When the charter school is ready to look for financing, the first item required is a financing package, used by lenders as a tool to evaluate their potential loan.
The financing package is made up of several sections, including the story of your charter school, financing history or projections, security or collateral for the loan, equity or the capital required to make the loan, conditions of the local market for charter schools, and the role of the charter authority.
The Story of Your School
Every charter school is formed for a specific purpose. Existing charter schools have the ability to show their history of service to the community and the students of that community. Newly formed or potential charter schools are required to identify the specific education mission of their school and the programs to be employed in fulfilling that mission. Lenders are interested in these stories since they form the basis of the relationship between the lender and the school.
The makeup of the board of directors also makes an important contribution to the school’s story. The board should consist of parents, educators, influential representatives of the community at large, and business professionals–an attorney, an accountant, and local business owners. If these business professionals are not available, consideration should be given to outsourcing these responsibilities to one of the growing number of education management organizations, preferably one already operating in your area.
Financing History or Projections
Existing charter schools will have a two- or three-year record of enrollment that can be used to forecast future earnings of the school. This history will show the trends and stability of the school, which will assist the lender in assessing the risk in making a loan.
For new charter schools, which in most instances will be looking for funds to convert or renovate existing buildings, projections of enrollment, income, and operating expenses will be analyzed along with the existing market for education in the area.
Security or Collateral
In any business loan, the lender is most interested in preservation of capital. Consequently, the lender will look for items that can be used as security for the loan. The real estate, which would include the land and the building, is one of these items. The lender also would look to the furniture, fixtures, and equipment purchased by the school as additional collateral.
The security of the loan also is enhanced by guarantees from individual board members, the charter sponsor, the state, or some other government agency. Such enhancements provide the lender with a greater level of comfort regarding repayment of the loan and may result in a lower interest rate on the loan. In some instances, the lender might ask to receive payments directly from the sponsor or the state.
Equity and Capital Requirements
As well as security or collateral, the lender also may require that the school make a cash contribution toward the cost of developing or renovating the school site. This not only reduces the size of the loan but also demonstrates the faith of the founders in their education vision.
For existing schools, evidence of retained earnings and the use of these earnings as a reserve fund for future loan payments helps lower the interest rate on the loan and improves the lender’s inclination to make the loan.
Local Market Conditions and Role of Charter Authority
Local political support for charter schools is important to the lending institution reviewing a loan package. For example, lenders would consider loans less risky in states where there are numerous charter schools. Other factors that affect the willingness of lenders to make a loan are the current trend in charter school enrollment; the relationship between local public schools and charter schools; the identity of the sponsor/authorizer; and the planned role of local educational management organizations in the project.
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.