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Providence Financial



I heard that the definition of a neurotic is a person who builds dream castles in the sky, and a psychotic is one who moves in.

There is nothing wrong with dreaming and striving for the best in life, in education, and in business. As charter school administrators and managers, it is your duty to find the best programs to educate your students. Further, if you want your school to last very long, you must always look for the best management and financial strategies available. However, your desire to achieve the lowest cost financing available must be tempered with the practicalities of your situation and the realities of the market. Let me point out a few examples.

New Market Tax Credits: This is a government program to encourage investment in economically depressed areas. It is not restricted to charter schools, but on the contrary, the vast majority of these credits have gone into non-educational ventures. I am aware of a number of companies that were granted tax credits, but I am unaware of a single charter school to which the credits trickled down. Iíll bet there are some, but I have not encountered them. Some companies used their tax credits to benefit the causes for which they were intended, and their programs were very attractive. Other companies used the tax credits to minimize their risk and to maximize the profitability of the transactions to their investors to a degree that these programs were no better than any other financing for the borrower. I saw one New Market Tax Credit proposal that was not any better, and in some ways, not as favorable for the school as an unrated bond offering. I do know of many charter operators who spent a lot of time chasing these programs just to be disappointed. As is the case with all government enhancements, loans and grant programs, the availability is very limited; and there seems to be no limit to the number of applicants. The odds of success do not favor most schools.

Most charter schools will not get the government grant, enhancement, and loan programs. It is a matter of simple supply and demand arithmetic.

Credit Enhancements: Recently, I wrote about the benefits of credit enhancements and getting your bonds rated to get a lower interest rate. These strategies are available to very strong schools seeking large amounts of money, usually over $5M. The benefit of going this route is a very low interest rate. I am currently arranging two charter bond offerings with enhancements that will carry a fixed rate in one case of 5.5% and a variable rate in the other case of 4.25%. In both cases, the schools are exceptional in every way. The primary key to getting this type of treatment is a conservative loan to value ratio of 75% or less.

What is the reality? Most charter schools will not get the government grants, enhancements, and loan programs. It is a matter of simple supply and demand arithmetic. Most charter schools will not qualify for a commercial credit enhancement. The primary reason is that most charter schools do not have 25% cash to make a down payment. However, the market is getting stronger every month for unrated, un-enhanced charter school paper. This month I have introduced two major underwriters to the charter school market who have not previously done any charter school bonds. Providence Financial currently has over $130M in charter school facilities financing applications. Over three-quarters of that amount is for unrated, un-enhanced bond financing; and it works very well for the schools. These issues are available for up to 100% of the appraised value of the facility, and they carry a reasonable fixed rate of interest for a term up to 30 years. This market is not sexy, but it is practical and available.

Can you get out of a bad deal? Many schools are currently in an older bond offering or loan that has restrictions or rates that are no longer desirable in todayís market. Contrary to what you may have been told, there are ways to get out of many of these financing arrangements. Lock outs, pre-payment penalties, and defeasance charges can often be circumvented with some creativity. Each of them is unique, so I canít give you a formula that works for everyone; but Iíll be glad to look at your situation to see if you can get out of it. Just give me a call.

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