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MONTHLY NEWSLETTER:  NOVEMBER 2007 ISSUE

CHARTER SCHOOL FACILITIES—LEASE VS. BUY
BY RICK VAN ALFEN, CPA
PROVIDENCE FINANCIAL CO., INC.


One of the most significant financial decisions that the management of a charter school must make is whether to lease or buy a facility for their school. There are many factors to consider in making this decision, and each school’s situation is different. However, there are some general principles you can think about in relation to your school’s unique circumstances.

There are some “no-brainer” leasing opportunities – Schools sometimes have opportunities to lease government facilities such as former public school buildings for low lease rates. If there is a good long-term prospect of continuing these favorable leases, they may be in the school’s best interest.

Leasing is often a valid short-term solution – Before extending a loan for a facility purchase, any lender or bond investor needs to have confidence that a school will have the cash flow to make the debt payments. Therefore, schools that are struggling with enrollment (and therefore have limited revenue) or have poor cash flow sometimes do not have the option of purchasing a facility. Leasing can be a good solution for these schools while they try to improve their financial condition to be in a position to buy a facility. Similarly, start-up schools also often need to lease a facility until they have the enrollment to be in a position to buy. Here are a couple of things to keep in mind on this point. Because the criteria for qualifying for financing can sometimes be complex, often schools do not realize whether or not they can qualify for financing. It helps to speak with someone with experience. For new schools, a helpful development in the area of facility finance is that we have recently been successful in financing schools in their first year of operation; so it does not take as long as it used to for a new school to own its own facility.

Buying provides long-term stability –If a landlord chooses not to renew a school’s lease, it can be devastating to a school. A school may not be able to locate an available facility nearby. If a school is forced to move to a new location too far away, it could lose significant enrollment. Additionally, due to the unique facility requirements of schools, anytime a school moves it usually must incur significant costs to build tenant improvements.

Buying usually is less expensive over the long-run – Purchasing a facility using fixed-rate debt “locks-in” a school’s future facility payments. This creates a favorable financial situation as per-pupil revenue increases in the future. The percentage of a school’s facility payments in relation to its revenue will therefore decrease over time. Leases usually include lease escalator clauses, which cause the amount of a school’s lease payments to increase over time, sometimes by a percentage greater than the increase in per-pupil revenue.

Buying usually is less expensive over the long-run. Purchasing a facility using fixed-rate debt “locks-in” a school’s future facility payments.

Buying builds equity – Owning a facility provides the opportunity for a school to eventually be free of facility payments when the debt is paid off.

If you lease, you’re usually paying taxes you don’t need to (even if you don’t realize it) – A for-profit entity that owns a building and leases it to a school is required to pay property tax. This can be tens of thousands of dollars per year. They must pass this cost along to the school, whether or not it is explicitly stated in the lease. When a non-profit organization owns a facility, it is not required to pay property tax.

Owning a facility can help attract students and teachers – Ownership usually makes it economical to design a school facility exactly as a school would like; leasing a facility presents obvious limitations. For example, compare a school that is designed and built as a school compared to leasing a location in a strip mall. First-rate facilities provide an additional sense of pride for the students and teachers who use the facilities on a daily basis. This usually contributes to higher enrollment demand and retention.

I’m sure you can tell that I am not impartial on this topic. Other than certain circumstances I described above, I believe that a school is usually better off by owning its facility. In order to qualify for financing, schools must plan carefully. We would be happy to help you evaluate whether leasing or owning a facility is best for your school or whether your school qualifies for financing.




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