Charter School Facilities: A Resource Guide on Development and Financing

Introduction

Facility
Development

Needs
Assessment

Site
Selection

Construction/
Renovation

Appendix A
Appendix B
Appendix C
Appendix D
Appendix E

Once the needs assessment has been completed, the site evaluation and selection process can begin. Operators should be prepared to commit adequate time to this process, which can be long and tedious.

Try to designate at least two people to the site selection process. In addition to a charter school staff member, the project manager or architect (if hired), a board member or anyone else with some real estate, construction or finance background will be helpful.

A real estate agent may also be a member of the team. It is advisable for schools to find someone who will serve as a "buyer's agent." This means he/she will represent the school's interest at all times and not just show properties he/she is personally listing.

Using a team approach will help evaluate potential sites because each team member will have a different perspective. Ideally every team member should visit each potential site. This will enable the group to make fully informed comparisons.

Adapt the Site Selection Worksheet on p. 25 to your particular needs. Have each team member evaluate each site using these criteria.

The benefit to starting the process early is that the selection of a school site may take several months before an appropriate space becomes available. Seeing many different properties, and many different types of properties will help the team understand what kind of space is available at what price. It is recommended that the team visit at least five to ten properties before making a decision. Many organizations view dozens of properties before finding a suitable location.

Finding a Low Cost Site
New Visions School in Minneapolis, MN selected the site of a former sheet metal plant for its school. The grade one through eight charter school renovated the 40,000 square foot site, adding 12,000 square feet to accommodate the school's needs. New Visions was able to complete the project for $4.6 million, or $90 per square foot (including the costs to acquire the site, renovate the building, and build the addition), a bargain compared to the $125-$150 per square foot spent by local districts to build new schools.

For more information contact Bob DeBoer at 612-706-5512 or bdeboer@mail.actg.org.

As you evaluate sites, always keep in mind safety issues for your school. Personal safety, fire safety and safe accessibility for those with disabilities should be given a high priority.

This is a major mistake of many groups. Entering into a real estate transaction is a business arrangement. Operators must be prepared to evaluate facilities in an unemotional way and to be able to walk away from any situation where costs outweigh benefits.

Armed with an estimate of the school's square footage needs and its basic budget, the team should visit a variety of types of space. They should become familiar with local rates, such as:

Cost Per Square Foot - The cost per square foot (cost psf) is the total cost divided by the total square feet of the space. Compare the rates on several facilities. The rates will probably vary based on the condition of the space, the amenities offered and the location of the property. After viewing a number of properties the team should get a feel for current rates and what they will be able to afford.

For leased space, this rate is calculated based on the annual rent divided by the useable square footage. Useable square footage excludes the space taken up by walls, elevators etc. When viewing space to be leased, the site selection team should note what is included in the cost per square foot. Taxes, insurance and utilities may or may not be included. If they are excluded the lease rate may be called "triple net." This means that the lease rate is net of those expenses and therefore the school will be responsible for them. The team will also want to know whether the tenant or the landlord is responsible for property repairs and maintenance.

For a facility to be purchased, the cost per square foot is simply the purchase price divided by the total square footage. The site selection team should be sure to note how the square footage of the building was determined and what space it includes. Square footage estimated by the seller is less reliable than square footage measured by a certified real estate appraiser. Square footage that includes unusable space, such as the basement or attic, may result in a misleading rate.

To compare the cost of purchased space with leased space, divide the annual cost of the purchased space (mortgage payments) by useable square feet. Compare this rate to the lease rate. This is a basic comparison, and operators may want to evaluate other long-term costs and benefits from purchasing or leasing.

Costs of Improvements - During the site selection process, it is important to obtain a realistic sense of the all-in cost to make a facility operational. As an exercise, prepare a budget for a potential site visited by the team. Even if that site is not selected, it will give the team a realistic sense of the costs involved. (See Section V for ideas about budgeting.)

If the site is to be purchased, estimate closing costs, financing fees, and the cost of interior and exterior renovations. If possible, ask a general contractor to visit the site and give a real estimate of the cost of the construction work.

If the site is to be leased, calculate any one-time costs that would not be paid for by the landlord. Some landlords will not pay for renovations, such as new walls for classrooms, installation of outlets for computers, etc.

Many charter schools will face the dilemma of whether to buy or lease a facility. There is no right answer; both options have advantages and disadvantages.

May provide a good option for schools that are knowledgeable about financial and legal issues around property ownership
May be more economical than leasing for schools with large enrollments. Large one-time costs can be spread over many students
Allows control over the physical plant and gives sense of permanence to school
Protects from the uncertainty of short-term leases
May improve ability to build financial assets

Necessitates up-front cash
Requires substantial time
May require debt
Gives school responsibility of property management
Results in less flexibility to change locations easily
Owning real estate may be legally prohibited for schools

Agreement of Sale
Legal document denoting price offered by buyer and any conditions to the sale. This document is legally binding when the seller signs it (accepts the offer).

Settlement Date or Closing Date
The date when the seller receives payment for the property and ownership transfers to the buyer. If a loan is needed, loan documents are also signed at this time.

Mortgage (also called a Deed of Trust in some states)
The instrument through which ownership of a property is transferred if a loan cannot be repaid. Most lenders require a mortgage as collateral when lending funds. The party borrowing the funds will sign a legal document evidencing this pledge.

Note
A written promise to repay a loan, which lays out the amount of the loan, the interest rate and terms of repayment. The party borrowing the funds will sign a legal document evidencing this promise.

Title
Legal control of a property. You will receive "title" to the property you are buying at the closing or settlement. A title company will research the past ownership of the property and any outstanding liens or unpaid bills before title is transferred to you. All buyers want a "clean title" to the property being purchased, meaning there are no other ownership claims to the property and no unpaid bills (especially taxes) for which the new owner could be responsible. Buyers can purchase "title insurance" from title companies to ensure that their ownership of a property is free of any other claims or liens.

Allows for more flexibility
Provides more options since many different types of space are usually available to lease
Can have shorter negotiations than when buying property
Creates flexibility to move at a later date if necessary
Requires less up-front cash and may be cheaper in the short run
May involve fewer property management responsibilities

Creates uncertainty at the end of the lease term when the school will have to find alternative space if the lease cannot be renewed
May be harder to finance because many lenders will not accept a lease as collateral for a loan (although in some states a Leasehold Deed of Trust is acceptable as collateral for a loan - check with local lenders)
Can be more costly over the long run since it does not allow the organization to build assets
Often involves a lack of direct control over property management issues

Lease agreement
This document details the terms of the lease, including the amount to be paid (usually monthly). The agreement will outline the responsibilities of both the tenant and the landlord. The tenant and landlord must sign the document to make it valid and in effect.

Term of the Lease
The lease agreement will identify the dates when the lease is in effect. It will also describe if the tenant has the option to renew the lease and how to do so.

Base Rent, Effective Rent, Annual Increases
The base rent is the amount to be paid as negotiated in the lease. The effective rent takes into account rent abatement, or months of free rent that reduce the overall cost of the lease. The lease agreement will also lay out whether or not the rent will increase and when.

Triple Net (NNN)
With a NNN lease, the tenant is responsible for the payment of taxes, insurance and utilities (not included in lease payments). In other words, the lease payments are net of taxes, insurance and utilities.

Rent Abatement
Rent abatement is a concession given by the landlord in the form of reduced or waived lease payments. For instance, a tenant might negotiate to receive three months free rent while the tenant is renovating the space at the tenant's expense. The rent abatement is consideration for the expenses incurred by the tenant.

Lease Details
It is important to pay careful attention to the fine print. Make sure you understand how the following will be handled:

payment of utilities
payment of taxes
payment of insurance
responsibility for maintenance
responsibility for custodial duties
access to shared amenities
access to parking
off-hours access
security
notice of termination of lease
options to renew lease

The following chart summarizes advantages and disadvantages of various types of space, regardless of whether it is leased or purchased.

TYPE	PRO	CON

School buildings	Ideal academic setting Already arranged with classrooms, gym, cafeteria, library, administrative offices Site is usually very accessible Good parking, playground space	Rarely available in good condition Sharing space with charter schools difficult in some districts School buildings sometimes deed restricted to educational use (decreasing the re-sale value for charter schools purchasing these facilities)

Commercial space	Frequently available in strip malls Large, open spaces easily converted to classrooms Easy bus and car access Good parking	Extensive renovations required Few windows, poor light & ventilation Setting often inappropriate for school Limited playground space Busy traffic may be safety issue May not be zoned for education use

Office space	Frequently available Access to public transportation Good parking, car access	Extensive renovations required Limited non-academic space (gym, etc.) Limited playground space Elevators and potential safety issues May not be zoned for education use

Residential space	Location accessible to student homes	Extensive renovations required Limited non-academic space Zoning variance possibly necessary Limited parking Potential difficulties accommodating growth Possible resistance from neighbors

Warehouse/flex space	Large, open spaces easily converted to classrooms Easy to adapt space for non-academic uses (gym, etc) Easy bus and car access Good parking	Extensive renovations required Limited access to public transportation Zoning variance possibly required Potential hazardous material issues Possibly inappropriate setting for school

New contruction	Tailored to the school's needs Low maintenance costs	Public funds to construct new buildings sometimes prohibited for charter schools Very expensive (though sometimes actually cheaper than renovating) Disposition of building if charter is not renewed

Modular units (trailers)	Can be obtained quickly Appropriately sized space provided Configured in flexible ways Short term commitment Flexibility of location Growth easily accommodated	Expense of necessary site work Sub-optimal in bad weather conditions (not all under one roof) Limited office and non-academic space

Houses of Worship	Usually very affordable Frequently available during school days Often configured with classrooms Often include gym, cafeteria, playground Good access, parking	May need to set up every Monday, pack up every Friday

When looking for a site to build a new facility, there is a range of other issues to consider:

Infrastructure
Does the site have water, electricity, gas, sewage (or septic tank)? Is there easy access to the site by roads, or will roads have to be built?

Soil Condition
It is worth doing a preliminary assessment of the soil condition if there is any reason to believe the soil cannot support a new facility. Is the soil marshy or sandy? On the other hand, particularly rocky soil can also impinge on your ability to build on a site. A soil engineer can help you investigate these concerns.

Zoning Issues
Who will support your use of this land for a charter school? Who will oppose it? Get legal help early if there is a chance of a public debate.

Environmental Issues
What else has this site been used for? If there were any industrial or unknown uses in the past, you will want to get a Phase I Environmental Report (at a minimum) to find out exactly who used the site in the past. If the Phase I indicates underground storage tanks, you may need to do further tests to verify underground storage tanks or other potentially hazardous materials.

The key to the site selection process is to keep many options open. No matter how perfect a facility seems, experience has shown that there are many hurdles to clear after selecting a site. It is critical to have one or two back-up plans at all times in the process. This is time consuming, but it will pay off when an unforeseen obstacle appears.

Continue to keep an open mind when selecting a site. You may find a building to buy which cannot be renovated in time. Leasing for a year might be a reasonable solution.

Negotiate. Everything is negotiable in the facility development process. Don't assume any price is absolute - make an offer! There are a variety of ways to compromise with landlords and sellers of property which may save you money. Take advantage of any knowledgeable advisors to make sure you get the best deal.

A Creative Solution
The founders of the Flagstaff Arts and Leadership Academy in Arizona searched for sites in a variety of places. A potential site in a shopping mall was the right size but didn't "feel right." The school approached a local cultural institution, the Museum of Northern Arizona to host the school on its 400-acre campus and use the charter school's modular buildings for summer outreach programs. The museum agreed and now the museum's arts and science exhibitions are integrated into the charter school curriculum. The partnership helped raise community awareness about both institutions and helped the charter school raise additional start-up funds.

Source: "Museums and the Charter School Movement," Museum News, September/October 1998.

The School Design Primer, The Little Institute for School Facilities Research, 1996. Contact The Little Institute for School Facilities Research, 5815 Westpark Drive, Charlotte, NC 28217.

Guide for Planning Educational Facilities, The Council of Educational Facility Planners International, 1991. Contact CEFPI at 8687 E. Via de Ventura, Suite 311, Scottsdale, AZ 85258-3347.

Charter School Development Guide California Edition, by Eric Premack, 1998 (published by the author).

The Charter School Workbook, Second Edition, Center for Education Reform, Washington, DC, 1997. 800-521-2118 or http://www.edreform.com.

The Massachusetts Charter School Handbook, Fourth Edition, Pioneer Institute for Public Policy Research, 1999. http://www.pioneerinstitute.org/cscr/ch8.html.