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Providence Financial












MONTHLY NEWSLETTER:  AUGUST 2009 ISSUE

IF IT DOESN’T PASS THE SMELL TEST, DON’T EAT IT!
BY BRENT VAN ALFEN, CPA
PROVIDENCE FINANCIAL CO., LLC



Difficult economic times create a great breeding ground for con artists. With the tax-exempt financing markets still stuck in the mire of illiquidity after 18 months, many charter school managers are being contacted about financing “solutions” that sound like a “godsend.” With facility plans on hold because of a dearth of financing options, charter operators are becoming vulnerable to questionable, if not blatantly fraudulent, financing schemes.

For example, we were recently approached by some people who wanted us to sponsor their financing plan to charter schools. They featured a 0% interest rate and 100% financing. Now, that will always get my attention! They said they did not really need to do a great deal of due diligence on the financial condition of the prospective borrower schools but just wanted to help “good people.” Their loans do not require documentation. The source of funds is a $1.2T private trust fund that is domiciled in a foreign country but administered in New York. The loans are to be administered by one of the individuals with whom we were meeting who has absolutely no experience in banking, accounting, or finance. Oh well, how do you lose? Where do I sign? Oh, but there is just one more detail, the borrower must deposit 20% of the loan amount in a trust account to demonstrate good faith – before the loan request is processed. So if a charter school facility will cost $10M, $2M must be deposited in a trust account in a bank of the lender’s choosing. Then you fill out an application and send it in to the folks in New York who manage the private trust. Even if there are a few charter schools that have enough cash to deposit that much money with a loan application, NEVER, NEVER DO THAT! It is a scam that is as old as the dollar bill itself. Whenever a prospective lender or broker asks for a large deposit with the application, the red lights should be flashing in your brain like a fire engine. When someone asks for a large deposit, one must ask if that is the way they are making their money – from the deposits.

Another common theme in loan scams is the use of some form of additional or “primary” collateral, which may take the form of financial instruments such as bonds, treasuries, letters of credit, etc. which are held beyond your control and which you may never see again. These are secured at the borrower’s expense to reduce, or in some cases, eliminate the risk entirely from the lender. In these “programs,” foreign banks or other offshore sources are almost always involved.

Whenever a loan type or structure is presented to you that you do not understand or that has some aspects that don’t sound quite right, always seek competent advice. Ask for help from a CPA, attorney, banker, or a qualified financial advisor.

During times like these, we must be creative but sensible. During the past year and a half, I have seen schools get pressured by underwriters and lenders into permanent, long-term financings in the 8% to 9.75% range. They won’t be able to refinance that debt without a prepayment penalty, aka no-call provision, for up to 12 years! Each situation has a solution -- some better than others, but the school does not have to fit into some lender’s or underwriter’s program. There may be other, more creative solutions that are not being offered because the lenders or underwriters can’t or won’t do them.

We at Providence Financial have been mitigating the high interest rates by structuring rate resets in two years and by giving the school the right to call the bonds anytime without penalty, aka advanced refunding. We are using Build America Bonds to allow lower rates to the schools while accessing shorter-term funds. These bonds are more challenging to sell, so you are not likely to hear about them from many underwriters. There are creative ways to finance your facility in today’s market. Don’t hesitate to call to see if we can help you.

Oh, and by the way, we have a great deal going right now with a bank in Kenya…send us $50,000 and we will tell you about it!!!

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