|PDF (599 KB)|
Policy Considerations Regarding Ability to Borrow Money for Facilities
Respondents interviewed for this guide shared several suggestions and reflections based on their experience with charter school financing. These may be useful for policymakers.
Incremental development of charter school finance market. Two respondents, the Massachusetts Charter Public School Association's Marc Kenen and Jim Griffin of the Colorado League, advise that it takes time for any charter bond market to mature. In their experience, the first step is that some schools must be successful getting in the door with the local private lending sector and securing commercial loans. As this happens, banks begin to understand that the risks associated with lending to charter schools are not as great as they might have imagined. As these lenders develop a level of comfort with charter school financing, they begin to consider these schools as another potential market. Once the market is established, state legislatures are more likely to pass legislation that gives charters access to lower-cost financing options, such as tax-exempt bonds or tax credits.
Flexible financing options for start-up and smaller charter schools. As mentioned, the borrowing options for larger, more mature charter schools are better developed than those for start-up and smaller charter schools. To shrink the financing barriers for the newer and smaller schools, Jim Griffin suggests that state policymakers consider developing special funding programs to offset capital needs for charter schools that are not able to benefit from bonds.
|Tax Breaks for Investors Make School Renovation a Reality Neighborhood House Charter School, Boston|
The Neighborhood House Charter School (NHCS) sits on three acres of land, overlooking a bay from one of the highest points in Boston. The school's building was previously used as a nonprofit transitional home for troubled youths, and sat empty for a year before the school purchased it and embarked on an ambitious renovation. NHCS gutted two wings of the facility and built an addition, creating an inviting school setting with plenty of greenery. The total price for the purchase and renovation of this facility was approximately $20 million.
In Massachusetts, charter schools receive direct cash assistance, but the amount is limited: only about $850 per pupil (compared to over $3,000 per pupil in Washington, D.C., for example). This funding is not nearly enough to cover all of NHCS's facilities costs, but it helps, and this revenue source also makes the school more attractive to investors. In addition to long-term loans and private fund-raising, the school raised $7.1 million through tax-exempt bonds underwritten by Fleet America (now Bank of America) and approximately $7 million in federal Qualified Zone Academy Bonds (QZABs)—bonds that offer tax credits to investors. The school will pay back its various debts over the course of 30 years, initially with annual payments of approximately $450,000 to $500,000.
The QZABs were critical to financing the NHCS facility. Jug Chokshi, the school's chief financial officer, says, "If it wasn't for the QZABs, I don't know that we would have gone forward with this real estate deal." At the same time, however, the QZABs also restricted the school's options for how it could spend the money. Because QZABs cannot be used to finance new construction, the charter school's operators decided mostly to rebuild the facility they had purchased instead of tearing it down and starting from the ground up. (Funding from other sources was used to finance the new portions of the facility.)
The school had to spend a substantial amount of time and resources to complete the transactions for both the QZABs and the tax-exempt bonds. To help them, the school's operators relied heavily on an external group called Paradigm Properties for advice throughout the complex financing process and for help with communication among the various parties involved. As with all the school's financial transactions, the purchase and financing was handled not by the school itself, but by a foundation set up to handle the school's finances. This arrangement protects any private investments from being forfeited to the state if the school should close for any reason.
NHCS had several advantages that made it a good candidate for the sophisticated forms of financing it pursued. Having opened in 1994, NHCS has a longer track record and history of securing financing than many charter schools. (Tax-exempt bonds and QZABs typically are used by relatively mature charter schools seeking large sums of money.) NHCS also had the benefit of having several school board members with backgrounds in real estate and finance. These members initially sparked the idea to purchase a facility and also had the expertise to support the school through the complex financing process it chose.
Neighborhood House Charter School: Selected Statistics
Government support of entities involved in charter school finance. Many jurisdictions, including those featured in this part of the guide on charter school borrowing, offer examples of partnerships and close collaboration among government agencies involved in charter school finance, such as conduit issuers and state departments of education. In addition, the conduit issuers featured in this guide illustrate how enabling a central government agency (or, as in the case of Washington, D.C., a city government) to issue bonds on behalf of charter schools throughout the jurisdiction can help develop this finance market.
In some cases, charter school associations also have developed strong working relationships with government and quasi-public agencies that deepen the support available for charter school facilities. For example, for Massachusetts, Sullivan and Chuang specifically call attention to the benefits of close collaboration between key state agencies involved in charter facility finance, including the charter association, the Massachusetts Department of Elementary and Secondary Education, and MassDevelopment. Sullivan suggests that this collaboration may be unique in the country and says that it has been "very helpful" because the association and the department identify the needs within the marketplace and MassDevelopment helps to find solutions. In addition, Chuang says that, informally, this collaboration, involving regular interaction among the various players, has made communication and processes smoother, enabling the three agencies to coordinate.
Efficiencies through government-supported technical assistance and streamlining. Since facilities finance is not typically among the core competencies of charter school operators, they require significant technical assistance to understand the options, particularly in the bond arena-both tax-exempt and QZABs. Typically, schools hire financial advisors and consultants who can help them learn about and navigate financing deals. However, if government agencies could provide this expertise free of charge, charter schools could save time and money.
Washington, D.C.'s William Liggins highlights examples of how the Office of the Deputy Mayor for Planning and Economic Development (ODMPED) provides these benefits to charter schools seeking bond financing. According to Liggins, ODMPED holds many seminars to teach charter schools about the available financing options, and its staff is well versed in and shares information about the associated processes and relevant tax regulations. He emphasizes that streamlining the processes involved in securing bond financing through ODMPED to make them as efficient as possible and being as transparent and open as possible have been critical. ODMPED strives to have a user-friendly process in which all of the details and timing related to the application can be clearly explained. This helps ensure that schools complete all of their due-diligence related to leases, deeds, and any type of zoning issues. This streamlining also results in resource savings for charter schools (i.e., money and time).