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Providence Financial












MONTHLY NEWSLETTER:  JUNE 2007 ISSUE

BONDS VS. BANKS
BY RICK VAN ALFEN, CPA - PROVIDENCE FINANCIAL CO., INC.


Most of us are used to going to a bank when we need to borrow money. A bank is a good source for many types of traditional financing such as a mortgage, car loan, or a commercial loan if one has the required equity or down payment. However, in our experience, a bank is usually not the best source for charter school financing. Tax-exempt bond financing is usually the most economic and flexible method of financing charter school facilities. As I have recently been dealing with a bank on a charter school loan (due to some unique circumstances, they need some interim financing from a bank prior to obtaining long-term bond financing), I thought it may be useful to point out the primary differences between financing a charter school facility with tax-exempt bonds and bank financing. While varying facts and circumstances cause each charter school financing to be slightly different, following are some general differences between tax-exempt bond financing and traditional bank financing:

• Tax-exempt bond financing usually results in a lower interest rate. The non-taxable nature of interest from tax-exempt bonds creates an incentive for investors to buy these bonds, driving a lower interest rate. In our experience, the commercial interest rates available from traditional bank financing cannot compete with tax-exempt bond financing.

• Tax-exempt bond financing can be structured to provide a fixed rate for 30 years. Banks usually want to structure this type of specialty loan with a provision to reset interest rates every five years or less, causing higher payments if interest rates rise.

• Tax-exempt bond financing will generally allow the borrower to borrow an amount of money greater than the appraised value of the underlying assets. Banks usually will only lend up to 80 percent of the appraised value of a capital project. This is usually an insurmountable hurdle for charter schools because they usually do not have enough funds on hand to pay for 20 percent of the capital project they are trying to finance. Bond investors are usually more interested in enrollment and the resulting cash flow stream from the State than they are in the appraised value of the loan collateral (within reasonable parameters).

Tax-exempt bond financing is usually the most economic and flexible method of financing charter school facilities.

• Tax-exempt bonds usually provide less conservative lending criteria than banks. A credit officer at a bank is very cognizant that if he approves a loan that defaults, it reflects very poorly on him/her. With a record amount of investible cash from mutual funds, retirement accounts, etc., there is currently a significant demand from investors for tax-exempt bonds. This dynamic causes an interesting contrast between these two financing methods. When dealing with a bank, it often feels like an adversarial relationship. Borrowers often feel like bankers place as many hurdles in their path as possible; and only if borrowers successfully run this arduous gauntlet, do they qualify to borrow money from the bank and pay them interest. On the other hand, I have observed that all parties involved in a bond financing—from the school, financial advisor, underwriter to the bond investors—usually have a mutual, vested interest in successfully completing the financing. This lends itself to a more efficient process and a better result.

My intention is not to sound negative about dealing with a bank, because that would be the first place I would go for certain types of financing; but it is usually not the best alternative for most charter schools.

For information contact Rick Van Alfen, Providence Financial Co., Inc.
Phone: 801-556-2290 - Email: rick@providencefinancialco.com