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MONTHLY NEWSLETTER:  JUNE 2008 ISSUE

A TOTAL FACILITY SOLUTION IS MORE THAN BRICKS AND MORTAR
BY BRENT VAN ALFEN, CPA
PROVIDENCE FINANCIAL CO., INC.



I wish I had kept track of how many times over the last few years charter school board personnel have approached me with their expensive architectural drawings completed and asked me to arrange financing for their new facility. All too often the plans are for a project that was estimated to cost an amount of money the school could not possibly afford. This illustrates the tendency to think that the building projects begin with the architect and the drawings. It is a trap that all too many have fallen into. So where does the new building project begin? I am sure there are varying opinions about this question, but here are my suggestions.

First, a school must create a budget for the project beginning with determining how large of a payment the school can prudently afford to pay each month. Conventional wisdom is that a school should not commit to facility payments that exceed 15% to 20% of gross revenues. A budget for your new facility should begin with an operating budget for the next five years to determine a payment amount the school is comfortable with. Once you have arrived at a payment amount, you can calculate the amount the school can borrow for the project. Don’t forget to add costs of obtaining the financing; and if you are getting an adjustable interest rate, those rate changes should also be considered.

Schools that are entering into a lease for their facilities should also keep this guideline in mind and remember to factor in applicable property taxes. Your facility should be “sized” to the number of students you plan to have. That means the above mentioned budget should begin with the number of students you will teach in the new facility. This should include growth assumptions, if any, from your current location. I have seen schools plan buildings they could not afford with their enrollment income. A budget projection should begin with the enrollment assumption and proceed with income and expenses based on that enrollment.

Many don’t realize that location can have a significant effect on availability and pricing of facility financing. For example, last month Rick wrote about the USDA financing programs that are available in communities of less than 20,000 people. I have seen a school locate in an urban area that was 1.5 miles from an adjacent community that would have qualified for USDA financing. Locating in that community would have lowered their interest rate by at least 1.5%.

Construction and permitting are always an enigma to charter schools--mainly because there are no board or administration people who need an extra, unpaid job. However, there are solutions to this difficult problem. I favor design-build arrangements with reputable contractors over the traditional architect and contractor approach. The design-build approach combines the functions of the architect and the contractor so there is a seamless, more integrated process. I am also told that there are many areas of duplicated costs that are eliminated. Further, this arrangement gives the board one responsible point of contact that has total responsibility to bring the project to completion on time and in budget. There can be no blaming the other guy if there is no other guy! In a design-build arrangement, the contractor will handle the permitting, design, quality assurance, etc. The municipal entities involved will also provide inspections that will assure a level of quality. If a board wants to have additional safeguards against sub-par workmanship, etc., construction monitoring and inspection firms can be engaged.

Current research suggests that the brains of the digital generation are different physically and chemically. And they continue to change.

In any construction project schools should insist on a guaranteed maximum price contract. A school should settle for nothing less than that because they cannot afford to assume construction risk in behalf of the builder. Builders that resist such a contract may not be strong enough financially for your project. You should check the state agencies that oversee contractors to make sure they have a good track record and no record of litigations that may concern you.

Plan your project with the future in mind. You should plan for expansion or other contingencies that may arise. The earlier you get a financial advisor in place in the construction planning process, the better. We can help you avoid many pitfalls that you otherwise may fall into. If you have questions, give us a call anytime at no obligation.

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