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Cascade: No. 76, Winter 2011

Management Team Key to Charter Schools’ Success

Charter schools are increasingly being recognized for the educational alternatives they provide, particularly in low-performing urban school districts. Since the first charter school law was passed in Minnesota in 1991, 40 states and the District of Columbia have passed similar legislation. According to the National Alliance for Public Charter Schools, there are almost 5,000 charter schools serving an estimated 1.66 million students.

Charter schools are independent public schools that operate under contracts, or “charters,” for a fixed period of time. The charters are usually authorized by local school districts or sometimes by state departments of education, universities, or independent chartering boards. Tuition-free and nonsectarian, charter schools are to be open to all students on a first-come, first-served basis. If demand exceeds capacity, students are enrolled by a lottery system.1

Unlike traditional public schools, charter schools have flexibility over fiscal, operational, and curricular issues, giving them the ability to implement innovative practices that provide diverse educational options. This increased curriculum option as well as their smaller school and class sizes makes charter schools a popular choice for both parents and students.

The Reinvestment Fund has provided financing to Mastery Charter Schools in Philadelphia. This student is one of over 4,000 students who attend Mastery Charter Schools in this city. Mastery currently operates seven schools in Philadelphia, including the Thomas Campus.The Reinvestment Fund has provided financing to Mastery Charter Schools in Philadelphia. This student is one of over 4,000 students who attend Mastery Charter Schools in this city. Mastery currently operates seven schools in Philadelphia, including the Thomas Campus.

When it comes to academics, charter school students often do better than their district public school peers.2 This is especially true of poor and minority students who most frequently fall behind in traditional settings.3 Charter schools serve a disproportionately high number of economically disadvantaged students (as measured by the percentage of students receiving free and reduced lunches).4 Compared with traditional public schools, charter schools have fewer safety issues and experience fewer behavior problems;5 they also have higher attendance rates and lower dropout rates.6

An emerging trend in the charter school industry is the replication of successful charter programs (e.g., Knowledge Is Power (KIPP), Mastery, Aspire, Achievement First) by high-performing regional or national charter management organizations (CMOs). These models frequently originate in low-performing urban school districts where CMOs are building strong schools that outperform the local district and meet or exceed state standards.

Charter schools are also important community assets. In urban neighborhoods, they can play a role in revitalizing communities by encouraging young middle-income families to stay in their homes.7 Many charter schools transform dilapidated or abandoned buildings into state-of-the-art facilities and provide necessary services to their communities.8 Many are open around the clock and on weekends, offering their facilities for community education and recreation outside of traditional school hours.

A Leading Charter School Lender

The Reinvestment Fund (TRF), a 25-year-old community development financial institution (CDFI) serving the mid-Atlantic region (i.e., Pennsylvania, New Jersey, Delaware, Maryland, and the District of Columbia), has been lending money to charter schools since charter school legislation passed in Pennsylvania in 1997. TRF’s first charter school borrowers were community development corporations (CDCs) with which TRF had established financing relationships for affordable housing, child care, and other social service or small business loans. These CDCs felt that improving the educational options in their communities was the next essential step in their plans to strengthen their communities. TRF agreed that high-quality educational alternatives are an essential component of any strategy to strengthen communities, and financing charter schools has become a core part of TRF’s lending portfolio. Through September 30, 2010, TRF has provided $189 million in financing to 65 schools serving over 30,000 students in Pennsylvania, New Jersey, Delaware, Maryland, and the District of Columbia. Most of the students served at TRF–financed schools qualify for free or reduced-price lunch. TRF has had one default with no charge-offs and no losses.

TRF’s work with charter schools primarily involves financing real estate. TRF provides acquisition, construction, and permanent financing to charter schools. In keeping with its mission to support sustainable development, many of TRF’s loan packages include loans for energy-efficient construction or energy retrofits; every dollar saved in utility expenses increases the amount available for the school’s educational program.

TRF works with early-stage schools and continues to support the real estate efforts of charter schools as they mature. Many charter schools start off in rented space. Therefore, TRF provides leasehold improvement loans; some of these loans are essentially unsecured, and others are secured by recorded leasehold mortgages. TRF has provided multiple rounds of financing to some schools as they move from temporary to more permanent facilities. Relying upon credit enhancement provided through the U.S. Department of Education’s credit enhancement program, TRF provides subordinated debt to schools as they move on to larger facilities or increase the amenities of their existing facilities. Additionally, TRF has provided a New Markets Tax Credit allocation to four charter school transactions.

In underwriting a charter school transaction, TRF uses the same criteria a lender would use for any commercial transaction: projected cash flow, historical financial performance (if available), collateral, construction team (if applicable), business plan (academic program), and management capacity. However, in TRF’s 13 years as a charter school lender, management has emerged as a primary criterion in evaluating the strength of a school, regardless of its track record. Charter schools are founded by a variety of individuals interested in and committed to educational reform, including educators, community organizers, social service organizations, and business leaders. In TRF’s experience, it is the breadth and depth of the team — rather than a single entrepreneurial founder — that is a key determining factor in a school’s capacity to navigate the academic, political, financial, real estate, and legal challenges to operating a successful program.

JPMorgan Chase Provides Financing to Charter Schools

In the spring of 2010, JPMorgan Chase announced a $325 million initiative to provide financing to high-performing charter schools. Chase is partnering with The Reinvestment Fund (TRF), along with the Low-Income Investment Fund and NCB Capital Impact, to create New Markets Tax Credit (NMTC) financing pools. This commitment by Chase to the growth of charter schools expands TRF’s ability to finance strong schools, even in today’s challenging credit environment. TRF intends to provide an additional $50 million in loans to finance real estate projects for high-performing, established charter schools that are acquiring, renovating, or expanding their facilities. Charter schools that are replicating or expanding to additional locations are also eligible for financing. Facility projects must be NMTC–eligible.

–Sara Vernon Sterman

Opportunities and Challenges for Lenders

Provision of public education services is under state purview, so charter schools are controlled at the state level. Some states are considered to be more charter friendly than others. However, across the country, charter schools face greater financial challenges than traditional public schools.

Charters are usually issued for a period of five years, although some states/authorizers, such as Arizona and the District of Columbia, issue charters with terms as long as 15 years. Some lenders have found it difficult to assess the risks associated with charter renewal. In TRF’s early experience, before any renewals had occurred, all of its loans fully amortized over the term of their four- or five-year charters. But since that time, many rounds of renewal have occurred, and the process has proven to be transparent and predictable in many places. Many lenders now view charter renewal in the same light as annually renewing social service contracts.

In most states, the funding received by charter schools is less than that received by traditional public schools. The actual funding formula varies from state to state and is calculated based on the number of students served and their grade level. On average, charter schools receive approximately 80 percent of the per-pupil funding received by their district public school counterparts (less than 60 percent of district funding in some states).9 This funding gap exists despite the fact that charter schools typically serve a greater number of students eligible for free or reduced-price lunch than traditional public schools.10

Few states offer capital dollars to charter schools for facilities, and typically charter schools cannot access capital funding streams used by district schools. Therefore, they must pay for rent and debt service from operating cash flow. Locating an affordable and suitable facility is one of the most persistent challenges cited by charter schools. School districts are frequently unwilling to share facilities, and even when they do, significant renovations are required to meet the demands of a 21st century educational experience.

Financing facilities for charter schools is a critical piece to making quality educational alternatives accessible to all. It is also a key community development strategy, as these schools bring educational opportunities to many low-income families, serve as community assets, and bring new institutional actors into public education. TRF is committed to being a reliable source of capital to charter schools.

TRF Lending Case Study

The Reinvestment Fund (TRF) has provided short- or long-term financing to more than half of the charter schools in the School District of Philadelphia (SDP). Among them, TRF worked with Mastery Charter Schools, a network of middle and high schools that has managed the turnaround of three troubled district schools into high-performing Mastery Charter Schools. With participation from Wachovia Bank (now part of Wells Fargo), TRF financed the conversion of all three of these facilities. In 2006, the SDP invited Mastery to convert Shoemaker Middle School in Philadelphia into a charter school. Poor maintenance and extraordinary wear-and-tear had contributed significantly to the school building’s dire condition. An $11 million construction loan from TRF helped Mastery upgrade the HVAC and electric system as well as reconfigure hallways to reflect Mastery’s hub system, which limits spaces where students are out of public view. Shoemaker — once among the most violent schools in the district — is now a model school with its students showing dramatic improvements in discipline and academic performance. In state testing conducted in 2006, prior to the conversion, only 30.6 percent of Shoemaker’s eighth graders scored proficient or above in math, and only 42.8 percent scored proficient or above in reading. In 2008, proficiency rates increased to 76 percent in math and 79 percent in reading. Over 80 percent of its students qualify for free or reduced-price lunch.

—Sara Vernon Sterman

For information, contact Sara Vernon Sterman at 215-574-5800 or sara.vernon.sterman@trfund.com E-mail Address; www.trfund.com. External Link