I Need a Better Facility for My School. Now What? | California Charter Schools Conference 2017

Copyright © 2017 Charter School Capital, Inc. All Rights Reserved.
Facilities Options
for Charter
Schools
California Charter
Schools Conference
3/21/2017

Welcome

3
Mike Morley
President and CEO
American Charter
Development
WELCOME
Stuart Ellis
President and CEO
Charter School Capital
Michelle Lynch
Director, Regulatory
Affairs
CCSA
Kevin Lynch
Senior Director
Cushman & Wakefield

4
WHAT WE’LL COVER
• 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
Agenda
Presentation will be available to download at
http://CharterSchoolCapital.org/California2017

Market Overview

6
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)

7
PROGRAMS AND REGS
• P39
• SB 740
• Incentive grant
• State bond program
• Credit enhancement program
• Legislative and Regulatory developments for charter school facilities
State and Federal

Facilities Funding Structures

9
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

10
FACILITIES BUDGETING
How much can we afford?
$0mm
$2mm
$4mm
$6mm
$8mm
$10mm
$12mm
$14mm
$16mm
$18mm
$20mm
$0mm $2mm $4mm $6mm $8mm $10mm
Potential
Project
Budget
Annual School Revenue
Facilities Budget vs. School Revenues
10% Facilities Cost/Rev 15% Facilities Cost/Rev 20% Facilities Cost/Rev

11
AVAILABLE OPTIONS VARY
# 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
Alternative capital sources expand with school/network size
and maturity 1st Renewed Charter
~$7 -10mm

12
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
How do different options compare
for my particular school?

13
FINANCING OPTIONS
Criteria Cash Bank Bond Long Term
Lease
Cash needed to
close
$7M $2.1 – 2.8M ~$200 – 500K $0 – 100K
Annual cost
(example)
$0 $350 – 700K $600 – 800K $630 – 700K
Underwriting None Min 5 yrs
Surplus
Assets + Revenue
Min 3 yrs
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 yr minimum
Refinance risk
Covenants
Scalable,
expandable
Considerations/chall
enges
Reserves? 20+/- 40% equity
5-20yr 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.

14
THE BOND MARKET SOLUTION
• 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
Source: 2015 LISC report, Charter School Facility Finance Landscape

15
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

16
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

Funding Approval and Execution

18
PASSING THE TEST
• Enrollment
– Stable or increasing enrollment
– Strong demand – waiting list, expanding grades, 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
– Authorizer relationship
– Operational excellence and adherence to internal controls
Funding structure requirements

19
FACILITY CONSIDERATIONS
• Plan ahead
– Collaborate with the programmatic side of the organization
– 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
Four key components

20
PROJECT EXECUTION
Execution requires significant time
Plan ConstructDesignAcquire
 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/purc
hasing
 Acquisition
 Use Permit
 Land prep
 Move dirt
 Raise the
roof
 Control:
Project
manager or
owners rep
Fund
 Cash
 Bank
 Bond
 Lease

21
KEY CONSIDERATIONS
• Full-service resource
–Funding partner / structure
–Commercial developer
–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

22
OTHER OPTIONS
• Long-term lease
• State bond
• CDFI
• Private bond
• Cash reserves
• New market tax credits
• EB-5
• USDA (rural development funds)
Options expand as organization matures

Questions?
Presentation available at
CharterSchoolCapital.org/
California2017

24
Thank You
Presentation available at:
Charterschoolcapital.org/California2017
Stuart Ellis, Charter School Capital
sellis@charterschoolcapital.org
Mike Morley, American Charter Development
mike@amercd.com
Michelle Lynch, CCSA
mlynch@ccsa.org
Kevin Lynch, Cushman & Wakefield
kevin.c.lynch@cushwake.com

I Need a Better Facility for My School. Now What? | California Charter Schools Conference 2017

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