charter school facilities options - webinar 2/2/2016

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

Facilities Options for

Charter Schools

Webinar2/2/2016


Welcome

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

WELCOME

Stuart Ellis, President and CEOCharter School Capital

Larry Rieder, PresidentCharter School Property Solutions


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 atwww.slideshare.net/CharterSchoolCapital


Market Overview


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

– Should be seeking to lock in

– Consider refinancing

• Options for your situation

– CMO v. EMO v. individual school

– Refinance and expansion

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


Facilities Funding Structures


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


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


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


FINANCING OPTIONS

Criteria Cash Bank Bond Long Term Lease

Cash needed to close

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

Annual cost $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.


FINANCING OPTIONS



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

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






None










FINANCING OPTIONS



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

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






None







100% financing No amortizationBuy back



BOND REQUIREMENTS

• Pledge of state funding assigned to trustee

• Fully funded debt service reserve

• First mortgage collateral

• Level annual debt service amortization

• Liquidity covenant 30-45 days cash on hand

• Debt service ratio covenant of 1.10x

• Debt service default covenant of 1.0x

• Capital improvement reserve funding

Since 1990s, ~9% of charters nationwide received bond market funding

Source: 2014 LISC report, Charter School Facility Finance Landscape


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


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


Funding Approval and Execution


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


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


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


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


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


Questions?


Thank YouPresentation available at: SlideShare.net/CharterSchoolCapital

Stuart Ellis [email protected]

Larry [email protected]

charter school facilities options - webinar 2/2/2016

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