The Changing Field of Facilities Financing
The Changing Field of Facilities Financing
Charter schools typically have been thin on revenue streams, thin on funds dedicated for facilities, and thin on the history that creditors look for when evaluating loan risk. The complaint that charter schools have been left out in the rain when it comes to obtaining buildings for instructional space has been partly rooted in the reality of the start-up school. But recent developments indicate growing interest by investors in charter schools that may help charters better meet facility needs.In recent news, the financial services firm JPMorgan Chase announced that it will provide $325 million in financing assistance to aid charter schools with facilities development, including $50 million in grants of permanent equity to community development financial institutions working with charter schools.
At the charter school level, YES (Youth Engaged in Services) Prep, a network of open-enrollment charter schools in Houston, recently announced that it had taken advantage of two types of special low-cost federal bonds targeted for school facilities--the first time a charter school had done so in Texas. The school used Qualified School Construction Bonds (QSCBs), initiated in 2009 as part of the American Recovery and Reinvestment Act, and Qualified Zone Academy Bonds (QZABs), a program that started in 1997. An upcoming report by the Local Initiatives Support Corporation (LISC) will include information for how other charters can take advantage of such financing options. The report, which will be published in June, is the third edition of its Charter School Facility Finance Landscape study and focuses on the changed and diverse environment of charter school financing. The report will have a new section about bond issues. Reena Bhatia, LISC vice president of education programs, said that among the findings of the report, which covers a wide range of financing arrangements, is that charter debt is not as risky an investment as people might think.
But investments in individual schools and school networks alone will not end the imbedded inequities in facility support for charters. Charter schools need to have a facilities funding plan that pulls together multiple funding sources and lays the groundwork for low-interest debt.
In addition to utilizing QSCBs and QZABs, YES Prep found a way to assemble multiple financing pieces to strike a $22 million debt deal to fund a major expansion and will pay less than 1 percent interest on the debt. The funds will be used to build its sixth and seventh campuses and develop a permanent classroom facility at its main site. The school enrolls 3,500 students in Grades 6-12 and plans to grow to 10,000 students.
"If you're fast-growing, you better have a well thought out plan," said Drew Masterson, a YES Prep board member and managing director at First Southwest Bank who represented the school in the debt deal.
How Did YES Prep Pull the Pieces Together to Get the Low Interest Rate?
YES Prep's low interest rate is the result of a series of nuanced deals. YES Prep historically has relied on donations, not debt, to develop facilities. So it helped that YES Prep was unencumbered by previous loans going into the loan market. It also was critical that the value of YES Prep's real estate, used as collateral, met the lender's requirement that it be equal to 70 percent of the loan amount. The Texas Education Agency allocated to YES Prep $6.1 million in QSCBs and $16 million in QZABs. But access to the bonds wasn't enough, according to Masterson, because the tax credit, provided as an interest rate on the debt, was only 5.8 percent. Masterson said every lender isn't necessarily looking for a tax credit and, in this case, the 5.8 percent wasn't attractive enough. So the deal was sweetened with a 2 percent "supplemental coupon," an additional interest amount to be paid by YES Prep. The debt was marketed privately and sold to Capital One Bank.
To offset the additional interest burden of the "supplemental coupon," a "sinking fund" was created, where YES Prep's principal payments are set aside in a fund to earn a fixed interest rate of 4.26 percent. There is a "reset mechanism" on the supplemental interest rate, which means the rate could rise--but not above 3 percent. Then, Yes Prep chose a 15-year loan with a faster payment schedule, instead of the more common 30-year term, which means lower costs for interest. In the end, the pieces worked together so that YES Prep expects to pay what amounts to 0.67 percent in interest.
What Lessons Can Be Learned From YES Prep's Experience With QSCBs and QZABs?
YES Prep was proactive in seeking out financing options and took advantage of what was available. Gary Marek, the Texas Education Agency's school facilities director, said charters had not previously been granted QSCBs and QZABs and that the new action came about partly because a charter asked to be included. The Texas Education Agency acts as a federal bond gatekeeper, doing an initial screening of applicants and then distributing set amounts to those that qualify.
In addition, YES Prep utilized the expertise of its board member to negotiate the financing deal. Masterson had expertise in developing complex financial deals and said he was able to do the work pro bono on behalf of his firm, filing a conflict-of-interest disclosure. Masterson said YES Prep's strong financial position from tapping into donors enabled it to use a grant for the 10 percent private match required for QZABs.
Another key for YES Prep was arranging privately for Capital One Bank as the investor. A charter school in Texas that received access to QSCBs and QZABs wasn't as fortunate. The charter operator KIPP (Knowledge Is Power Program) in Houston was authorized for $11 million in QSCBs and $8 million in QZABs. KIPP ended up returning all of its authorization because there was insufficient interest from the public market to find an investor, according to John Murphy, chief operating officer of PHILO Finance Corp., which aids KIPP with its financial affairs. "It's kind of the 'water, water everywhere,' " Murphy said of the bond allocation. "You could get an allocation, but couldn't do anything with it."
Murphy said a recent change in the law governing QSCBs and QZABs will allow a direct payment instead of a tax credit, which he expects will broaden the appeal of QSCBs and QZABs to potential investors. "We fully expect to use them going forward," Murphy said.
"There are always all kinds of hurdles like that," Berg said. "In general, charter schools think bonds are something mysterious or overly technical. But they are really just a kind of loan."
Mary Filardo, executive director of the 21st Century School Fund in Washington, D.C., which aids urban charter schools with facilities financing, said school leaders don't necessarily need to be the experts. "They need to understand who's out there in the world and identify someone who will do a good job," Filardo said, noting that law and financial firms often are willing to provide services pro bono. In fact, a growing network of organizations is developing to help solve charter school finance problems.
Supporting Facilities Financing Through Law
For charter schools, finding ways to pay for facilities isn't just about financing. It's also about the laws that support financing.
The National Alliance for Public Charter Schools has developed a model law(1) for states, which includes provisions for equitable access to existing school buildings and financing. California, Colorado, and Washington, D.C., for example, include many of the model law's provisions dealing with equitable access to buildings and finances, while Hawaii, Iowa, and Kansas have none, and no jurisdiction completely satisfies the Alliance's standard, according to comparisons by the Alliance.
The National Charter School Resource Center would like to share your ideas about facilities financing. If something has worked well for you, please let us know by e-mailing a brief summary to john.bray@learningpt.org.
News
Charters Get $325 Million Boost From JPMorgan Chase. JPMorgan Chase will provide $50 million in grants and $275 million in equity and debt assistance to support charter schools, the company announced. As part of the seven-year initiative, the grants will go to community development financial institutions (CDFIs), which will use the money as equity to fund charter schools. The company also will provide $175 million in debt and $100 million in New Markets Tax Credit equity to the CDFIs, which will use the funds for charter facilities. Up to 40 charter schools could receive grants and financing through participating CDFIs over the life of the initiative, the company said.
Number of Authorizers Hits 872. The number of charter school authorizers nationwide has grown to an estimated 872. The State of Charter School Authorizing 2009 survey by the National Association of Charter School Authorizers shows that 70 large authorizers that oversee 10 or more schools account for the monitoring of more than half of all charter schools and about 59 percent of all charter school students.
June 2: Join Lucy Steiner for an interactive webinar on emerging research and conversation about leading the transformation of struggling schools. Steiner, senior consultant with Public Impact, will discuss School Turnaround Leaders: Competencies for Success, a report and toolkit she developed. She will discuss its application to charter school leaders and then engage webinar participants in applying what they've learned. Register now.
June 28: Join us for the U.S. Department of Education's Charter School Facilities Institute. This complimentary, full-day event is presented in partnership with the National Alliance for Public Charter Schools. It is being held the day before the national conference officially opens in Chicago at the Chicago Marriott Downtown Magnificent Mile, 540 N. Michigan Avenue. The institute will complement the conference's facilities strand.
For a complete list of upcoming events related to charter schools, visit Events. To have your event posted on our website, please contact us.
Resources
Following are helpful resources related to facilities:
U.S. Department of Education Qualified School Construction Bonds (QSCBs).This U.S. Department of Education press release provides information about the program. Qualified school construction bonds can be used to finance the construction, rehabilitation, or repair of a public school facility or for the acquisition of land where a school will be built.
U.S. Department of Education Qualified Zone Academy Bonds (QZABs). This U.S. Department of Education website provides information about the program. Funding may be used for renovating school buildings, purchasing equipment, developing curricula, and/or training school personnel. The proceeds of the bonds may not be used for new construction.
The Answer Key: How to Plan, Develop and Finance Your Charter School Facility (downloadable after online registration). This guide from NCB Capital Impact provides charter school operators with step-by-step assistance in planning, evaluating, and implementing facilities projects through all key stages of facilities development. It includes worksheets for needs assessments, budgeting, and balance sheets.
Charter School Facility Finance Landscape. This 2007 report from the Educational Facilities Financing Center at the Local Initiatives Support Corporation provides a snapshot of the public and nonprofit financing programs for charter school facilities across the nation. A new edition will be published in June 2010.
Charter School Financing: Challenges, Opportunities and Lessons Learned.This report from the Low Income Investment Fund outlines characteristics of typical charter school facility loans and encourages the development of performance benchmarks.
Charter Schools: Limited Access to Facility Financing. This 2000 report by the U.S. General Accounting Office (now known as U.S. Government Accountability Office) outlines the facility financing options available to charter schools, including comparisons of state legislation involving charter school independence and financing, as well as other means of state assistance.
Federal Programs Related to Charter School Facilities. This 2010 list, developed by the Resource Center, indicates federal agencies, programs, and bonds available for charter school projects.
Getting a Piece of the Pie: Schools Need to Be Flexible When Pursuing Stimulus Funding. This 2009 article from Educational Facility Planner provides advice that helps schools use the federal stimulus funding for school facility related projects.
Making Charter School Facilities More Affordable: State-Driven Policy Approaches. This 2008 U.S. Department of Education report profiles policy interventions by eight states and the District of Columbia. It is intended to help charter schools address facilities challenges, including dedicated funding streams and ways to help charter school operators access low-cost financing for facility needs.
School Facilities and Tax Credit Bonds. This 2009 article from Educational Facility Planner provides an explanation of funding options available through the tax credit portion of the American Recovery and Reinvestment Act.
Using Municipal Bonds to Finance Charter School Facilities. This case study by the National Resource Center on Charter School Finance and Governance details partnerships undertaken by the Walter D. Palmer Leadership Learning Partners Charter School in Philadelphia to secure an innovative financing model involving the use of municipal bonds to fund the construction of a new facility.
Webinar: Financing Mechanisms for Charter School Facilities. This PowerPoint presentation from the Resource Center's February 2010 webinar, shares practices that state education agencies (SEAs) can use to leverage funding and financing for charter school facilities, identifies the various funding mechanisms for charter school facilities, and presents examples from SEA charter school staff and other experts.
For more resources listed on our website, please visit Resources & Research.
