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Planning for a Future Charter School Facility

Prior to the COVID-19 pandemic, you may have been actively planning or contemplating a future facility sometime in the next 6 to 36 months.  Given the unpredictable impact of COVID-19, charter schools may consider putting the planning process on hold until the situation stabilizes.  Certainly, there is some value in taking a “wait and see” approach, particularly with the fiscal year coming to a close and most states getting ready to announce funding levels for the following fiscal year. The SchoolPrint team encourages charter schools that are able, to use this time to continue planning their facility project, so that they can be in the best position to move their facility project forward when the time is right. Charter schools in the planning stage should use this time to review their finances, research the best partners for their facility project, and ultimately vet potential partners.

When examining your school’s finances start by assessing your ability to afford facility-related expenses.  In most cases, a new facility is, at least in part, paid for with some form of debt instrument, so evaluating your capacity to support ongoing debt service is paramount. The most common affordability analyses look at debt service coverage and loan-to-value ratios.   Being thoughtful about how you approach your financial planning now, months or years before you apply for financing, will not only lead to stronger likelihood of being approved for a loan, but it will also help you get a good handle on the scope of your facility project. This is also a good time to more generally evaluate your financial capacity to support other facility expense increases, whether rent, utilities, insurance, and other operating expenses.  Specifically:

• Develop a dynamic multiyear financial pro forma that allows you to toggle between different scenarios, whether it is variable enrollment, changing funding levels, new expenses, or even borrowing assumptions (interest rate, loan term, loan amortization, interest only periods, closing costs).
• Get a good handle on how your current and projected finances stack up against loan industry benchmarks and requirements for borrowers concerning debt service coverage, loan-to-value and loan-to-cost caps, net assets, and liquidity.
• Create a dashboard summary of these measures so that you don’t lose sight of them as you make changes to your financial plan.
• Perform a sensitivity analysis around key revenue and cost variables and how much they move you away or towards your ability to afford a new facility.
• Pay extra attention to any recurring unsecured funding in your financial plan, specifically fundraising, donations, and private grants.  The philanthropic environment is likely to change and become more competitive as the country rebounds from COVID-19.
• Take extra care to identify what sort of expenses associated with implementing a remote learning plan will persist or are likely to persist in future budget years.
• Articulate clearly what is fungible and what is not in your budget as resources contract or expand.  For example, your program by design may require supplemental resources for English Language Learners that you have determined cannot be reduced or eliminated regardless of budget.  Conversely, your program might incorporate regular field trips or excursions that are tied to resource availability.

One aspect that often gets ignored during financial planning is the long-term refinancing requirement for most facilities.  Most of the time the initial financing for your facility will mature in 5 to 10 years before you need to pay off the balance or look for more permanent refinancing.  If you figure out how to make the short-term financing work through a combination of one-time funds or scaling up of your operations over time, but you are relying on major increases in per pupil funding to support permanent refinancing assumptions down the line, you are potentially creating a bigger problem for your charter school down the line.  Consider a financial plan that takes into account flat or modest per-pupil payment increases and see how it corresponds to your ability to afford short-term and long-term debt service.

Often, we see charter schools developing facility project scopes and costs beforehand and then trying to figure out how to afford the facility based on their existing finances.  By starting first with your charter school’s financial plan and a clear sense of what you can afford to spend on your facility project, you have an overall project budget that your proposed facility and scope cannot exceed.  From there, you can take the overall project budget and engage facility planning partners to evaluate whether it is sufficient for the facility you want to build.

Of course, there is always going to be some “give-and-take” between your overall finances and your project finances, but you want that calibrating exercise to occur earlier in the planning than later.  We have traditionally seen most charter schools getting to the point where they want to close on financing and commence construction in the next 2-3 months, yet they are still tinkering with both school finances and project finances.  We expect that one of the effects of the COVID-19 pandemic is that lenders are perhaps not going to be as amenable to condensed underwriting timelines with so many moving parts.  Moreover, we expect any sort of underwriting wiggle room lenders gave in underwriting previously to disappear, with a focus on financing projects that clear standard underwriting benchmarks and requirements easily.  Taking the opportunity to develop a strong financial plan will avoid a lot of this. 

With a clear financial plan in place, this is also a good time to spend vetting and selecting your future facility partners, particularly ones that you will need to engage during pre-development such as an owner’s representative or an architect. Partner selection is another difficult process for schools.  Unless a state has specific bidding or RFP requirements that dictates a vendor selection approach and timeline, many charter schools are often under tight time constraints and do not have the bandwidth or capacity to take a very rigorous, articulated approach towards partner selection.  Sometimes, the stamp of approval for a potential partner is simply that you know that they worked with another charter school in town and they have a nice building. However, with this type of referral, there is no way to know whether the engagement may have been fraught with issues throughout or worse, there might be an ongoing dispute or litigation.  This dynamic, in fact, is why initiatives like SchoolPrint exist – to ensure that charter schools have access to a neutral partner in the service partner identification and selection process. 

In this era of social distancing, you may be experiencing a diminished feeling of community and social interaction.  Most of us have had a conference this spring cancelled.  There’s something to be said about reaching out and responding to your peers during this time.  Reference checks and vetting your future facility partners, like other professional touchpoints, now have the silver lining of providing some opportunity for distant socializing.

SchoolPrint is a free service to charter schools who need assistance in identifying and working with quality construction service providers, or general assistance in navigating the facilities process. We provide the blueprint schools need to successfully complete their facility projects. If your current facility situation has been further exacerbated by COVID-19 and you need expert advice, please feel free to email us at SchoolPrint@lisc.org. 

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