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Providence Financial









MONTHLY NEWSLETTER:  AUGUST 2005 ISSUE

PLAN AHEAD WHEN FINANCING
BY BRENT VAN ALFEN, PROVIDENCE FINANCIAL COMPANY, INC.


I am currently involved in a rather large refinancing that includes several schools. One of these schools is administered by a husband and wife team who has a lifetime of experience in education. They are superb educators, and they relate well to kids. I was heartbroken to hear their story. They had built their school, a not-for-profit entity, up to three campuses and a large number of students. They had hired people they felt they could trust and gave these key people considerable fiduciary responsibility. During the course of building their school, John and Mary (fictitious names), loaned the school a considerable amount of their own money. Further, they signed personal guarantees on loans for the school. Tragically, John and Mary were betrayed by some of the key people they trusted in the school. As a result, the school has failed; and they had to close the doors. John and Mary not only have endured the tragedy of going through the school’s failure and all of the misery that is involved in that event, but they have also lost their home and are on the verge of personal bankruptcy. Why? Because they leveraged personal assets to loan the school money and signed those personal guarantees!

Many lenders, mostly banks, ask for personal guarantees of the key personnel in a school as a condition of making a loan. According to the lenders rationale, this keeps the key people in the deal so they won’t leave and will continue to make the school successful. Oh, and by the way, if the school does fail, the bank can go after all of the guarantors’ personal assets, including their homes.

In the case of a not-for-profit charter school, a personal guarantor generally has neither a claim to the asset nor do they have any reward for their risk.

Never, never, never sign personal guarantees on anything unless you have some “upside” in the deal and some assets associated with that guarantee that you can fall back on if things don’t work out. In the case of a not-for-profit charter school, a personal guarantor generally has neither a claim to the asset nor do they have any reward for their risk. The assets that 501c3 charters are financing belong to the school, not the guarantors. Hence, any increase in value or equity buildup belongs to the school. There is no upside for the guarantors. If the school fails and the value of the building is not sufficient to cover the debt owed the mortgage holder, guess who gets the phone call from the banker demanding the shortfall? Yup, the guarantor is the lucky one. The guarantor in this case has no upside and all of the downside. Just ask John and Mary.

If you are in this position already, give me a call. There may be a way to remedy it. If you are considering the financing or refinancing of a charter school facility, do not even think about signing a personal guarantee unless you will own the building and lease it to the school. I can also arrange that for you. The important point is that you carefully consider all of the options in financing a charter facility and don’t put yourself at personal risk unless it is prudent, and you are rewarded for doing so. ?

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