Category Archives: Charter Schools

Loan Funds Help Charter Schools Finance Facilities. Here’s What You Need To Know. “Infrastructure Insights: Financing Charter School Facilities” Series

Photo courtesy of Yan Krukov for Pexels

As the Biden administration’s historic infusion of federal education funds are spent in states, coupled with a potential $1 trillion bipartisan infrastructure package making its way through Congress — a package that could include money for K-12 building safety and technology upgrades — we must ensure that charter school facilities are included in the policy debate. This concludes the “Infrastructure Insights: Financing Charter School Facilities” weeklong series, where Bellwether Education Partners shared insights into a range of issues facing charter school facilities.

Charter school loan funds are more affordable ways for charter leaders to pay for a new facility without diverting funds away from the things that matter most: educating and serving underserved students. But they can be complex. That’s why I’ve done the leg work and can share key findings to help you understand options available for your charter school. 

What is a charter school loan fund?

A charter school loan fund is created when an investment manager pools together a pot of money from people who have excess cash and are looking for ways to invest it. These low-interest, short-term loans offer temporary financing during a time when a traditional lender would not extend credit to a new entity. Loan funds such as these exist in many sectors outside education (e.g. residential and commercial real estate and start-up companies, among others). 

How are loan funds specifically used in the charter sector?

A charter school loan fund helps new or growing charter schools finance the rental, purchase, or construction of a school building. Traditional lenders often don’t extend credit to a new or expanding charter operator because these schools haven’t yet demonstrated viability through meeting enrollment targets, proving financial sustainability, or reaching academic success. Other investors might not have the industry expertise to understand if a charter school is a good investment.

People with excess funds they want to invest, including philanthropic entities, will turn to a charter school loan fund investment manager, who then uses their background in the education sector — and knowledge of the challenges facing charter leaders — to act as a steward of the money. This trusted professional writes loans to several charter schools, often providing these loans at lower interest rates than other options available in the market. Like any loan, charters must pay back these funds within the term of their contract (this varies by fund and can range anywhere from one to 30 years; many funds trend toward a five-year repayment term). After this time, a charter will have a stronger track record and lower risk profile, enabling them to secure loans from traditional lenders who are now willing to play ball and extend credit to the school.

Charter school loan fund overview

Do different kinds of charter school loan funds exist?

Yes. Here are a few examples,* though it is worth mentioning that this isn’t an exhaustive list:

Across all of these funds, one common theme emerges: the willingness to lend at subsidized interest rates. The combination of the power of philanthropy, short-term investment timelines, and the investment manager’s education expertise enable lenders to extend a charter operator credit at below-market rates while the operator builds a track record of success and creditworthiness. 

This sounds great. How can I access one of these charter school loan funds?

To get you started, we recommend a few practical tips: 

1. Know your options: Research facilities funds that are actively looking for schools to finance; some of them may even be in your own backyard.

2. Understand your needs: Before speaking to a loan fund professional, define your charter facility needs with key inputs such as: enrollment, master schedule, specials and amenities offered, etc. Think ahead about what compromises you’re willing to make and which you’re not. 

  • Have you built a financial model to understand how much debt you’ll require and the interest rate you can afford? If so, are the assumptions in your model realistic based on what the investment manager has seen?

3. Ask Questions: Many of these funds are willing to provide technical assistance to navigate this process. Know what questions to ask to tap into the knowledge of these investment managers.  

  • Where are real estate prices in your target market? 
  • Are suitable school facilities readily available or is the market highly competitive? 
  • What have other charter leaders recently paid to secure a building? 

If you’d like more information on how to navigate the charter facilities financing process, or want to collaborate with our team, email contactus@bellwethereducation.org. And if you missed any installments of our “Infrastructure Insights: Financing Charter School Facilities” series, click here.

(*Some organizations listed include past or present clients or funders of Bellwether.)

How Federal Funds and State Policy can Support Charter School Facilities “Infrastructure Insights: Financing Charter School Facilities” Series

Photo courtesy of Mary Taylor for Pexels

As the Biden administration’s historic infusion of federal education funds are spent in states, coupled with a potential $1 trillion bipartisan infrastructure package making its way through Congress — a package that could include money for K-12 building safety and technology upgrades — we must ensure that charter school facilities are included in the policy debate. Join us in an “Infrastructure Insights: Financing Charter School Facilities” weeklong series, where Bellwether Education Partners will share insights into a range of issues facing charter school facilities.

My colleagues have noted many of the challenges and potential supports for charter schools that struggle to access facilities. Many of these solutions are funded by philanthropy or by private sector investors; the public sector also supports access to facilities through federal and state policy. These programs provide a patchwork of solutions that are each an essential step toward more systemic support for charter school facilities. 

Charter schools can leverage several federal programs to support facilities access. These programs provide loans and grants, various forms of credit enhancement, access to bond markets, and incentives to encourage per-pupil funding at the state level. 

As with most education policy, however, most of the action is at the state level. Although state policies to support charter school facilities access vary significantly in their design and implementation, in general, they fall into four categories: 

  1. Access to existing school facilities
  2. Moral obligation and credit enhancement
  3. Loan and grant programs
  4. Direct per-pupil funding

Access to Existing School Facilities

In some states, charter laws ostensibly help charter schools access existing school facilities by requiring districts to share, lease, or sell underutilized district buildings, often at or below fair market value. For example, D.C. law requires that the mayor give charter schools the “right of first offer” to purchase, lease, or otherwise use an excess school facility. First preference is given to existing charter school tenants that have occupied most or all of the facility or property, followed by any charter schools that the DC Public Charter School Board has determined to be high-performing and financially sound. Unfortunately, these programs are rarely implemented as intended. 

Some districts have adopted charter schools as important partners, such as Denver. Even here, however, efforts to distribute facilities equitably between district and charter schools have become more contentious as empty school buildings become more scarce. 

Moral Obligation and Credit Enhancement

Other states offer charter schools credit enhancements, by creating some sort of payment guarantee on charter schools’ debt. Payment guarantees, backed by the state, reduce charter schools’ risk of default, leading to lower interest rates from lenders and allowing schools to access additional capital to purchase, lease, renovate, or construct facilities. Arizona has created a credit enhancement fund for public schools, including charter schools, which can be leveraged to provide low-cost financing. In addition, the Arizona Credit Enhancement Board guarantees the bonds of charter schools who have earned an “A” on the state’s academic performance rating.

One specific type of credit enhancement are moral obligation bonds, which are revenue bonds backed by a state’s pledge to make up for missed payments with funds appropriated through the budgeting process. While these pledges are not legally binding, states take them seriously. If a state fails to honor its pledge, it risks a downgrade of its credit rating, which could trigger increased borrowing costs across the board. Similar to other credit enhancement programs, the moral obligation bond provides charter schools with higher credit ratings and lower interest rates. States use these bonds for a variety of purposes across multiple sectors; however, only a handful of states (Colorado, Idaho, Indiana, and Utah) currently use them to support charter schools.

Loan Funds and Grant Programs

States can also establish loan funds or grant programs that specifically support charter school facilities. Colorado’s Building Excellent Schools Today (BEST) program provides competitive, need-based grants to public schools (district and charter) to use toward major capital projects. BEST funds can be used for the construction of new schools, as well as general construction and renovation of existing school facility systems and structures. Since 2008, BEST has awarded approximately $2.5 billion in grants to more than 525 Colorado schools, including many charter schools. Other states, such as Utah and South Carolina, have loan programs that provide funding for school facilities projects. Similar to private sector loans, as schools repay the loans, lenders (in this case the state) can recycle the funding to provide additional loans to more schools. 

Direct Per-Pupil Funding

Rather than offering various financing mechanisms, states can also fund charter schools’ facilities based on their enrollment. Florida provides per-pupil charter facilities funding on a formula basis for eligible charter schools, which include those that have been in operation at least two years, are part of an expanded enrollment feeder pattern, or are accredited. Similarly, Indiana provides a facilities allotment for charter schools of $750 per pupil, which must be used primarily for facilities and transportation purposes, provided the schools meet performance expectations. California, meanwhile, created the Charter School Facility Grant Program, which provides up to $1,117 per pupil in lease reimbursement for charter schools where 55% of students — either at a particular charter school or within its local elementary school attendance area — qualify for free and reduced-price meals.

In assessing how best to support charter schools’ access to facilities, state policymakers have numerous trade-offs to consider. For instance, providing access to existing facilities is perhaps the best way to protect taxpayer dollars, since it limits the instances in which charter schools are paying to refurbish and rent a facility when a suitable facility sits empty. But these programs typically only work with the partnership of district leaders, who are often disinclined to help charter schools open and operate. Meanwhile, grant programs and per-pupil allocations are often the most flexible sources of funding for schools, but are also mostly likely to be funded through line items in state budgets — making them politically vulnerable during periods of austerity like that which will unfold in the wake of the COVID-19 pandemic. 

The characteristics of a state’s sector also have implications for which policies have the greatest impact. In cities with a growing student population and few underutilized district facilities, policies that require districts to share excess space with charter schools may be moot. In sectors with fewer schools operated by seasoned charter management organizations, moral obligation bonds may feel too risky. Where charters receive particularly low per-pupil funding for general school operations, meanwhile, a per-pupil facilities allocation provides helpful flexibility that school leaders can use to creatively meet the needs of their school and students. 

No single policy “best” supports charter schools’ facilities access; the best approach is a quilted one, with numerous policies in place that can support charter schools in accessing facilities, in the way that makes sense for them and their needs.  

Stay tuned for the final post in our “Infrastructure Insights: Financing Charter School Facilities” series, examining one promising solution to help charter schools secure facilities.

What are the Four Characteristics of a Healthy Charter School Facilities Ecosystem? “Infrastructure Insights: Financing Charter School Facilities” Series

Photo courtesy of Yan Krukov for Pexels

As the Biden administration’s historic infusion of federal education funds are spent in states, coupled with a potential $1 trillion bipartisan infrastructure package making its way through Congress — a package that could include money for K-12 building safety and technology upgrades — we must ensure that charter school facilities are included in the policy debate. Join us in an “Infrastructure Insights: Financing Charter School Facilities” weeklong series, where Bellwether Education Partners will share insights into a range of issues facing charter school facilities.

Finding and affording adequate permanent facilities or land to house a charter school is one of the biggest barriers to charter growth. Suitable existing facilities or land are hard to find and typically expensive, the work is highly technical and complicated, and the process takes a considerable investment of time. 

Given lean operating teams at most charters, school and network leaders that should be focused on driving academic gains find themselves instead navigating this unfamiliar and complicated terrain. 

For charters to thrive, we need more systemic solutions that lower the significant facilities barriers that exist. 

Through our work with charter operators and funders across the country, Bellwether has identified the four characteristics of a healthy charter school facilities ecosystem; the graphic below captures three ideal-state market characteristics (in blue) as well as policy characteristics (in red).

Market (in blue) and policy (in red) characteristics of a healthy charter school facilities ecosystem

1. ACCESS: There must be a supply of affordable buildings (or land that can be developed) that is accessible to charter schools. The most economical option, and the one most operators look to first, is securing an existing school building and modifying it to meet their needs. In many markets, districts typically hold on tightly to their vacant buildings; access to buildings previously occupied by private schools (many of which have shuttered due to declining enrollment) is much more limited. Local policies that incentivize or compel districts to make vacant buildings or excess space available (at market or discounted rates), including co-locating charter schools with traditional district schools, can add needed building supply, if enforced.

When existing school building space is limited, charters must look to commercial spaces that are more expensive to modify. This can be prohibitively expensive in many dense, urban markets such as Boston, San Francisco, and Seattle. Overly restrictive zoning regulations and bureaucratic permitting processes can also create barriers in many markets, severely limiting the options available to charters and significantly extending the time it takes to navigate the process. 

These barriers can be reduced or eliminated through a mix of smart zoning and incentives. Local zoning regulations should permit the construction of schools in most commercial or mixed-use areas. In dense markets, incentives can encourage developers of mixed-use buildings to include a school as a tenant. And, a nonprofit “incubator” space that is used by charters in their early years as they scale up (before they move to a permanent building) can help make the economics work by lowering the cost of facilities in the early growth years.

2. FINANCING: Operators must have access to affordable financing, which typically requires schools to contribute ~10-20% equity. When an operator does identify a suitable building or land, it must secure the financing required for the purchase and any renovation/building costs. Most charters cannot issue bonds (the primary mechanism for districts to finance facilities construction). Instead, they must look to the private lending market. This is often an issue because most private lenders don’t have familiarity with the charter market and are reluctant to make investments as a result. 

To secure financing, schools typically must provide some amount of equity, which is a major struggle for most as a result of the relatively low (compared to district schools) per-pupil funding and limited dedicated facilities funding charters receive. There are multiple mechanisms for addressing this gap. A nonprofit or mission-driven lender (e.g. CDFI, loan fund, or philanthropist) can provide a low/no-interest loan that serves as equity and stimulates private lending and other nonprofit lenders that provide higher-risk capital. A publicly funded loan fund can provide credit-worthy charters access to low-cost capital. And the State can provide credit enhancements (e.g. in the form of a loan guarantee) that lower the cost of borrowing. 

3. EXPERTISE: Schools must have — or have access to — the expertise and resources to navigate the complicated facilities process. The leaders of individual charter schools and small networks often have academic backgrounds and limited expertise in facilities. Unfortunately, because most leadership teams are lean, these leaders must also drive the facilities process. 

In an ideal situation, these leaders can access support from a local expert to navigate the often multi-year process to secure a permanent facility (see graphic below). Local nonprofits, facilities developers, or individual consultants can provide technical expertise, funded by philanthropy, to operators across the full facilities process or more targeted support at different stages.

Support levers to secure a permanent building in a healthy charter school facilities ecosystem

4. STATE POLICY: There must be supportive state policy. State policy has a major impact on access and financing in a healthy charter school facilities ecosystem. Come back tomorrow for another post in our “Infrastructure Insights: Financing Charter School Facilities” series, focused on the different ways that federal funds and state policy impact the charter school facilities ecosystem.

Why Is It So Hard for Charter Schools to Tap Into Local Infrastructure and Secure New Facilities? “Infrastructure Insights: Financing Charter School Facilities” Series

Photo courtesy of Mary Taylor for Pexels

As the Biden administration’s historic infusion of federal education funds are spent in states, coupled with a potential $1 trillion bipartisan infrastructure package making its way through Congress — a package that could include money for K-12 building safety and technology upgrades — we must ensure that charter school facilities are included in the policy debate. Join us in an “Infrastructure Insights: Financing Charter School Facilities” weeklong series, where Bellwether Education Partners will share insights into a range of issues facing charter school facilities.

Yesterday, we launched a new series, “Infrastructure Insights: Financing Charter School Facilities.” To dig deeper, today’s post unpacks specific facilities barriers that charter schools face compared to traditional district schools. Although it varies in each state, the big barriers we’ve seen across the country include:

Access to public funding: In most states, charter schools lack access to the state and local funding that district schools rely on for facilities investments and ongoing maintenance and operations (M&O). While some states have implemented programs to support charter schools in accessing facilities funding (e.g., direct per-pupil facilities funds, state bond or loan programs), these programs tend to be insufficient to offset the full costs of school facilities. 

Access to private financing: Traditional lenders are often hesitant to lend to charter schools for a number of reasons. First, because charter schools operate on time-bound contracts and can be closed for poor performance, there’s a perception that they are unstable, leading lenders to shy away from investing in them. Second, the relatively low funding that charter schools receive — due to the fact that state funding is lower than that of traditional public schools and, in many cases, it cannot be supplemented by local levies — often raises questions regarding the ability of charter schools to make loan payments. New charter schools face an even bigger uphill battle, as they lack a track record of student attendance to demonstrate academic results or financial health. Charter schools operating in a young sector are often in an even tougher position given that they reside in an ecosystem in which traditional lenders aren’t yet familiar with charter schools and don’t yet know how to accurately evaluate their risk.

Terms of private financing: Charter schools that do receive private financing are often only offered short-term loans, as lenders tend to match loan periods to charter reauthorization cycles. And so while a charter school would almost always prefer the long-term security and reduced refinancing requirements that come with a 20-year loan, sometimes it can only access 3- or 5-year loans. A bank may find it too risky to hand out a 20-year loan to a school that may be ordered to close in a few years.

This can leave charter schools in the unwieldy situation of holding several short-term loans, which isn’t ideal given the administrative burden on the school leadership and the risk of receiving a higher interest rate when refinancing. Nonprofits such as the Equitable Facilities Fund,* a former Bellwether client, are changing this by offering long-term (30-year), low-cost fixed-rate loans to high-performing charter schools. 

Ability to save for a down payment: Without a public funding source (such as annual per-pupil facilities allowance or facilities grants), it can be incredibly difficult for charter schools to have the cash on hand needed for a down payment to finance their facility project cost. Charter schools in this position have two options: acquire philanthropy to cover some or all of the equity they need or slowly save money from their operating budget. Those following the second approach often open in temporary facilities and stay there for a few years until they 1) have saved enough money for a down payment, and 2) have a track record that can allow them to access philanthropy and/or affordable debt. Nearly half of charter schools surveyed by The Charter Schools Facilities Initiative in 2017 were in school buildings that could not accommodate their anticipated enrollment in the upcoming five years.

Technical assistance: Charter leaders often lack the specialized expertise required to manage complex facilities projects. As a result, they end up diverting time away from school leadership to do the facilities work, whereas school leaders in traditional district schools benefit from central office staff’s expertise and support systems. This is especially true for leaders in standalone charter schools (as charter schools that are part of networks may have some support from the network’s central or home office staff). 

Access to buildings below market cost: In some cases, charter schools are able to partner with their neighboring school district to rent or purchase a vacant district building for minimal cost. However, these partnerships are limited, as state policies that give charter schools access to district buildings are often vague, lack teeth, and leave decision making to districts, which have few incentives to provide this support to charter schools that compete with the district for students and resources (learn more about this in CRPE’s 2017 report). 

Lower per-pupil funding in general: In addition to the discrepancies mentioned above, charter schools in general receive lower state per-pupil funding versus traditional district schools. A 2018 University of Arkansas report found that, across cities with large charter sectors, charter schools receive an average of $6,000 less in public funding per student than district schools. Higher annual per-pupil funding could be used to pay for annual M&O costs or could be saved over time and for use as equity on a future facility project.   

Stay tuned for more in our weeklong “Infrastructure Insights: Financing Charter School Facilities” series. Up next, the four key ingredients of a healthy charter facilities ecosystem.

(*Some organizations listed include past or present clients or funders of Bellwether.)

How Much Does a Charter School’s Facility Cost? Introducing the “Infrastructure Insights: Financing Charter School Facilities” Series

Photo courtesy of Caleb Oquendo for Pexels

As the Biden administration’s historic infusion of federal education funds are spent in states, coupled with a potential $1 trillion bipartisan infrastructure package making its way through Congress — a package that could include money for K-12 building safety and technology upgrades — we must ensure that charter school facilities are included in the policy debate. Join us in an “Infrastructure Insights: Financing Charter School Facilities” weeklong series, where Bellwether Education Partners will share insights into a range of issues facing charter school facilities.

Charter schools and charter school networks face a considerable array of challenges when it comes to finding and financing facilities. These challenges often prevent them from expanding their impact. In Bellwether’s work with charter schools, we’ve found that many tend to spend time and money on facilities that could instead be spent on core programming (e.g., staff salaries, instructional supplies, and field trips). We’ve also seen schools settle for less-expensive, smaller, or shared facilities, which can limit the range of programming offered. 

The National Alliance for Public Charter Schools* reports that 17% of the 650 charter schools it surveyed from 2014 to 2017 had to delay their opening date by one or more years due to facilities barriers. When charter schools do find facilities, they’re often less-than-ideal. For example, our research in Idaho found that while most charter schools had a computer lab and cafeteria, less than half had a gym, library, or auditorium. 

It’s a problem that deserves a spotlight as the national debate swirls on investments in infrastructure. This week, my colleagues and I are rolling out a series of blog posts that will:

  • Help policymakers, charter advocates, prospective school leaders, and others understand the facilities barriers that charter schools face.
  • Provide an overview of the ecosystem of private and philanthropic strategies for addressing these barriers.
  • Review state and federal policy levers that can support facility access and affordability.
  • Provide a description of a particularly promising solution — charter school loan funds — and what charter school leaders should know about them. 

Today, let’s get started with charter facilities 101:

How much does a school building typically cost?

If you’re planning to own your building, there are two primary categories of facilities costs: project costs and maintenance and operations (M&O).

Project cost consists of the cost of acquiring land and/or an existing building as well as the work done to the site. The work done to the site includes “hard” costs (e.g., construction) and “soft” costs (e.g., management, permits, and appraisals).

Project cost is significant and depends on factors such as the local real estate market, building/lot size, and amenities such as science labs and playgrounds. National facilities support providers such as Building Hope and ExEd suggest $20,000 per student (with a reasonable 100 square feet of space per student) as a rule of thumb for newly constructed charter school buildings, which results in a $10M project cost for a school that serves 500 students. As you can imagine, location (particularly urban versus rural) has a significant impact: Project costs for several buildings we’ve seen lately that are located in cities are closer to $40,000 per student and more than $20M in total. 

And while purchasing and renovating an existing building might seem like it would be more cost effective than new construction, it’s often just as expensive. The buildings that are available for charter schools to purchase tend to be former grocery stores, warehouses, office spaces, or churches — not former schools. That means there’s significant retrofitting and renovating that must happen before the building can be safe for use as a school. 

Ongoing facilities M&O is what it costs to maintain the school building each year (e.g., expenses such as janitorial, utilities, insurance, and routine or small-scale maintenance and repairs). This is essentially all of the annual facilities cost except for the mortgage (also known as debt service). M&O varies by factors such as building size but is typically a much smaller expense relative to what one pays for the building itself. For context, the 21st Century Fund looked at M&O expenditures across state public schools in FY2017 and saw a range of ~$700-$1500 per pupil, with an average of $1,128.

How do schools pay for this?

The diagram shown below, called the “capital stack,” illustrates the mix of financing sources used to fund a facility project. Schools may use a mix of upfront cash known as “equity” and loans (a.k.a. “debt”) to pay for their often multi-million dollar project costs. A typical capital stack may look something like this:

Capital stack diagram illustrating how charter schools pay for a facilities project cost

The equity at the bottom of the stack is similar to the 10-20% down payment that is often required when you purchase a home. This is upfront cash that the charter school must provide in order to obtain debt (the other two parts of the stack) at reasonable interest rates. Charter schools often acquire this money from philanthropy and/or build up their own savings over time. Even when providing the upfront equity, access to affordable debt (i.e., getting loans at reasonable interest rates) can be a major barrier for charter schools, but more on that later.

The other type of cost, M&O, is typically paid for via general operating budgets such as the per-pupil funding charter schools receive.

Now that you have a sense of scope in charter facility costs, up next in our weeklong “Infrastructure Insights: Financing Charter School Facilities” series, we’ll focus on challenges charter schools face in securing new facilities. 

(*Some organizations listed include past or present clients or funders of Bellwether.)