Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.
Facilities Options for
Charter Schools
Webinar11/30/2016
Copyright © 2015 Charter School Capital, Inc. All Rights Reserved.
Welcome
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WELCOME
Stuart Ellis, President and CEOCharter School Capital
Dick Ward, Sr. Vice PresidentDougherty & Company
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WHAT WE’LL COVER
• Market overview and impact
• Understanding and choosing a funding structure
• Balancing facilities dreams and budget realities
• Funding approval - keys areas of focus
• Project execution and timing
• Other considerations
Agenda
Presentation will be available to download athttp://charterschoolcapital.org/webinars
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Market Overview
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CURRENT MARKET IMPACT
• Lack of facilities access is an obstacle to growth
– Despite 3 million students there are still 1 million on waitlists
– Nearly 7,000 charters in U.S. yet many have suboptimal facilities that hinder
their growth
– With more financing options, charters can expand enrollment
• Money is cheaper than its been, but markets recently“disrupted”
– With rates currently rising, consider locking in long-term
– Refinancing may also be attractive now
• Options for your situation
– CMO vs. EMO vs. individual school
– Refinance and expansion
– Long-term lease vs. bank funding vs. bond
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Facilities Funding Structures
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CONSIDERATIONS
What can we afford? What is required?
Existing reserves Academic mission
Ongoing % of revenue Growth plan for attendance
Fundraising – public/private Specialty requirements
Funding alternatives Local considerations
Want – need – budget
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FACILITIES BUDGETING
How much can we afford?
$0mm $2mm $4mm $6mm $8mm $10mm$0mm
$2mm
$4mm
$6mm
$8mm
$10mm
$12mm
$14mm
$16mm
$18mm
$20mm
Facilities Budget vs. School Revenues10% Facilities Cost/Rev 15% Facilities Cost/Rev 20% Facilities Cost/Rev
Annual School Revenue
Potential Project Budget
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AVAILABLE OPTIONS VARY
# of Years of Operation
$ Size of Financing
Large
Small0 10+
DeveloperLong-term Lease
BankLong-term Lease
BondLong-term Lease
Bank
Short-term LeaseLong-term Lease
Developer
Alternative capital sources expand with school/network size and maturity1st Renewed Charter
~$10mm
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CONSIDERATIONS
• Control versus Ownership
– Control is critical to maintain stability, growth and financial predictability
– Ownership is an investment
• Evaluate total dollars spent not percentage rates
• Cost is not just money, but time and opportunity
– Risk of funding effort failure
– Total elapsed time to complete funding
• Structural constraints and impact on future options
What to consider in a financing structure
How do different options compare for my particular school?
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FINANCING OPTIONS
Criteria Cash Bank Bond Long Term Lease
Cash needed to close
$7M $2.1 – 2.8M ~$200 – 500K $0 – 100K
Annual cost (example)
$0 $350 – 700K $600 – 800K $630 – 700K
Underwriting None Min 5 yrsSurplusAssets + Revenue
Min 3 yrsDebt coverageSurplusRating?
No minimumAcademic successFlexible
Security interest None Real estate + all assets
Real estate + all assets
None
Growth options Cash = Build Refinance risk Rate risk
10 yr minimum Refinance riskCovenants
Scalable, expandable
Considerations/challenges
Reserves? 20+/- 40% equity 5-20yr term and amortization
100% financing Transaction costs “Road show”
100% financing No amortizationBuy back
Note: $7 million project example; bank assumptions 6-8% interest on debt, 30-40% equity, 10-20yr amortization; bond assumptions 6-9% interest rate, 18% transaction cost/additional financing, 30yr amortization; lease options assumptions 100% financing, 9-10% cap rate.
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THE BOND MARKET SOLUTION
• Bond market financing of charters has increased as the charter school market
has grown
• Bonds fit well for larger, more mature charters
• Other alternatives exist today to serve the remaining 88% of the charter
school market
Since 1990s, ~12% of charters nationwide received bond market funding
Source: 2015 LISC report, Charter School Facility Finance Landscape
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TAX-EXEMPT BONDS
• Minimum 3 years operating history and audited financial statements
• At least one successful charter renewal (subject to state)
• Good to great disclosure in 4 key areas
– Academics (state report card benchmarks)
– Demand and enrollment (established enrollment base, retention)
– Governance and management
– Finances (fund balances, reserves, positive NOI)
• Facilities and real estate, not working capital
Qualifying criteria – general
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TAX-EXEMPT BONDS
• Long term fixed rate capital
• 100% financing
• Cash flow emphasized over LTV or LTC
• Works for acquisition, new construction and combination
• Borrower creates credit history in a large, sophisticated market
Benefits and outcomes – general
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TAX-EXEMPT BONDS
• Multiple parties involved (including legal)
• Higher transaction costs
• Suitable conduit issuer
• Longer funding process
• Direct review and approval from multiple investors
• Adherence to covenants (debt service coverage, other)
• High level of ongoing reporting
Tradeoffs (challenges)
All identified challenges have market participants, resources in place to
serve the charter operator
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BONDS
• Issuance increased significantly in last 5 years
• Average transaction size increased – $15MM
• Key metrics have evolved
– 60 days cash on hand (in lieu of fund balance)
– Authorizer renewal/relationship important
– Disclosure requires good academic reporting
• 2015 & 2016 -- considerable # older bonds refinanced
Current conditions and trends — non-rated
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BONDS
• Number of rated bonds increased
• Specific rating metrics published (both S&P and Moody’s) 2016
• Investment grade ratings skew to:
– Larger population sizes
– Measurable metrics – DCOH and MADS
– More obligated groups
Current conditions and trends — rated bonds
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EXAMPLE - PROJECT $5MM
Security Interest
Growth Options
Underwriting
Annual cost
Cash needed
Comparison for illustrative purposes only. Rankings are based on how hypothetical “School A” might view its options based on unique attributes and objectives.
Criteria Cash BondTraditional Bank
Long Term Lease
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EXAMPLE - PROJECT $20MM
Security Interest
Growth Options
Underwriting
Annual cost
Cash needed
Comparison for illustrative purposes only. Rankings are based on how hypothetical “School A” might view its options based on unique attributes and objectives.
Criteria Cash BondTraditional Bank
Long Term Lease
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Funding Approval and Execution
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PASSING THE TEST
• Enrollment – Stable or increasing enrollment– Strong demand – waiting list, expanding grades, market growth
• School / Leadership History– Experienced leadership team with proven track record– Market leading academic performance(local peers, district, state)
• Numbers have to “pencil”– Sound financial performance and pro forma– Debt service / lease payment target < 20% of total revenue– Valuation of target property
• Governance issues– Authorizer relationship– Operational excellence and adherence to internal controls
Funding structure requirements
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FACILITY CONSIDERATIONS
• Plan ahead– Collaborate with the programmatic side of the organization– Lock in a stable leadership and management team– Understand academic performance– Plan financial performance measures
• Watch the market– Keep an eye on rates and available products– Understand the real estate opportunities and challenges– Have realistic expectations
• Line up internal resources– Legal, financial and academic
• Prepare for the deal– Work with a partner – Charter school experience – Line up your financing ahead of time
Four key components
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PROJECT EXECUTION
Execution requires significant time
Plan Construct Design Acquire
Space Programming
Features Budget Timeline Charter
approvals
Select team Design/build
options GC bidding Bldg. permit Timing; big
bang or phased
Locate Site Acquisition Use Permit Land prep
Move dirt Raise the
roof Control:
Project manager or owners rep
Fund
Cash Bank Bond Lease
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KEY CONSIDERATIONS
• Full-service resource–Funding partner / structure–Commercial developer–Architect–General Contractor
• Flexible / Adaptive to your unique project• Guarantor / Sponsor / Investor• Access to working / growth capital• Total cost of ownership (now and later)
Choose a strong partner
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OTHER OPTIONS
• Long-term lease
• State bond
• CDFI
• Private bond
• Cash reserves
• New market tax credits
• EB-5
• USDA (rural development funds)
Options expand as organization matures
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Questions?
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Thank YouPresentation available at: Charterschoolcapital.org/Webinars
Stuart Ellis [email protected]
Dick [email protected]
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Dougherty & Company LLC is not recommending an action to you as the municipal entity or obligated person;
Dougherty & Company LLC is not acting as an advisor to you and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to you with respect to the information and material contained in this communication;
Dougherty & Company LLC is acting for its own interests; [and] you should discuss any information and material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material;
Dougherty & Company LLC seeks to serve as an underwriter on a future transaction and not as a financial advisor or municipal advisor. The information provided is for discussion purposes only in anticipation of being engaged to serve as underwriter. The primary role of an underwriter is to purchase securities with a view to distribution in an arm’s-length commercial transaction with the issuer. The underwriter has financial and other interests that differ from those of the Issuer.
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