the roof
 Control:
Project
manager or
owners rep
Plan ConstructDesignAcquireFund
 Cash
 Bank
 Bond
 Lease

20
TEAMWORK IS KEY
• Full-service resource
–Funding partner / structure
–Commercial developer / broker
–Architect
–General Contractor
• Flexible / Adaptive to your unique project
• Guarantor / Sponsor / Investor
• Access to working / growth capital
• Total cost of ownership (now and later)
Choose a strong partner(s):

21
OTHER OPTIONS
• Long-term lease
• State bond
• Community Development Financial Institutions (CDFI) Fund
• Private bond
• Cash reserves
• New market tax credits
• Immigrant Investor Program (EB-5)
• USDA (rural development funds)
• Philanthropy
Options expand as organization matures:

Questions?
Presentation available at
www.CharterSchoolCapital.org/California2018

Thank You
Presentation available at:
Charterschoolcapital.org/California2018
Jon Dahlberg, Charter School Capital
jdahlberg@charterschoolcapital.org
Mike Morley, American Charter
Development
mike@amercd.com
David Langford, Ingenium Schools
dlangford@ingeniumschools.org
Kevin Lynch, Cushman & Wakefield
kevin.c.lynch@cushwake.com

Build Your Facilities Financing Knowledge - Best Practices for Charter Leaders

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