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MONTHLY NEWSLETTER:  SEPTEMBER 2007 ISSUE

NEW CHARTER SCHOOLS CAN OWN THEIR FACILITIES
BY BRENT VAN ALFEN
PROVIDENCE FINANCIAL CO., INC.


Historically it has been a significant challenge for new charter schools to purchase permanent facilities. Most states provide little financial support for charter school facility funding. The paradox is that it is difficult for schools to qualify for facility financing until they have sufficient enrollment to meet the cash flow requirements - but they cannot build enrollment until they have adequate facilities.

Many schools start in leased facilities, sometimes temporary modular buildings, until they build up enrollment and can qualify for financing to purchase permanent facilities. Each school’s situation is unique, and this can be a good solution for some schools. For other schools, a facility may not be available for lease that is set up to accommodate a school, and it could be expensive to fund the necessary leasehold improvements to build out a facility. For example, to utilize a location in a strip mall requires building out interior walls and often expensive HVAC and electrical work. Likewise, temporary modular units require a school to install plumbing and electrical service to the site and often walkways and parking. These are investments that usually will not provide long-term benefits.

Another option we have seen many new schools use to successfully finance a facility is developer financing. I wanted to highlight this alternative because I have found that many charter school founders are unaware of this potential solution. Developer financing typically involves a developer paying to construct or purchase a facility, managing any construction work, and then leasing it to a school with a purchase option. The potential advantages of this solution include:

• allows the school to move into a facility that will accommodate the maximum number of students under its charter, and it can begin to grow enrollment. For schools in facilities that would accommodate the anticipated growth and demonstrated strong enrollment demand, we have been successful in helping schools obtain permanent, low-cost financing to purchase facilities in the schools’ first year of operation;

• starting in a nice building that enables a quality learning environment makes it easier to attract enrollment and teachers;

• avoids risk of disruption and potential loss of enrollment by moving to a new facility at some future date;

• management avoids having to manage a construction project and can focus on education;

• avoids build-out costs for a temporary facility;

• the developer, not the school, assumes the project risk until the school exercises the purchase option.

Developer financing typically involves a developer paying to construct or purchase a facility, managing any construction work, and then leasing it to a school with a purchase option.

Here are a few caveats. We have seen some school founders agree to provide personal guarantees of projects. We always emphatically urge charter school founders not to consider providing personal guarantees. We admire the passion of those in the charter school movement, but there are ways of starting charter schools and obtaining permanent facilities without risking your personal finances. Another caveat is to carefully scrutinize the terms of a lease/purchase. It is very easy to agree to the terms of a legal agreement without clearly understanding the future implications. Additionally, developer financing is only a good alternative if the economics make sense for a school.

It is appropriate for developers to be fairly compensated for the risk they assume and effort they invest, but that does not mean there is no room for negotiation. Because they have a fiduciary responsibility to the school, management and the board of directors should invest the effort to understand the economics of building and financing a project before they commit the school to a development agreement.

If you would like to explore developer financing programs, we would be glad to provide you with additional information.

For information contact Brent Van Alfen, Providence Financial Co., Inc.
Phone: 801-299-8555
Email: brent@providencefinancialco.com