facilities options for charter schools - webinar
TRANSCRIPT
Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.
Facilities Options for
Charter Schools
Webinar12/14/2015
3Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.
WELCOME
Stuart Ellis, President and CEOCharter School Capital
Michael Atkins, General CounselThe Leona Group
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 atwww.slideshare.net/CharterSchoolCapital
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CURRENT MARKET IMPACT
• Lack of facilities access is an obstacle to growth
– Despite 3 million students there are still 1 million on waitlists
– 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
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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
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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
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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
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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.
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 $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.
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.
14Copyright © 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 $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.
15Copyright © 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 $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.
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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
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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
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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
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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
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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
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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
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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
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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
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Thank YouPresentation available at: SlideShare.net/CharterSchoolCapital
Stuart Ellis [email protected]