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Providence Financial









MONTHLY NEWSLETTER:  OCTOBER 2006 ISSUE

FACILITIES FINANCING FOR START-UP CHARTER SCHOOLS
BY BRENT VAN ALFEN, PROVIDENCE FINANCIAL COMPANY, INC.


Many of you don’t realize that I was a legendary high school football player. In fact, the older I get, the better I was! I will never forget the first competition game I ever played in junior high school (middle school now). I was on the ninth grade team and our first game was against another school that I had previously attended, so I had friends on both teams and on both sidelines. It was our first series of downs, and a pass play was called wherein I was to run a crossing route. In my mind, I pictured myself catching the pass, running to the end zone, and being cheered by my friends. I ran my route perfectly; the ball was perfectly thrown; and just as I was about to catch it, another pair of hands took it from my grasp. My first reaction was to tackle the defender who just shattered my dreams of glory before he ran it into our end zone and scored for the other team. I leapt and grabbed at the feet of the interloper and made a perfect open-field tackle. Just as he was beyond the point where he could right himself, he hollered in a voice of dismay that I will never forget …”Brrreeennntt!”  I pushed my helmet back from my eyes and looked up in horror at my friend and fellow teammate as he hit the ground with my football. I had tackled my own teammate and prevented a touchdown! One of us ran the wrong pass pattern; and, to this day, we argue about which one of us it was. For the record, he messed it up! See, I told you it was a legendary career! I have never lived that one down. Fortunately, things improved after that, and I managed to make the team through the rest of high school. 

The point I wanted to illustrate with that true story is that it often takes awhile, under the best of circumstances, to really get good at something. As related to charter school management and facilities planning, it may take you some time to really know what you want in a building and campus. Due to chronically tight budgets, sometimes it is more important in this business to learn what you can do without. I have had many calls over the years from schools that are just getting started or haven’t started yet, and they want to finance a rather elaborate campus. There are situations where it makes sense, as the one here in Utah that I am assisting now; but it takes an unusual set of circumstances to be able to intelligently plan a campus you can live with for many years and be able to get financing for.

Any start-up business has trouble getting financing, but several things compound the problem with financing a multimillion-dollar charter school facility. There is no operating history on the borrower.  Not many types of lenders know what a charter school is. There are no personal guarantees from owners (at least there should not be). Often the founders don’t have a proven track record.  Those are just a few of the problems.

I believe that a management team will know their facility needs far better after having run the school for a couple of years and learning what the needs and particulars of the school are.


I believe that a management team will know their facility needs far better after having run the school for a couple of years and learning what the needs and particulars of the school are. So, given the realities of getting started, what is the best facilities solution? I have seen some very creative charter school founders make do in facilities that one would think are almost impossible. I have seen them start in empty stores, strip malls, and office buildings. The owner/lessor may be willing to do some tenant improvements, or there are grantors and non-profit lenders that will look at tenant improvement loans to start-up charter schools. School buildings that are no longer in use by local school districts or churches may be available. In fact, there may be a church that has space to lease during the week.

Many schools start in modular buildings that can be leased for relatively short periods of time, such as 2 to 3 years. Some schools have been fortunate enough to get used modular classrooms at a very inexpensive lease rate. 

WHAT NOT TO DO is to enter into an expensive long-term lease for a custom-built campus. There is a growing number of developers and contractors who will build a school facility to suit the desires of management and then charge full commercial lease rates with escalator clauses. Buy-out provisions are also based on commercial “cap rates” used in today’s inflated real estate market but are out of the reach of a charter school on a tight budget. I have seen situations like this that I think will cripple the school’s ability to effectively pay the rest of the costs of educating their students, and the school is locked in to their lease for 25 years.  

Financially, it is best for a charter school to find a way to wait until after their second or third year of operation to acquire their facilities when the market will be much broader and the costs and rates will be lower. A school will have to live with the financing they get for a long time (five to ten years) before they can economically refinance, so it is important to try to anticipate the facility needs for that period of time. I believe that management will be in a better position to know that after they have been operating for a few years