As with any other business startup, charter schools need funds to pay for developing and staffing the facility . . . even before the first paying customer walks in the door. This requires finding lenders to fund the start-up expenses.
The two types of funding for a school are equity–the money the operator invests in the school–and debt–the money a third party lends to the school. Equity can take the form of tax-deductible contributions to a building fund, grants from foundations, corporate or business contributions, and funds provided by the board of directors.
Loans are available through many different sources, but the most common is the local bank. Other sources are awards from the new federal charter school facilities financing demonstration program, and bond issues.
When purchasing a home, the buyer puts up part of the purchase price–the down payment, or equity–and then turns to a local bank for the balance–the mortgage, or debt.
While banks are familiar with lending money for homes, most are uncertain about the viability of charter schools. However, the federal Community Reinvestment Act requires banks to invest in the communities they service. It is important for the charter school operator to communicate to the bank the benefits the school will bring to the community.
Since a bank is more likely to approve a loan to a new business if its exposure is reduced by a third-party guarantee to pay off the loan, the charter school operator should investigate the opportunity to obtain a guarantee for all or part of the loan. These guarantees may be obtained from the local school board, from members of the board of directors of the charter school, or from the federal government.
The federal government guarantee may be obtained from several different agencies. For example, the U.S. Department of Agriculture has a guarantee program for communities with populations under 50,000. The USDA guarantee has no loan limits and, in most cases, covers 80 percent of the loan.
With a third-party guarantee, plus the added bonus of earmarking the loan as a Community Reinvestment Act loan, the bank has strong incentives to lend the funds.
Federal Demonstration Program
The Federal Charter School Facilities Financing Demonstration Program was approved in December 2000 with a $25 million allocation to the U.S. Department of Education. The intent of the program is to test strategies for making facility financing more affordable and more readily available to charter schools.
The DoE has requested applications from prospective lenders who would implement new ideas for facilities financing. The program is expected to be operational after November 2001, when charter schools may apply for awards from the designated lenders.
Bond financing is cost-prohibitive for most charter schools. The relatively high cost of creating the bond makes this financing vehicle inappropriate for schools with small debt requirements. However, when the financing needs of a number of schools can be “pooled” into a larger group, a bond issue can be made cost-effective. This form of charter school financing is used in Colorado.
Private companies are beginning to assist charter schools by creating pools of loans from schools in many different areas. Two companies that can assist in this regard are Carty & Company in Memphis, Tennessee (phone 800/767-8940) and Ford and Associates in Tampa, Florida (phone 813/902-0250).
Other sources for information on charter school financing are The Charter Friends National Network at www.charterfriends.org, and Self Help at www.self-help.org.
Mark Howard has specialized in the development of commercial properties since 1980. He owns and operates M.H. Realty Associates, Inc. in Tamarac, Florida. Readers with questions on facilities and finances are encouraged to contact him directly at [email protected]. The most frequent questions about common problems will be included in future columns.