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MONTHLY NEWSLETTER:  MARCH 2007 ISSUE

IMPORTANT DEVELOPMENTS IN CHARTER SCHOOL FINANCING
BY BRENT H. VAN ALFEN, PROVIDENCE FINANCIAL CO., INC.


Charter school facility financing in the municipal markets has hit “warp speed.” It was just about a year ago now that excellent charter schools with a three or more year track record were paying 7% plus for their facility debt. Since then, rates have dropped dramatically. Now it is not uncommon to see similar schools in the mid to high 5% range. This is a natural result of the market maturing and the effects of added competition from new underwriters and investors being introduced to this market. I am happy to say (brag-sorry) that Providence Financial has played a significant role in this developing market.

Just recently, the market has taken another significant turn in favor of charters. I am arranging the financing for six charter schools that are in their first year of existence. They are in new buildings that were provided by a developer, and they have good student counts. They have excellent leadership, and we are going to be able to finance their facilities at excellent tax-exempt rates--and yes, they are still in their first year of existence. They will be able to borrow 100% of the cost of their building plus expenses at a 30-year amortization. Just a year ago, I don’t think this would have been possible unless they were pooled.

Let me describe how the transaction works. The developer will contract with the school to construct a facility for the school. He will have to be satisfied that the school has adequate governance and that there is enough demand to fill the seats. Once the school moves in to the new facility and the student count is established, take-out financing for the school begins. Assuming that there are enough students to create the cash flow necessary to make the payments and that the financial projections are satisfactory, the school can get financing to buy the facility from the developer. There are no personal guarantees, and the financing is for 100% of the facility cost. That means there is no down payment cash required. As long as the school is a non-profit entity, they will be able to achieve tax-exempt rates, which are currently under 6%. If you are associated with a school that is at this stage of development, I can recommend a developer to you.

Another feature that we have encouraged in the documentation is a balloon payment or call feature. This will allow a school to exit their bond financing without penalty and take advantage of future developments in the market and further lower their costs. This is another development that will become more acceptable to investors as the market continues to mature and competition intensifies.

Today it is not uncommon to see charter schools financing facilities in the mid to high 5% range.

Unfortunately, many of the developments in charter school financing are available only in charter friendly states. The political and legal climate in many states is holding charter school financing back. In one state where I am working, the teachers unions and their political henchmen are still opposing charter school facility development strenuously. In another state where I have several clients, the municipal political climate is still in the Stone Age, and the financing options are extremely restrictive for charter school facility financing.

The developing charter facility financing market is becoming much more complex than ever before. More financing alternatives are fast becoming available, and this trend will continue. As stewards of public money, charter school boards have a fiduciary responsibility to keep their costs at a minimum and to take advantage of every alternative possible to keep facility costs to a minimum. Just as municipalities everywhere do, more charters are recognizing the need to use the services of a qualified financial advisor to guide them in their financial decision making process. I just happen to know where you can find an excellent one.

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