Like a regular public school district, charter schools can own property as it is its own district. However, public schools can raise bonds and use some of the bond proceeds to buy and/or build schools. Charter schools can borrow money through a bond specific to the property
Q. We have saved up to build a strong cash reserve. Do we have to use some of that for a down payment on the acquisition of a property?
A. It depends. In most cases, bond financing will provide 100% of the cost of the facility, plus other legal and issuance costs for the bond. It is more important for the bondholders to know the school is keeping those cash reserves.
Q. The property we purchased will take about a year to complete a renovation. Do we still have to pay the debt service on the bond and our current school lease?
A. Not usually. Often times the bond terms will allow the first year’s interest to be capitalized. While this increases the total size of the debt, it allows the school to conserve its cash flow for that first year.
Q. We found a property in which we can build a new school. However, the seller of the property does not want to wait for us to go through design, plan check and then the construction process.
A. In some cases we can find a bridge loan. This loan allows you to buy the property and then make your plans for the construction and permitting process. During the “bridge” period, we’ll get the bond financing put together. You will have to pay interest on the bridge loan when outstanding.
Q. Can bond loans also provide a construction loan and then become permanent after the construction is complete?
A. Yes, in some cases, bonds will provide for the: 1) acquisition of the vacant land; 2) costs of construction; and, 3) costs of the bond issuance. During the period of construction, the bond fund provides for capitalized interest so you are not paying for where you are and the new site.
Q. What is a bond?
A. Bonds for schools are municipal and are controlled by the Municipal Securities Rulemaking Board (“MSRB”). Because a bond is public debt, there are certain rules and compliance requirements. A charter school is like a school district, it can use bonds to acquire property. However, there are many requirements in order to qualify and then after the bond has been issued, compliance requirements for fiscal reporting. The benefits of a bond are:
1. Usually 100% financing;
2. Lower interest rate than a bank loan.
Q. Could we borrow from a bank instead?
A. Yes, but banks have stricter requirements and usually need some form of a cash down payment. Banks are a better solution if tenant improvement costs are needed to improve a leased property.
Q. What types of properties could we buy and convert to a school?
A. We have been able to use the following properties to retrofit or build new schools:
a. Churches with enough space for the school’s program;
b. Industrial warehouse buildings in which we can make changes to the interior for classrooms;
c. Vacant land in which we could build a new facility;
d. Office buildings in which we convert the offices to classrooms.
Q. Could we use SB 740 grant funds to help pay for the building?
A. Yes, but not quite as you might imagine. We create an entity, controlled by the school, in which it owns the property and issues to the school a lease. This qualifies with the state for SB 740 grant funds. The State reimburses the lesser of a fixed dollar amount per student or 75% of the lease amount. The lease is based on the debt service for the bond.
Q. Do I have to find the property?
A. No, however, since it is your territory knowing local people certainly help. Our business can meet with your board and management team to give certain parameters that will work for a school site and financing. With that information, the management team can engage a local broker to find eligible property.
Q. Will I need an attorney at some point?
A. Yes, while we help get the ball going, you will need a specialized attorney who can help with certain board actions, and legal advice on the borrowing/bond documents. It is likely you have an attorney who advises on your board packages and the charter renewal. Most of those attorney groups have real estate or transactional attorneys who can help on the bond loan.
Q. Is the bond process complex?
A. Yes, but there are a number of specialists who come together to get this done for the school. Our firm brings all the right players to the table and then sets up timelines to ensure it is done quickly. Once the bond has been issued, our firm helps you with the quarterly compliance reports that occur after closing.
Q. How do we qualify for SB 740?
A. Charter schools that either serve a student population or are located within an attendance area in which 55% or more of students are eligible for the federal free or reduced lunch program qualify for this state program. The current program (2019) funds the lesser of $1,184 per student or 75% of total facilities costs.
Q. What is the best way to determine if we can find, buy and finance property?
A. There are a number of steps that we recommend:
a. Create a facilities team at your school. It should be comprised of knowledgeable people familiar with business operations and real estate. They don’t have to be experts; just familiar with the process.
b. Engage our firm to analyze the school’s finances to determine capabilities. If the school is not ready yet, our firm can help set goals for the future to get to the next step.
c. If the school’s finances qualify, then our firm can visit the school and do a market survey for property available. We’ll also help engage a broker if needed, to assist in leasing and/or buying the property.
d. Once a site is found, we can help put it into escrow, line up the financing and then engage contractors, if needed, to retrofit or build and new school.
Q. Do most charter schools own their own properties?
A. Most do not. Most used co-locations with their authorizers, which are usually modular buildings on dirt lots. In a study done by CCSA and others in 2015, these startling facts were borne out:
a. 41% of charter schools are in shared facilities;
b. 56% of charter schools share with more than one other organization, some are non-school entities;
c. 34% are concerned about student safety
d. 64% of charter schools have wait lists or have plans to grow but do not have adequate space to house students.
e. Of the some 1,300 charter schools in California, some 500 do not know if or where they will be in 2 years.
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