The Credit Enhancement for Charter School Facilities program helps charter schools with their facility needs, such as making leasehold improvements, constructing additions, and building schools. None of the current grantees under the program are charter schools, but all of them are assisting charter schools, typically by guaranteeing debt that is used to finance the charter school facility.

Credit enhancement is the act of reducing the risk associated with providing debt, oftentimes by guaranteeing and insuring the riskiest portion of the debt. For instance, when people buy houses they frequently purchase Primary Mortgage Insurance (PMI) to increase their credit worthiness. The PMI generally insures up to the first 20 percent of the value on a house that could be lost to a mortgage holder in the event of a default. Investors are willing to finance mortgages since they have both the insurance and the ability to sell the house to secure their investment in the event of a default.

Leasehold improvements

Most charter schools rent rather than own their facility. Renting provides some flexibility to charter schools, particularly new schools that might not be able to decide where they want to locate or how large of a building they want. However, the types of buildings charter schools generally rent, such as former strip malls, are oftentimes not conducive to educating students. Consequently, charter schools must make leasehold improvements to obtain the buildings suitable for this purpose. The Charter Schools Development Corporation (CSDC), a grantee under the Credit Enhancement for Charter School Facilities program, assisted the Corebridge Charter School in Boca Raton, Florida in obtaining financing for leasehold improvements.

Corebridge was located in several apartments at Bucky Dents' Baseball Camp during the fall of 2002. The school could only house 87 students at this former site; the enrollment was not large enough to generate sufficient per-pupil aid to cover its costs. With the help of financing for leasehold improvements, Corebridge relocated to a former Levitz furniture store and office space in January 2003 and quickly grew its enrollment to over 150 students. Boca Raton is a growing community, which should help the charter school grow in the future. Because the community is growing, however, land in Boca Raton is prohibitively expensive and the charter school could only afford to rent, not buy space there.

The CSDC provided grant funds to a bank as a guarantee to help Corebridge obtain a leasehold improvement loan. Corebridge obtained a 7-year loan at an interest rate of 4.65 percent from Union Planters bank for $335,000 to cover the leasehold improvements. This guarantee "burns off" as the loan is repaid. Corebridge has a ten-year lease on its space and the lease contains protections in the event the building is sold or the school has to relocate at the end of its lease.

Building an addition

Successful charter schools tend to grow over time and are likely to need additional space through such means as an addition. The Charter Schools Capital Access Program (CCAP), which consists of a consortium of three non-profits, the NCB Development Corporation; The Reinvestment Fund; and Foundations, Inc., received a grant under the Credit Enhancement for Charter School Facilities program. They used this grant to help the Mathematics, Civics, and Science Charter School (MCSCS) obtain a loan to build an addition.

The MCSCS is located in Philadelphia, Pennsylvania in a former training center for the Department of Public Welfare. It was founded in 1999 and is one of the largest charter schools in the state of Pennsylvania. It has approximately 960 students in grades one through twelve and a waiting list of over 4,200 students.

With financing from CCAP, MCSCS expanded its current facility using modular construction that connects to the original building. The addition has four floors and allows for six additional classrooms, a lobby, and administration rooms. It accommodates eighty students from the senior class who, without this modular unit, would have had to attend classes at another location. The expanded unit allows all the students to be located at one site.

The MCSCS obtained a ten-year loan for $4 million at a fixed interest rate of 7.75 percent. Under the CCAP model, the $6.4 million grant backs of a pool of up to $45 million in debt from 12 investors. The pool enables the investors to diversify their risk so that they have financial exposure to several charter schools instead of just one school. The credit enhancement virtually eliminates the investor's risk. If one or two schools defaulted on a loan, likely no investors would lose any funds. As a result they are more inclined to participate in financing charter schools under generous terms. Charter schools can obtain up to 15-year fixed-rate financing through the support under this grant, which is highly desirable in today's low-interest rate environment.

Creating a school facility

In some cases our grantees under the Credit Enhancement for Charter School Facilities program are helping charter schools rent space that they will eventually own under a lease-purchase agreement. The Raza Development Fund, a Credit Enhancement grantee, is helping the Bronx Charter School for the Arts (BCSA) do just this. The BCSA has been located in the South Bronx in New York, New York since September 2004. The school is in a renovated building that formerly served as a sausage factory and bagel bakery.

The school has a complete arts curriculum and links arts instruction to its academic program. In addition, the school partners with arts organizations, such as the Guggenheim and Lincoln Center.

In 2002, the only public elementary school serving the neighborhood was operating at 113 percent of capacity and housed its lower grades in three separate sites. In addition, student achievement scores at local schools are significantly below city- and state-wide averages.

The BCSA currently houses 200 children in Kindergarten through grade four. Ninety percent of the students are eligible for free- or reduced-price lunch. In the 2004-05 school year, the number of Kindergarten applications for Bronx Arts outstripped the available spots by 5 to 1.

The BCSA originally wanted to own its building outright, but as a new charter school it could not obtain a loan on favorable and affordable terms. Civic Builders, a nonprofit facility development organization specializing in real estate for charter schools, originally just served as a facilities consultant on the school building for BCSA. Civic Builders wound up putting down a $1 million deposit toward the building and leases the building to BCSA under a lease-purchase arrangement. The rent Civic Builders set was the minimum rent it could charge and still obtain a bank loan. (Civic Builders is sponsored in part by the New Schools Venture Fund under a grant from the U.S. Department of Education.) The rent is below the market rate and the school has an option to purchase the building at cost.

Raza Development Fund (RDF) is using its Credit Enhancement grant to guarantee the lease payments of the school up to $430,000 in order to ensure the revenue stream will be sufficient to support the debt service of the $3.3 million loan the Bank of America (BoA) has made to Civic Builders for the building. In addition, RDF has provided subordinated loans for $150,000, which were funded as the result of RDF's direct negotiations with BoA to ensure the bank's continued willingness to make its relatively large loan. In the event of a default, BoA is paid first and if any funds remain, the subordinate lenders are then paid. If the charter school is unable to meet its lease obligations, and Civic Builders has insufficient funds to repay BoA fully, then the grant funds will cover the first $430,000 of losses. Consequently, the program helps make lenders more willing to make large loans for charter school facilities on favorable terms by reducing the risk of non-payment they face in the event of a default by the charter school.

Charter School Facility Financing Demonstration/Credit Enhancement for Charter School Facility Grantees MS Word (29KB)

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