what charter leaders should know about facilities financing options

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Facilities Options for

Charter Schools

Webinar11/30/2016

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Welcome

3Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

WELCOME

Stuart Ellis, President and CEOCharter School Capital

Dick Ward, Sr. Vice PresidentDougherty & Company

4Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

WHAT WE’LL COVER

• Market overview and impact

• Understanding and choosing a funding structure

• Balancing facilities dreams and budget realities

• Funding approval - keys areas of focus

• Project execution and timing

• Other considerations

Agenda

Presentation will be available to download athttp://charterschoolcapital.org/webinars

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Market Overview

6Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

CURRENT MARKET IMPACT

• Lack of facilities access is an obstacle to growth

– Despite 3 million students there are still 1 million on waitlists

– Nearly 7,000 charters in U.S. yet many have suboptimal facilities that hinder

their growth

– With more financing options, charters can expand enrollment

• Money is cheaper than its been, but markets recently“disrupted”

– With rates currently rising, consider locking in long-term

– Refinancing may also be attractive now

• Options for your situation

– CMO vs. EMO vs. individual school

– Refinance and expansion

– Long-term lease vs. bank funding vs. bond

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Facilities Funding Structures

8Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

CONSIDERATIONS

What can we afford? What is required?

Existing reserves Academic mission

Ongoing % of revenue Growth plan for attendance

Fundraising – public/private Specialty requirements

Funding alternatives Local considerations

Want – need – budget

9Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

FACILITIES BUDGETING

How much can we afford?

$0mm $2mm $4mm $6mm $8mm $10mm$0mm

$2mm

$4mm

$6mm

$8mm

$10mm

$12mm

$14mm

$16mm

$18mm

$20mm

Facilities Budget vs. School Revenues10% Facilities Cost/Rev 15% Facilities Cost/Rev 20% Facilities Cost/Rev

Annual School Revenue

Potential Project Budget

10Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

AVAILABLE OPTIONS VARY

# of Years of Operation

$ Size of Financing

Large

Small0 10+

DeveloperLong-term Lease

BankLong-term Lease

BondLong-term Lease

Bank

Short-term LeaseLong-term Lease

Developer

Alternative capital sources expand with school/network size and maturity1st Renewed Charter

~$10mm

11Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

CONSIDERATIONS

• Control versus Ownership

– Control is critical to maintain stability, growth and financial predictability

– Ownership is an investment

• Evaluate total dollars spent not percentage rates

• Cost is not just money, but time and opportunity

– Risk of funding effort failure

– Total elapsed time to complete funding

• Structural constraints and impact on future options

What to consider in a financing structure

How do different options compare for my particular school?

12Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

FINANCING OPTIONS

Criteria Cash Bank Bond Long Term Lease

Cash needed to close

$7M $2.1 – 2.8M ~$200 – 500K $0 – 100K

Annual cost (example)

$0 $350 – 700K $600 – 800K $630 – 700K

Underwriting None Min 5 yrsSurplusAssets + Revenue

Min 3 yrsDebt coverageSurplusRating?

No minimumAcademic successFlexible

Security interest None Real estate + all assets

Real estate + all assets

None

Growth options Cash = Build Refinance risk Rate risk

10 yr minimum Refinance riskCovenants

Scalable, expandable

Considerations/challenges

Reserves? 20+/- 40% equity 5-20yr term and amortization

100% financing Transaction costs “Road show”

100% financing No amortizationBuy back

Note: $7 million project example; bank assumptions 6-8% interest on debt, 30-40% equity, 10-20yr amortization; bond assumptions 6-9% interest rate, 18% transaction cost/additional financing, 30yr amortization; lease options assumptions 100% financing, 9-10% cap rate.

13Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

THE BOND MARKET SOLUTION

• Bond market financing of charters has increased as the charter school market

has grown

• Bonds fit well for larger, more mature charters

• Other alternatives exist today to serve the remaining 88% of the charter

school market

Since 1990s, ~12% of charters nationwide received bond market funding

Source: 2015 LISC report, Charter School Facility Finance Landscape

14Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

TAX-EXEMPT BONDS

• Minimum 3 years operating history and audited financial statements

• At least one successful charter renewal (subject to state)

• Good to great disclosure in 4 key areas

– Academics (state report card benchmarks)

– Demand and enrollment (established enrollment base, retention)

– Governance and management

– Finances (fund balances, reserves, positive NOI)

• Facilities and real estate, not working capital

Qualifying criteria – general

15Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

TAX-EXEMPT BONDS

• Long term fixed rate capital

• 100% financing

• Cash flow emphasized over LTV or LTC

• Works for acquisition, new construction and combination

• Borrower creates credit history in a large, sophisticated market

Benefits and outcomes – general

16Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

TAX-EXEMPT BONDS

• Multiple parties involved (including legal)

• Higher transaction costs

• Suitable conduit issuer

• Longer funding process

• Direct review and approval from multiple investors

• Adherence to covenants (debt service coverage, other)

• High level of ongoing reporting

Tradeoffs (challenges)

All identified challenges have market participants, resources in place to

serve the charter operator

17Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

BONDS

• Issuance increased significantly in last 5 years

• Average transaction size increased – $15MM

• Key metrics have evolved

– 60 days cash on hand (in lieu of fund balance)

– Authorizer renewal/relationship important

– Disclosure requires good academic reporting

• 2015 & 2016 -- considerable # older bonds refinanced

Current conditions and trends — non-rated

18Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

BONDS

• Number of rated bonds increased

• Specific rating metrics published (both S&P and Moody’s) 2016

• Investment grade ratings skew to:

– Larger population sizes

– Measurable metrics – DCOH and MADS

– More obligated groups

Current conditions and trends — rated bonds

19Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

EXAMPLE - PROJECT $5MM

Security Interest

Growth Options

Underwriting

Annual cost

Cash needed

Comparison for illustrative purposes only. Rankings are based on how hypothetical “School A” might view its options based on unique attributes and objectives.

Criteria Cash BondTraditional Bank

Long Term Lease

20Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

EXAMPLE - PROJECT $20MM

Security Interest

Growth Options

Underwriting

Annual cost

Cash needed

Comparison for illustrative purposes only. Rankings are based on how hypothetical “School A” might view its options based on unique attributes and objectives.

Criteria Cash BondTraditional Bank

Long Term Lease

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Funding Approval and Execution

22Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

PASSING THE TEST

• Enrollment – Stable or increasing enrollment– Strong demand – waiting list, expanding grades, market growth

• School / Leadership History– Experienced leadership team with proven track record– Market leading academic performance(local peers, district, state)

• Numbers have to “pencil”– Sound financial performance and pro forma– Debt service / lease payment target < 20% of total revenue– Valuation of target property

• Governance issues– Authorizer relationship– Operational excellence and adherence to internal controls

Funding structure requirements

23Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

FACILITY CONSIDERATIONS

• Plan ahead– Collaborate with the programmatic side of the organization– Lock in a stable leadership and management team– Understand academic performance– Plan financial performance measures

• Watch the market– Keep an eye on rates and available products– Understand the real estate opportunities and challenges– Have realistic expectations

• Line up internal resources– Legal, financial and academic

• Prepare for the deal– Work with a partner – Charter school experience – Line up your financing ahead of time

Four key components

24Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

PROJECT EXECUTION

Execution requires significant time

Plan Construct Design Acquire

Space Programming

Features Budget Timeline Charter

approvals

Select team Design/build

options GC bidding Bldg. permit Timing; big

bang or phased

Locate Site Acquisition Use Permit Land prep

Move dirt Raise the

roof Control:

Project manager or owners rep

Fund

Cash Bank Bond Lease

25Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

KEY CONSIDERATIONS

• Full-service resource–Funding partner / structure–Commercial developer–Architect–General Contractor

• Flexible / Adaptive to your unique project• Guarantor / Sponsor / Investor• Access to working / growth capital• Total cost of ownership (now and later)

Choose a strong partner

26Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

OTHER OPTIONS

• Long-term lease

• State bond

• CDFI

• Private bond

• Cash reserves

• New market tax credits

• EB-5

• USDA (rural development funds)

Options expand as organization matures

Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Questions?

28Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Thank YouPresentation available at: Charterschoolcapital.org/Webinars

Stuart Ellis sellis@charterschoolcapital.org877-272-1001

Dick Warddward@doughertymarkets.com612-376-4159

29Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.

Dougherty & Company LLC is not recommending an action to you as the municipal entity or obligated person;

Dougherty & Company LLC is not acting as an advisor to you and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to you with respect to the information and material contained in this communication;

Dougherty & Company LLC is acting for its own interests; [and] you should discuss any information and material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material;

Dougherty & Company LLC seeks to serve as an underwriter on a future transaction and not as a financial advisor or municipal advisor. The information provided is for discussion purposes only in anticipation of being engaged to serve as underwriter.  The primary role of an underwriter is to purchase securities with a view to distribution in an arm’s-length commercial transaction with the issuer. The underwriter has financial and other interests that differ from those of the Issuer.

Dougherty & Company LLC Disclaimer