Charter School Facilities: A Resource Guide on Development and Financing

Introduction

Facility
Development

Needs
Assessment

Site
Selection

Construction/
Renovation

Financing

Timeline

Glossary

Bibliography

Appendix A
Appendix B
Appendix C
Appendix D
Appendix E

Public funding for the facilities of charter schools is scarce in many states. This forces charter schools to use per pupil revenues both for operating their program (paying teachers and other operating costs) and acquiring and maintaining their facility. In many cases this funding is insufficient to cover all the expenses associated with developing a facility and schools must finance their project in other ways. This section will review various sources of funds for charter school facilities and how to access them. Use the financing worksheet to compare sources of financing, their terms and conditions.

When applying to any funding source - be organized. If you have a business plan you can lay out exactly what your needs are and supply a great deal of information on your program in one document.

If you think you're going to need additional funding for your project, start seeking funds from a variety of sources as soon as possible.

There are several major categories of funding sources. Obviously, grants are preferable to loans or bonds that must be repaid. Some sources of funds include:

          Government Grants
          Foundation Grants
          Corporate Grants
          Individual Donations
          Private Investors
          Loans
          Bond Issues

Depending on your local jurisdiction, your charter school may be eligible for various local, state or federal grants.

Federal Grants
Charter schools have used federal funds for facility projects, but these funds usually flow through state or local conduit government agencies. Check with your state and local governments for the following:

Start-Up funds
The U.S. Department of Education provides grants to states for charter schools in their first three years of operation. Each state distributes these funds in different ways - usually either a per pupil amount received by each school, or through a request for proposal (RFP) process. They are currently your most dependable sources of funds for facility projects in the early years, though the amount of the grant is unlikely to be sufficient for any large capital project. They are also restricted and cannot be used to purchase a building.

CDBG funds (Community Development Block Grant)
Federal funds distributed by states to revitalize communities. See http://www.hud.gov/progdesc/cdbg-st.html.

Empowerment Zones/Enterprise Communities
Grants, tax incentives and loans to create jobs and expand opportunities in the most economically distressed communities. See http://www.hud.gov/cpd/ezec/execlist.html.

HOPE VI
Federal funds to revitalize severely distressed public housing and improve social and community services (including schools). See http://www.hud.gov/pih/programs/ph/hope6/hope6.html.

State Grants
Charter schools should contact their state department of education, state legislators representing their district and any other related state agencies that may have funds available for a charter school facility.

Some schools have received small grants from local legislators when they have been able to demonstrate the positive impact of their school on a neighborhood. Legislators in some states, such as Pennsylvania, have made small grants to charter schools serving very low income communities.

Local Grants
Check with city and/or county governments to learn about local sources of grants. Your school may be eligible for funds based on the demographics of the students you serve, or because you are revitalizing the community through your facility project.

Contributions from a philanthropy may be a worthwhile option to pursue for facilities funding. Foundations are highly specific; each has its own philanthropic focus, grant application and approval process. However, there are many reference sources about foundations that track the types of grants they make (for example, some foundations have a particular interest in funding educational organizations, or programs for children and youth), and their geographic focus. See http://www.fdncenter.org for more information about foundations in your area.

National Foundations
There are several national foundations who make grants to charter schools for operating expenses and technology needs, however none make funds available for capital projects. Hopefully this will change in the future.

Local Foundations
The Foundation Center is a good starting place to find out about local philanthropies you might want to approach. Once you find a good match for your program, set up an appointment to meet with the staff if possible. This can be useful before filling out an application. It provides an opportunity to get a better understanding of what the foundation is looking for, and perhaps to help educate them about charter schools in general.

Do not ignore very small local foundations. They may be run by family members and more open to a variety of funding requests. Every contribution, even the small ones, count!

If your area has an association of local foundations, you and other local charter schools may consider a brief presentation to explain the mission, goals and operation of charter schools. You may lay the groundwork for significant foundation support for your programs.

Fundraising Success
New Visions School in Minneapolis, MN raised $4 million over a 2-year period for its $4.6 million facility project. Contributing to New Visions' fundraising success was the school's ability to demonstrate results from its program, such as a 1-½ year reading gain among students for multiple years. An annual report that highlighted the school's achievements also raised awareness in the community and led to increased contributions.

Contact Bob DeBoer at 612-706-5512 or bdeboer@mail.actg.org.

Applying to Foundations
Once you know you meet the eligibility criteria for a foundation, get an application or find out what its process is. If you prepared a business plan, it may be a useful attachment to their application. Pay attention to deadlines - many foundations make grants only once or twice a year.

Be Clear About Your Request
This manual is focused on developing your facility. If you are requesting foundation funds for your facility, you are looking for a "capital grant" or a "grant for bricks and mortar" or a "building grant". This is different from a request for an operating grant (to pay staff, buy materials, etc). Many foundations do not make capital grants. Check before you apply.

Hone Your Message
If you are aware of a foundation's hesitation over charter schools, think carefully about how you will present your program. Often a pre-application meeting can be useful to answer any questions about how charter schools work. Be prepared to respond to questions about charter schools siphoning resources from traditional public schools, etc. If you meet eligibility requirements in other areas, such as serving a low-income population, try to emphasize the impact of your program in reducing poverty, for example.

Foundations want to know how you will sustain your program in the future. They are concerned about grantees becoming dependent on foundation support. This is a good opportunity to demonstrate how your school is self-supportive through per pupil allocations.

Do Your Homework
Make sure you have researched the size of grants a foundation has made in the past. Be sure your request fits in that range. Also, realize that foundations often require status reports to find out how their investment is doing. It is important to honor this commitment and many schools use it as an opportunity to further familiarize foundations with their work.

Beware of Co-Mingling Funds
Never change the use of grant funds without the consent of the donor. Even if you are in a bind and need to make payroll, don't use grant funds restricted for a capital project for any other use. Make sure you understand what the funds can be used for when you receive them and make sure your financial management system can keep them separate.

Many companies have charitable giving departments that make grants to community-based non-profits. This is an area worth investigating. Most communities have several businesses interested in investing in the community. Some companies are particularly interested in developing a skilled workforce, and you might consider pursuing a partnership that might include facility funding as well as in-kind support through mentors or materials.

As with foundation grants, find out what the company's goals are for its philanthropic efforts - if it has a targeted giving program or other eligibility guidelines. Again, your business plan may be a useful addition to any application.

Consider other ways to partner with local corporations. Some corporations have proven willing to invest substantial sums in schools near or within their own facilities. Having a public school nearby or on the premises is an excellent draw for employees. Talk to corporations in your community about a variety of ways to support your school.

Fundraising for your facility through individual contributions may seem like an uphill battle, but it can be a meaningful source of funds. You might develop an individual contributions goal as part of an overall capital campaign (see below). Find out from board members, staff and parents if you have contacts with high net worth individuals who might be interested in making large individual contributions to your school (emphasize the tax benefits to these donors). If you expect individual donations to be fairly modest you can design a fundraising strategy such as "Buy a Brick" with each donor's name engraved on a brick visible in the school. Contributions from individuals can build community goodwill as much as raise funds.

Be careful, however, of the costs involved with raising funds through individual donations. Time, energy and money spent raising these funds should be considered, especially if it drains resources away from raising large grant awards or other sources of funding.

An organized way to approach all the different sources of grant funding is to develop a capital campaign. This is a plan for raising funds (usually grant funds) for a specific project. There are fundraising consultants who can help you develop a campaign or you can develop one yourself. You determine how much you can reasonably fundraise over a given time period and then lay out how you will go about doing that.

For instance, a charter school may decide to begin a capital campaign to raise $145,000 for a $400,000 facility project (the remainder to be financed through a loan). The school prepares a written fundraising plan including goals for each type of grant. This might include $50,000 from governmental grants, $50,000 from foundation grants, $40,000 from corporate grants and $5,000 from individual donations. The fundraising plan would further break out each category of grants; which organizations it would apply to; and which staff or board members would contact each one. The school should do its homework ahead of time to check its eligibility for each grant.

A smart charter school will be conservative in how much it thinks it can raise, and not count on receiving all grant dollars by the time it needs them for the project. In the example above, a larger loan size was assumed in case fundraising results were not as successful as planned.

A capital campaign like the one in the example would take at least six months. It would involve every board and staff member and many parents. It would put most of its resources into the large grants which it knew it had a good chance of receiving. Parents in this example could organize individual contributions and hold special events to raise funds. The key is to break a capital campaign into smaller pieces and to have realistic expectations.

Capital Campaign

Total Project Cost:
Capital Campaign Goal:
Loan:

$400,000
145,000
330,000

(The loan amount is larger than necessary in case the capital campaign raises only half its goal.)

Breakdown of Capital Campaign Goals

1 government grant
2 foundation grants totaling
4 corporate grants totaling
100 individual donations totaling

$50,000
50,000
40,000
5,000

While you are considering various ways to finance your facility, do not overlook the involvement of individuals or firms in non-traditional ways.

If you are looking to buy a property, approach the seller to find out if they are interested in providing you with financing. Sometimes the seller will hold a mortgage which reduces the amount of grant or loan funds you need to raise to acquire the site.

Some sellers may be interested in getting a tax break by making a large monetary donation to the non-profit charter school which the school would then use to purchase the building. This should be arranged carefully with legal counsel, but it can be a creative way to get what is essentially grant funding from a non-traditional source.

Private investors might also be willing to buy a property and lease it to your school for reasonable rates. They may be able to help out with equipment leasing or other materials. One common arrangement is for friends of the school - perhaps even members of the charter school board - to purchase and lease a facility, or to lease a facility they already own, to the school.

While this approach can result in beneficial financial terms, operators should take care to avoid problems with conflicts of interest. A couple of guidelines can help. First, operators should be able to demonstrate that the rates they are paying are at or below market rates, i.e., that the owners are not earning extraordinary profits from the arrangement. Second, individuals with a financial interest in the property should scrupulously avoid the appearance or reality of participation in decisions made by the school about the property (e.g., by recusing themselves from board votes on property issues, by removing themselves from the charter school board altogether, or by refraining from "lobbying" other board members on property questions.)

Many charter schools find they cannot raise enough grant funds to cover the costs of their facility projects. If the school can afford the costs of taking a loan (or issuing bonds), and if it has the resources to make debt service payments, this may be a suitable source of financing for a facility project. In some cases, borrowing may even reduce the fiscal burden of facilities if loan payments are lower than lease payments, or if the loan allows the school to increase enrollment.

Costs of a Loan:

Application Fee
Sometimes lenders will charge an application fee that must accompany the loan request. It can range up to $1,000 and can sometimes be credited toward the origination fee if the loan is approved.

Origination Fee
This fee covers the costs of the lender reviewing the loan request. It will usually amount to one to two percent of the loan amount. A one percent origination fee on a $500,000 loan would be $5,000.

Legal Fees and Closing Costs
Lenders may have additional fees for the preparation of the legal documents and other costs of "closing" or executing the loan. These vary widely depending on the lender and type of loan. Be sure to find out what they are up-front.

Prepayment Penalties
Sometimes lenders will charge a penalty if you repay your loan in total before it comes due. Check your loan documents before executing them to see if there is a prepayment penalty and how much it is. If you anticipate refinancing the loan, or prepaying it because you move to a new or bigger facility, you may want to look for a loan with no prepayment penalty.

Interest
Interest is the amount charged for borrowing funds. The interest rate is usually quoted in an annual percentage rate. For example, to borrow $100,000 for just one year at an interest rate of 10 percent would cost a charter school $10,000 in interest for one year.

Loan Repayment
Loan payments are usually made up of two components: principal payments (repaying part of the $100,000 borrowed) and interest payments (the charge for using the money). For mortgages, the payments will be the same each month, while the proportions of principal and interest vary. On the following page is a mortgage amortization schedule from the spreadsheet program Lotus 123. It amortizes a $100,000 loan at 10 percent for a term of 15 years. In the first month, the monthly loan payment or debt service payment of $1,074 includes $833 of interest and $241 of principal. After this first monthly payment, the loan will have a balance of $99,759 ($100,000 minus $241 of principal payments). You will notice that as more principal is paid down, the interest expense decreases. If you want to calculate your own loan amortization, you will need access to a spreadsheet program such as Lotus 123, which has a template for amortizing loans. You can also use an HP calculator or search for one of the many mortgage calculators available on the internet.

There are many different sources of loans, each with its own criteria, cost structure and application process. Included in Appendix E is a sample loan application from NCBDC for your reference. Every lender will have its own process and application requirements. Many lenders are not yet familiar with charter schools, so be prepared to give a basic description of how charter schools are organized and funded.

TYPE OF LENDER	WHERE TO FIND THEM	COMMENTS

Large regional and national commercial banks	Should have a presence in the community. Talk to a loan officer, perhaps in the non-profit, small business or real estate department.	If you serve a low-income community, your loan may help the bank meet its Community Reinvestment Act goals.

Small community banks	Talk to neighborhood banks near your proposed facility. Ask board members and parents where they bank. These banks may not have a non-profit lending department.	May have minimum loan size. May have lower minimum loan size requirements and more flexible terms.

Community development financial institutions (CDFIs)	CDFIs try to revitalize communities by providing access to credit to organizations that are not otherwise eligible for loans. For a CDFI that finances charter schools, check NCB Development Corporation. Or, call NCBDC's education team at 202-336-7680 or email to request an application. Or, check here to find other CDFIs that serve your community.	May be more familiar with charter schools. Several CDFI's, including NCBDC, have dedicated loan pools for charter schools. May have more flexible lending criteria. There may be local and national CDFI's who serve your area.

Government loan pools	Some schools may qualify for government programs such as the USDA's Rural Development Program. This program provides loan guarantees for community facilities in rural areas.	Check eligibility: programs may target specific geographies or types of organizations.

Finance companies	See your local charter school resource center for private financing companies in your area. There are some national finance companies as well. Check here and here (PDF).	Compare rates, private finance companies may charge a premium over other sources.

Seller financing	If you have found a facility for sale, ask the seller if they are interested in taking back a mortgage. The charter school would make loan payments to the seller. Often the seller will only finance a percentage so you may still need conventional financing for the remainder.	Get a lawyer and accountant to review any seller-financed project. Beware of sellers who want to charge exorbitant rates - see if you can get a bank loan instead. If not, pay close attention to the fine print of any agreement and make sure your rights are protected.

Before you approach a lender, know what you are asking for. Banks and other financial institutions have a variety of loan products. You should determine your facility financing needs and decide what loan product best meets those needs.

LOAN TYPE	USE OF LOAN FUNDS	TYPICAL LOAN TERMS	COMMENTS

Construction loan	To pay for costs to construct a building or renovate an existing structure.	Repayment is usually required at the end of the construction period (usually 6-12 months).	At the end of construction, loan is usually converted into a permanent loan and repayment is made over several years.

Permanent loan or mortgage loan	To purchase land or buildings, or finance a project at the end of the construction period.	Charter school may have to provide up to 30 percent equity (i.e., the loan may be limited to 70 percent of the value of the property). Repayment may be required when charter expires.	This is often combined with a construction loan. Charter schools may be restricted to a "mini-permanent" loan with, for instance, a 20-year repayment schedule, but a requirement that the loan be repaid at the expiration of the charter, in say year five. This is called a balloon payment. In year five the school would refinance the loan to repay the lender.

Leasehold improvement loan	To fund the costs of renovating a leased facility.	Loan term will usually not exceed lease term. Borrower will need to obtain consent from landlord (lenders may require a Leasehold Mortgage or Deed in Trust, or an Assignment of the Lease).	This type of financing can be difficult to obtain. Many lenders shy away from Leasehold Improvement Loans due to the poor quality of a lease as collateral. (Lenders prefer a mortgage on land or buildings because it can be liquidated to satisfy the loan).

Working capital	To fund operating expenses, start-up costs.	Usually short-term (6-12 months).	This loan type is not covered in this manual, but charter schools may want to explore this type of financing with lenders if needed.

Since loans are a very common way for charter schools to achieve their facility project goals, the following are tips for dealing with lenders.

Do your homework and bring the right information
Figure out what type of loan you need and what institutions offer those products. Set up a meeting with a loan officer to discuss your project. Do this as soon as possible. You may need to gather additional information before applying for a loan, but the sooner you review your project with a loan officer, the sooner you will know what your chances of getting financing are. Bring your business plan and a budget for your facility project and be able to explain them in detail.

Financing through a CDFI
A North Carolina charter school accessed financing for its facility project through a state-wide community development financial institution (CDFI), Self-Help. The CDFI was able to use a program of the U.S. Department of Agriculture (USDA) that guarantees loans. The USDA program will guarantee up to 80 percent of a loan for community facilities if the facility is located in a rural area.

CDFIs are located throughout the country in both urban and rural areas. Many are interested in lending to charter schools. Contact the National Community Capital Association at http://www.communitycapital.org to find a CDFI in your area.

Find out what costs are involved and how long it will take
Every lending institution has its own fees and approval processes. Find out all the costs involved: loan application fee, loan origination fee, interest rate, prepayment penalties, closing costs, and legal expenses. You may find that there is a wide range between lenders. Balance their fee structures against their timing. How long will it take to find out if your loan is approved? Once approved, how long will it take to close your loan (execute the documents and begin receiving loan funds)? If your project has time constraints, you may need to choose a lender on the basis of the expediency of their process.

The lender's priority is repayment
If you want a loan, you need to convince a loan officer that it will be repaid. Show them your annual budget, your most recent financial statements (income statement and balance sheet) and future years' financial projections. Show them how you receive your per pupil allocation and what your enrollment has been. Be prepared to explain how your school manages its finances (e.g., computer software, bookkeeper, accountant, board finance committee).

Know what kind of collateral, or security, you can offer for the loan. This is the lender's secondary source of repayment if you do not make your loan payments and default on the loan. If you are purchasing a building you can pledge the building to the lender if you don't make your payments (this is a mortgage). Lenders have a variety of requirements regarding collateral - ask what they are and figure out how you can meet them.

The lender sees each loan in terms of risks
If you understand how the lender will evaluate your loan request, you can make a better case to the lender about why your school is a good credit risk. The following chart summarizes some of the main risks a lender might find in a charter school loan request and how you can address them.

RISK	INDICATORS	WAYS TO MITIGATE

Organizational Risk	Charter schools are start-up organizations and, in general, have a short track record.	Demonstrate depth of management and board experience Demonstrate sound financial management policies Demonstrate enrollment or waiting list

Renewal Risk	Charter schools are authorized for a finite term.	Demonstrate ability to repay loan before charter expires Explain your local process for receiving, keeping and renewing your charter. Describe the goals you set up for your school and how you will meet them in order to keep your charter.

Construction Risk	Charter schools often lack experience with real estate development. There is usually a short timeframe before school opens.	Hire experienced project manager and/or architect Provide detailed project budget with solid cost estimates and ample contingency Have a "Plan B" in case construction is delayed and school needs to open

Repayment Risk	Payments may be delayed because of cash-flow problems, enrollment may be off and therefore decrease revenues; school may go out of business and default on the loan.	Demonstrate solid enrollment, waiting lists Show detailed cash flow projections under multiple scenarios (worst case, best case) If you have an operating history, show financial statements for the most recent period (hopefully show surpluses and positive fund balance) Demonstrate ability to make debt service payments without depleting all funds (show that you have a cushion in your budget for unexpected expenses) Explain your local process for receiving, keeping and renewing your charter (see above)

Collateral Risk	In the case of a default on the loan, it is questionable if the property could be liquidated to repay the loan. This may be due to inflated property value, the property being single-use, or in poor condition.	Demonstrate the value of the property through an appraisal by a certified appraiser. Make an equity contribution to the project - lenders may fund only 70 percent of the value of the project - the charter school raises the remaining 30 percent. Provide information on how the property could be used for other purposes if liquidated (if the facility can only be used as a school then demonstrate that other schools would use/purchase it) Describe a property management plan and funds to be set aside for repairs to the building.

Appropriation Risk	The state legislature may decide to eliminate charter schools, or make conditions for charters less favorable.	Explain the terms of your current charter and how the per pupil allocation is disbursed. Describe the goals you set up for your school and how you will meet them in order to keep your charter. Provide cash flow proforma showing loan repayment before charter expires.

Charter schools in some states are beginning to raise funds for their facility projects through tax-exempt bond issues. Tax-exempt bonds are attractive because interest rates are usually lower than traditional commercial loans and terms usually extend to 20 or 30 years. Facilities projects generally need to be around $2 million or more to make a bond issue economically feasible.

Charter schools should investigate the environment for bond financing in their state. Bonds usually have to be issued through a conduit agency authorized by the state. Charter schools need to understand the bond underwriting guidelines. Often this includes a strong financial position, operating experience, and collateral in land or a building. Bond purchasers will be concerned about the expiration of the charter, so operators should be prepared to explain the likelihood of their charter renewal and the collateral value of the property. The fees involved in a bond issue can also be prohibitive to smaller projects. Also, find out how long it will take to issue bonds to be sure it fits the timing of your facility.

Colorado has pioneered tax-exempt bonds for charter schools. You can also talk to other charter schools and issuers of tax-exempt bonds for non-profits and schools in your area. This area of financing holds a great deal of promise for charter schools and is expected to grow in the future.

Financing through Tax Exempt Bonds
The Renaissance School in Parker, CO was one of the first charter schools in the country to issue tax-exempt bonds in a public offering to finance the costs of a facility project. The school raised $3.7 million in September 1999 through the Colorado Educational and Cultural Facilities Authority. The school received a 30 year loan at an interest rate of 6.75 percent, far below other sources of financing at the time.

Contact Melissa Marquez 303-805-0023 mcwinkel@earthlink.net.

http://www.uscharterschools.org/pub/uscs_docs/ta/budget.htm
http://www.communitycapital.org
http://www.charterfriends.org
http://www.pioneerinstitute.org/csrc/cshb/
http://www.wested.org/pub/docs/resources.htm
http://www.lqe.org/Resource_Guide/bm_funding.htm

Bank-Ability A Practical Guide to Real Estate Financing for Nonprofit Developers, F. DeGiovanni, R. Ream, L. Phare, Community Development Research Center, New School for Social Research, New York, 1996.

The financing worksheet can be adapted to your school's financing needs. Use it to compare sources of financing, their terms and conditions.