facilities financing options for charter schools - csdc

Copyright © 2014 Charter School Capital, Inc. All rights reserved.

Facilities Financing

Options for Charter Schools

11.4.2014

CSDC

Leadership Update Conference

Copyright © 2014 Charter School Capital, Inc.

Welcome

3Copyright © 2014 Charter School Capital, Inc. All rights reserved.

WELCOME

• Alex Lucero, CEO, REAL Journey Academies

• John Helgeson, Chief Development Officer, Charter School Capital

Panelists


AGENDA

• Understanding and choosing a funding structure

• Balancing facilities dreams and budget realities

• Funding approval - keys areas of focus

• Excel Prep case study

• Other considerations and best practices

What we will cover today

Copyright © 2014Charter School Capital, Inc.

Focused on Charter Schools

6Copyright © 2014 Charter School Capital, Inc. All Rights Reserved.

WHO WE ARE

100% dedicated to charter schools

• Specialty finance company empowering charter school growth

• Began funding charter schools in California in 2007

• More than $800M of funding provided to date

• 0% default rate

• Relationships with over 400 charter schools serving 450,000 students in 11

states

7Copyright © 2014 Charter School Capital, Inc.

WHERE WE ARE

400 5

519,0001,130

184,400605

44,100149

253,245280

239,996625

141,204297

119,533400

130,842176

Current Clients – Working Capital + Facilities

# Students# Schools

99,328197

91,813233

69,392110

58,933127

63,175145

54,90695

58,691117

47,689245

35,35381

31,74387

34,34775

29,718124

19,43938

22,38459

19,40947

21,91195

26,02234

16,05139

10,37021

10,39833

15,5337116,137

25

2,44611

7,13118

2,13319

7256

3153

3824

5,98027

6,21519

Anticipated Working Capital 2014

Facilities Only

TBD31

21,39752

38,302107


Facilities Funding Structures


FACILITIES FUNDING

• 42 states and the District of Columbia have charter law– 16 states provide per pupil funding earmarked for facilities

oCA: SB740oCSFA

• Use state credit rating to reduce costs?• Why don’t states do more?

Industry data


FACILITIES FUNDING

Bond; $9.0 NMTC; $1.7

Gov't subsidies, $1.2

Non profit sources, $2.1

Other; $59.3

Volume of facilities financing

Since 1998 ($ in billions)

Source: LISC 2014 Charter School Facility Finance Landscape


BOND RATE DISTRIBUTION

Total Rated Bonds in 2013 = 67

A+ A BBB+ BBB BBB- BB+ BB BB- B+ NR

1 12

3

17

11

8

1 1

22



BOND ISSUANCE DATA

Annual charter school bond issuance through May 1, 2014


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$250

$500

$750

$1,000

$1,250

$1,500

0

15

30

45

60

75

90

$11 $80 $208

$305 $226 $274 $327 $396

$572

$1,037

$556 $361

$951 $800

$1,109 $1,303

$470

4

19

2631 33

30

42 43

59

79

44

26

74

51

75 76

23

$ Amount Issued (in millions)

Number of Issues


BOND OPTION

• Pledge of state funding assigned to trustee

• Fully funded debt service reserve

• First mortgage collateral

• Level annual debt service amortization

• Liquidity covenant 45 days cash on hand

• Debt service ration covenant of 1.10 – 1.25x

• Debt service default covenant of 1.0 – 1.2x

• Capital improvement reserve funding (school is funding TI/buildout)

Requirements


BOND READINESS

• Waiting for approval of discretionary entitlements

• Quantifying costs of design, acquisition and build out

• Completing at least one charter renewal

• Recent management, staff or faculty turnover

• Recent or uncertain adverse financial developments

Factors that may delay bond financing


BOND READINESS

• Adopt an official intent resolution

• This will aid in keeping future options open

Official intent resolutions


BOND READINESS

Other analysis

• Bonds at par for charters increasing relative to overall bond market

– 18% for charters compared to down 12% for broader tax exempt bond market

• Risk analysis

– Only S&P currently rates charter bonds

– Moody’s and Fitch only have one rating each since June 2012


CONSIDERATIONS

• Ownership is an investment

• Control is critical to maintain stability or growth

• Evaluate dollars spent not percentage rates

• Cost is not just money, but time and opportunity

What to consider in a financing structure


WANT – NEED – BUDGET

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

Things to consider


FUNDING COMPARISON

Criteria Cash Bank Bond Lease Option

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 yrsSurplusRating?

No minimumAcademic successFlexible

Security Interest None Real estate + all assets

Real estate + all assets

None

Growth options Cash = Build Refinance risk Rate risk

Refinance riskCovenants

Scalable, expandable

Considerations/Challenges

Reserves? 20+ - 40% equity 5-20yr amortization

100% financing Transaction costs “Road show”

100% financing No amortization

Note: $7 million project example; bank assumptions 6-8% interest on debt, 30-40% equity, 10-20yr amortization; bond assumptions 6-9% interest rate, 20%

transaction cost/additional financing, 30yr amortization; lease options assumptions 100% financing, 9-10% cap rate.


FUNDING OPTIONS

• New market tax credit (NMTC)

• CDFI

• EB-5

• Rural development funds

• Other

Other creative options


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

BankLease Option


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

BankLease Option

Copyright © 2014 Charter School Capital, Inc. All Rights Reserved.

Excel Prep Charter School


EXCEL PREP

• Established since 2009• Multi-campus/multi-charter operator in Southern California• Serving at-risk students, mainly of African-American and Hispanic origin• Moreno Valley campus authorized by Nuview School District

– Separate charter from other campuses• Grades K-7 – consistently growing enrollment• Merger with another area charter operator nearly complete

– Both organizations stand to benefit from economies of scale – Moreno Valley benefits from the operational expertise of partner

operator’s executive staff– Partner operator inherits the unsurpassed community rapport and

networks of Moreno Valley’s founders.

School overview


EXCEL PREP

Facility and project description

• Moreno Valley, Riverside County, California (east of Los Angeles)• 34,400 sq. ft. campus on 3.8 acres, formerly occupied by a church• Replacement for previous Moreno Valley location (2 miles away)• Lease executed with parent of multiple campuses• Below market value acquisition of ideal facility

– 20+ classrooms– Administrative space– Gym/auditorium– Outdoor green space– Playgrounds– Basketball courts– Ample parking– Easily accessible from two main thoroughfares


Property photos

EXCEL PREP


Total Project Cost - $5,456,284

2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

Enrollment 414 594** 594 594 522

Lease rate (%) 9.5 9.5 9.5 9.8 10.1

Cash on cash (%) 17.86 17.86 17.86 18.71 19.57

Ann. lease pymt $345,564* $518,347 $518,347 $533,897 $549,914

Coverage 1.53 1.96 1.99 1.94 1.92

Rent/rev (%) 12.8% 10.9% 10.9% 11.0% 11.1%

5 year pro forma

* 4 months’ rent capitalized into total project cost

EXCEL PREP

** 522 original enrollment projection


Funding Approval and Execution


PASSING THE TEST

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

• School / Leadership History– Experienced leadership team with successfully history– 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 (land)

• 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 or do the deal on your own?

o Have a beauty pageanto References and last three deals

Four key components


PROJECT EXECUTION

Execution requires significant time

Plan Construct Design Acquire

Space Features Budget Timeline Charter issues

Select firm(s) Design/build

options GC input Timing; big

bang or phased

Locate site Acquisition Permitting Land prep

Move dirt Raise the roof Control: Project

manager or owners rep

Fund

Cash Bank Bond Lease option


Construction

PROJECT EXECUTION

Building is almost the easy part


KEY CONSIDERATIONS

• Full-service resource

– Selecting the right funding partner and structureo Bondo Loano Lease

– Commercial developer

– Architect

– General contractor

– Design/build

• Flexible and adaptive to your unique project

• Guarantor / Sponsor / Investor

• Provide access to working and growth capital

• Calculate total cost of ownership (now and later)

Choose a strong partner


FUTURE CONSIDERATIONS

Trends and observations

• State and federal credit enhancement

• Rating agency

• CMO vs. individual school

• Refinance and expansion

• Long-term lease options

• Subsidized start-up capital


Thank YouPresentation available at:

SlideShare.net/CharterSchoolCapital

John [email protected]

Alex [email protected]

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