The ABCs and 123s of Facilities Options for Charter Schools

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

The ABCs and 123s of Facilities

Options for Charter Schools

National Charter Schools Conference

June 2016


Welcome

3Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

WHO WE ARE

Stuart Ellis, President and CEOCharter School Capital

Mike Morley, President and CEOAmerican Charter Development


WHAT WE’LL COVER

• Market overview and impact

• Understanding and choosing a funding structure

• Balancing facilities dreams and budget realities

• Funding approval - keys areas of focus

• Project execution and timing

• Other considerations

Agenda

Presentation will be available to download atwww.slideshare.net/CharterSchoolCapital


Market Overview


CURRENT MARKET IMPACT

• Lack of facilities access is an obstacle to growth

– Despite 3 million students there are still 1 million on waitlists

– Nearly 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

– With rates are currently unstable, consider locking in long-term

– Refinancing may also be attractive now

• Options for your situation

– CMO v. EMO v. individual school

– Refinance and expansion

– Long-term lease v. bank funding v. bond


Facilities Funding Structures


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


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


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 Revenues10% Facilities Cost/Rev 15% Facilities Cost/Rev 20% Facilities Cost/Rev


FINANCING OPTIONS

Criteria Cash Bank Bond Long Term Lease

Cash needed to close

$7M $2.1 – 2.8M ~$200 – 500K $0 – 100K

Annual cost $0 $350 – 700K $600 – 800K $630 – 700K

Underwriting None Min 5 yrsSurplusAssets + Revenue

Min 3 yrsDebt coverageSurplusRating?

No minimumAcademic successFlexible

Security Interest None Real estate + all assets

Real estate + all assets

None

Growth Options Cash = Build Refinance risk Rate risk

10 yr minimum Refinance riskCovenants

Scalable,expandable

Considerations/Challenges

Reserves? 20+/- 40% equity 5-20yr term and amortization

100% financingTransaction costs“Road show”

100% financing No amortizationBuy 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.


FINANCING OPTIONS



$7M $2.1 – 2.8M ~$200 – 500K $0 – 100K

Annual cost $0 $350 – 700K $600 – 800K $630 – 700K






None



Scalable,expandable







FINANCING OPTIONS



$7M $2.1 – 2.8M ~$200 – 500K $0 – 100K

Annual cost $0 $350 – 700K $600 – 800K $630 – 700K






None



Scalable,expandable




100% financing No amortizationBuy back



BOND REQUIREMENTS

• Pledge of state funding assigned to trustee

• Fully funded debt service reserve

• First mortgage collateral

• Level annual debt service amortization

• Liquidity covenant 30-60 days cash on hand

• Debt service ratio covenant of 1.2x

• Debt service default covenant of 1.0x

• Capital improvement reserve funding

• 10 year lock-up where you are usually not allowed to refinance

Since 1990s, ~10% of charters nationwide received bond market funding

Source: 2015 LISC report, Charter School Facility Finance Landscape and customary terms seen in the market


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 BondTraditional Bank

Long Term Lease


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 BondTraditional Bank

Long Term Lease


Funding Approval and Execution


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


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


PROJECT EXECUTION

Execution requires significant time

Plan ConstructDesignAcquire

þ Space Programming

þ Featuresþ Budgetþ Timelineþ Charter

approvals

þ Select teamþ Design/build

optionsþ GC biddingþ Bldg. permitþ Timing; big

bang or phased

þ Locate Site þ Acquisitionþ Use Permitþ Land prep

þ Move dirtþ Raise the

roofþ Control:

Project manager or owners rep

Fund

þ Cashþ Bankþ Bondþ Lease


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


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: SlideShare.net/CharterSchoolCapital


Thank YouPresentation available at: SlideShare.net/CharterSchoolCapital

Stuart Ellis [email protected]

Mike [email protected]

The ABCs and 123s of Facilities Options for Charter Schools

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