Funding for Facilities: What are Lenders Looking for?
Lenders want to know if you will pay them back. Whether you are considering traditional bank loans, taxable or tax-exempt bonds, or even special forms of financing created by state or federal government programs, the underlying question is the same. To find the answer, lenders look for assurances that your project and school will generate enough cash flow to service the debt (and that your school will stay open long enough to pay).
Below we outline seven key areas lenders will assess when evaluating your request for capital.
Academics
One of the primary reasons charter authorizers/regulators close charter schools is their failure to reach academic goals or standards. Schools with strong academic results tend to attract families and are most likely to have their charters renewed. Additionally, mission-driven community lenders value supporting charter schools that provide a high-quality education option to the community. Therefore, lenders will review your school’s academic track record including performance on standardized tests, state evaluation frameworks or rubrics, and other available measures of student achievement and well-being.
Enrollment
State and federal funding tied to enrollment is by far the dominant revenue source for charter schools. Lenders want to see that your school has met enrollment targets in the past and can provide evidence of strong future demand, especially if your school needs to grow to afford a facility project. A historically strong waitlist goes a long way towards convincing a lender that meeting enrollment will not be a problem.
Management Team & Governing Body
Strong leadership is crucial to running a strong organization. The management team executes the schools’ strategy. The governing body (“Board of Directors”) oversees the management team, provides strategic direction, and ensures that the organization stays faithful to its mission and vision. Lenders like to see that the Board of Directors is committed to the school, and that management possesses the necessary skills to implement the strategy (ideally proven by a track record of success). They also value some degree of stability and continuity in leadership.
Past & Projected Financials
Lenders will review three to five years of historical audited financial statements, current interim statements, and pro forma financial projections that extend at least through the expected term of the financing. They will evaluate your school’s capacity to service the project debt while continuing to adequately fund academic programming, including stress-testing your financial projections to ensure your organization would not experience undue financial strain in the event of unexpected hardship.
Reserve Funds
Cash reserves reduce risk for lenders. They provide a liquidity cushion for unexpected setbacks and can be invested in a project to reduce the debt burden and future cash required to service debt. They are also evidence that the school was historically able to generate ample cash. Cash reserves will improve your chances of financing approval and may entice lenders to offer lower interest rates, origination fees, and better loan terms.
Collateral
Similar to cash reserves, collateral reduces risk for the lender. Collateral includes not only the real estate involved in the transaction but also all things a school owns (e.g., furniture, computers) that can be seized by the lender in the event of default. One measure of real estate collateral in a project is the loan-to-value ratio. A low loan-to-value ratio will show a lender that if they have to liquidate assets to cover the loan balance, the value of the available assets would be sufficient to recover the amounts they are owed—even in a distressed sale.
Charter Term
Charter terms are generally substantially shorter than the terms of permanent real estate financing, and often there are interim reviews that can result in revocation. Therefore, lenders will evaluate the risk of a charter being revoked or not renewed. They will look for evidence that the school is satisfying its charter goals and that there is a positive relationship with the authorizer. A track record of successful reviews or renewals will increase confidence.
As we opened this post, all lenders really want is to feel relatively certain that they will get their money back. In summary, they want data showing that your school
will have the revenue to service the debt (Indicators: Academics, Enrollment, Past & Projected financials)
is generally well managed and will make prudent decisions (Indicators: Management Team & Governing Body)
has some cushion/assets in case things go south (Indicators: Reserve Funds, Collateral), and
is likely to stick around long enough to repay the debt (Indicators: Charter Term).
[This post contributed by Brad Olander, Managing Director]