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Community Investments Vol 16, Issue 1
CI Notebook
Author(s): Lena Robinson, Community Affairs Specialist, Federal Reserve
Bank of San Francisco
May 2004
Think about the last time you felt ill. Did you have the medical insurance
that would allow you to be seen at a hospital or better even, by a specialist?
Are you thinking about starting a family and calculating the cost of child
care? Do your children receive the quality of care or education you expect?
These questions and concerns are not restricted to individuals of limited
financial resources. They extend to everyone regardless of means. “Better
than decent” schools, clinics, daycare centers and other community-based
facilities should be the standard for all neighborhoods and not just available
in only middle- and upper-income communities.
This issue of Community Investments shares examples of how financial
institutions, nonprofit lenders and other intermediaries are working to
achieve this goal. For financial institutions, supporting the development of
new and improved community facilities can be CRA-eligible. Whether a
charter school, health clinic, child care center or housing development,
facilities not only mean construction jobs in the short-term, but they also
bring permanent jobs, ancillary support services and increased revenue into
the community, which are the linchpins of revitalization.
The organizations highlighted in these articles have developed the
specialized expertise required for underwriting, investing in and lending to
community facilities. The full online articles will help you to better
understand the challenges faced by childcare facilities, public health clinics,
charter schools and nonprofit organizations in finding the capital to serve the
needs of their constituents, as well as the solutions that have worked.
There is a great deal to be learned from the success stories shared by these
authors. But in order for there to be more success stories, you as the reader
must ask yourself, “how can I contribute to the realization of these efforts?”
Take a moment to jot down your answers, then contact the author to share
them. Hopefully, this will be the beginning of new partnerships that create
better healthcare, childcare, housing and technical assistance for those who
really need it.
Community Investments Vol 16, Issue 1
W3 Wall Street Without Walls: Preparing
Community Development Organizations for
the Capital Markets
Author(s): John Nelson and Greg Stanton, Wall Street Without Walls
May 2004
The objective of Wall Street Without Walls (W3) is to connect the traditional
institutions and financial products of the capital markets with communitybased development organizations (CBDOs) engaged in the diverse work of
community economic development in low- and moderate-wealth
communities both urban and rural. Wall Street Without Walls was created to
encourage, organize and facilitate the provision of volunteer investment
banking and ultimately capital markets services that improve economic
conditions in low-wealth communities and the nonprofits that serve them.
The mission of W3 is to encourage bankers’ volunteer involvement and
advance the profession’s responsibility to serve the needs of the nonprofit,
economic and community development industry.
Similar to “Doctors Without Borders,” this program is an opportunity for
finance professionals to give of their expertise in addressing pressing social
concerns by partnering with local economic development organizations that
serve emerging small businesses, individuals, and families. This muchneeded technical assistance capacity harnesses Wall Street expertise in real
estate, structured, public and nonprofit bond finance, with demand for our
intervention growing dramatically over the past year.
Who Benefits
Under the initial leadership of former Wall Streeter Greg Stanton, The Wall
Street Without Walls Program (W3) has successfully provided financial
technical assistance to medium and large nonprofits seeking advice on how
they can more efficiently finance their assets and operations using the
capital markets. The program matches community-based organizations with
teams of volunteer bankers and finance professionals who provide help on a
pro bono basis. Small business loan funds, housing developments,
commercial sites, mixed-use projects, and factory/industrial sites are some
of the projects that have benefited from the technical assistance of W3
professionals.
How It Works
Participating nonprofit organizations seeking financial technical assistance
submit their specific financing needs or transaction questions for deals over
$3m through trade associations serving the field such as the National
Congress for Community Economic Development, LISC, the Enterprise
Foundation, National Community Capital, and the Neighborhood
Reinvestment Corporation. The Securities Industry Association (SIA) works
with W3 to manage, track and assist the volunteer process to be productive
for both the volunteers and the nonprofits. To get the word out, a series of
outreach and training programs were conducted in 2003 in partnership with
the Federal Reserve Bank system and underwritten by the Fannie Mae
Foundation.
Understanding the Obstacles
Capital to finance various community assets such as single and multifamily
affordable housing, small business loans, consumer loans and community
facilities is currently provided by a host of mission-driven financial
intermediaries, such as community development financial institutions,
community development corporations, revolving loan funds, community
development credit unions, and micro-lending financial intermediaries. Yet,
the increasing demand for capital to support these mission areas, is not able
to be met by the current supply of traditional philanthropic, government,
and concessionary rate capital, including loans from banks often provided
under the aegis of the Community Reinvestment Act. And while there have
been a few CBDOs successful in achieving limited access to financing from
institutional investors, according to specialists in the field, such as Kevin
Smith, executive vice president of the Fannie Mae Foundation, “…there is an
inadequate flow of capital into the community development finance system
to fulfill the supply needs for affordable housing and build healthy, vibrant
communities nationwide.”
Some of the problem areas and systemic blockages to the capital markets
may be caused by inadequate infrastructure, lack of preparedness, or
unwillingness by CBDOs to adopt market standards. These are the problem
areas that need to be addressed collectively by the entire field, including
government agency partners, trade associations, foundations, and
practitioners themselves. The major activities which require collaboration
are:
1.) conforming assets,
2.) improving systems,
3.) finding credit enhancement, and
4.) adopting common standards.
Our discussion of the major obstacles such as scale or performance
augments other important current research and pilot projects, which are
dedicated to finding solutions to the capital shortage for this nation’s most
depressed communities, minority businesses and aging infrastructure. The
premise of W3’s effort is that access to sustained capital markets is a
function of increased scale, standardization of practices, documents and
processes, and improved skills in managing capital markets.
Identifying Solutions
Improvements or innovations which may be helpful in improving capital
markets access for the community development finance industry include
providing CBDO managers with advanced financial skills. These skills can
enhance an organization’s lending practices to ensure profitability and longterm sustainability. The efforts to close the ‘capital gap’ will be based on the
success of CBDOs accessing mainstream markets by achieving scale by
partnering with other CBDOs and using the market’s customary structures.
The collaborative efforts must meet and pass institutional investors' due
diligence and appetite for various security types. This includes engineering
financial products, using the New Markets Tax Credit (NMTC) to appeal to
institutional investors; accurately documenting asset performance;
quantifying mission liquidity needs and market size; and designing
innovations necessary to isolate perceived and actual risks related to CED
investments.
The innovations from W3 include:
forming community development financial guarantees and financial
wraps custom-tailored for CED products but shaped by generic
investment grade institutional investor demand
using ‘dead’ and underused government assets, such as the assets of
HUD auctions, to provide additional collateral to raise CED transaction
credit quality and reduce financial guarantee and transaction costs;
developing financial products for funding programs that use the New
Markets Tax Credit
modernizing the community-based organizations’ approach to
financing and asset management – from the Portfolio Method of
Financing (PMF) to a Capital Markets Financing (CMF) method of asset
management. The CMF method originates, packages and sells assets
to increase capital and liquidity, rather than just originating assets and
managing them through maturity.
The W3 program calls for bold action and leadership from CBDO practitioners
and finance professionals. The shared goal is to stand on common ground
and identify methods to efficiently finance pools of non-conforming assets.
Bold action calls for substantively improving systems of tracking and
servicing assets, finding more cost-effective means of credit enhancement,
and adopting standards which are accepted by capital markets. Bold action
requires strong debate and analysis on how communities can access capital.
Bold action must address an widening capital gap and move it to a priority
position on the national agenda. Financial leadership will be required to
make the hard decisions that need to be made, such as closing down failing
or inefficient CDFIs. But, financial leadership may also stimulate new ideas
for developing practical measures for rewarding excellence and achieving
higher levels of social impact.
How we view these obstacles and what we do to overcome them profoundly
influences society. With a heightened sense of urgency, we must investigate
how to integrate mission needs into viable and investment grade capital
markets instruments. There are other ideas and innovations being discussed
in the field. W3 has been developing innovative concepts and
recommendations to the CED field. The top four include:
1.) establishing a financial guarantee corporation or capability to
provide a financial guarantee by credit enhancing or wrapping CED
transactions to investment grade credit quality;
2.) establishing a CED financial product task force for HNW and
Institutional Investors;
3.) developing peer-to-peer lending capacity for CBDOs in the form of
a capital exchange system;
4.) and establishing an intensive Capital Markets training program
alongside the Federal Reserve Bank’s community affairs programs.
All of these efforts are in place thanks to the ongoing support of the Fannie
Mae, F.B. Herron, and Kellogg Foundations and the cooperative efforts of the
Federal Reserve Banks. W3 has conducted its one-day Orientation to the
Capital Markets program for CBDO practitioners with the Federal Reserve
Banks in Boston, Richmond, Atlanta, San Francisco, and New York with
others scheduled in 2004. W3 has also held a follow-up more intensive threeday Capital Markets Training Institute at Southern New Hampshire
University's School of Community Economic Development. These sessions
were supported by industry partners including Impact Community Capital,
Fleet Community Investment Group, and BB&T.
W3 seeks other partners and sponsors to support further distribution of these
innovations in different regions of the country to nonprofit community-based
development organizations like CDCs and CDFIs. We also seek financial
companies and individuals wishing to participate as pro bono financial
technical assistance providers. For further information contact our web site:
www.WallStreetWithoutWalls.com.
John Nelson and Greg Stanton are program co-directors. They can be
reached in their offices respectively in Washington DC: 703-648-9544 / John
Nelson or New York: 212-977-2759 / Greg Stanton.
Community Investments Vol 16, Issue 1
Supporting Community Health Centers
May 2004
Although they serve a predominantly low-income population, community
health center facilities do not have to look like it. This California facility
pictured above, completed in 2000, is one of seven service delivery sites
managed by a community health center with a $14 million annual operating
budget. The health center is co-located with low-income senior housing as
part of a campus that allows seniors to remain in their community. This
state-of-the-art facility also includes an adult day health center that
accommodates approximately 20,000 patient visits annually. Virtually all of
the health center’s patients live at or below 100 percent of the federal
poverty level, which is less than $9,000 in annual income for an individual or
about $18,000 for a family of four.
The campus occupies space in a predominantly residential neighborhood
with a handful of small service businesses in the immediate area. It replaced
decaying housing, which provided a notable improvement to the
neighborhood. For every job created by the health center, it is estimated
that another 1.5 jobs are created in the community to provide support
services to the facility and its users.
Like many health centers, this facility was constructed with a combination of
fundraising and debt. A strong capital campaign allowed the health center to
raise more than 30 percent of the construction budget, which is above
average for many capital campaigns. The balance of the project was
financed with a combination of conventional loans and tax-exempt debt.
In Supporting Community Health Centers: Strengthening the Health Care
Safety Net through Financing and Technical Assistance Scott Sporte of the
NCB Development Corporation (www.ncbdc.org) and Mark Lurtz of Capital
Link (www.caplink.org) discuss their organization’s efforts to increase the
availability of health clinics throughout this country.
Community Investments Vol 16, Issue 1
Strengthening the Health Care Safety Net
through Financing and Technical Assistance
Author(s): Mark Lurtz, Capital Link & Scott Sporte, NCB Development
Corporation
May 2004
Introduction
Nonprofit community health centers meet the primary care needs of many of
the nation’s Medicaid recipients and uninsured in areas traditionally
underserved by physicians, regardless of the patients’ ability to pay. These
organizations act as the nation’s health care safety net, offering a full
spectrum of care that is sensitive to each community’s unique needs from
over 3,500 delivery sites in underserved urban and rural areas nationwide.
Community health centers rely on a combination of federal and state grants,
Medicaid and Medicare reimbursement, patient fees, private insurance
payments, and donations to provide care, underscoring the need for costeffective delivery.
In this time of economic uncertainty, community health centers face many
challenges in providing high-quality primary care to low-income patients.
Uninsured populations increase with growth in unemployment, placing
pressure on providers and facilities. State budget deficits force reductions in
entitlement programs. Organizations find it difficult to recruit and retain staff
willing to work for lower wages in older facilities. In addition to rising costs,
shifting reimbursement streams, and the strain of a constantly growing
demand for their services, health centers have traditionally encountered
difficulty in obtaining appropriately structured financing for working capital,
building projects and equipment needs. This is often due to a perception that
their clientele, their funding and their location make them a higher-thanaverage risk.
Financial Strength
Fortunately, experience has shown that community health centers and other
community-based health care providers are remarkably resilient and
resourceful. A recent survey of health centers in California administered by
Capital Link, a nonprofit technical assistance provider to community health
centers nationwide working in conjunction with the Tides Foundation and the
California Primary Care Association, has found that community health
centers in California have been and are increasingly becoming more
financially stable.1 The survey, conducted with information collected from
health centers throughout California for fiscal years 1999-2002, uses several
financial measures to determine an organization’s financial condition,
including liquidity, debt capacity and profitability (see box 1).
Although this survey covers a subset of community health centers in
California, it is not inconsistent with results seen in other states. The survey
results overall demonstrate a group of organizations that are in line with
traditional financial benchmarks and substantiate that many health centers
nationwide present an acceptable credit risk.
Lending to Health Centers
by Scott Sporte
One national lender agrees that community health centers are a good credit
risk and has made them the core of their lending activity. For nearly 20
years, NCB Development Corporation (NCBDC) has worked with communitybased health care providers to fill the gap of financial knowledge and need,
provide assistance and offer a variety of appropriately structured loan
products to finance working capital needs, facility acquisition, expansion and
renovation, and new equipment. NCBDC’s mission is to deliver innovative
financial and development services that improve the lives of low-income
individuals, families, and communities.
Health centers suffer from the perception that they are a health care
provider of last resort, with outdated facilities to match. But with financing
from NCBDC, health centers in many parts of the country have been able to
improve their facilities’ efficiency and capacity while maintaining a high
quality of care for their patients. Using their own balance sheet, and working
together with their affiliate, the National Cooperative Bank, and other
investors, NCBDC has committed more than $200 million in financing to
health care providers in underserved communities nationwide, with losses
totaling less than 0.1%.
One recent example of project commonly financed by NCBDC is a community
health center that desired to construct a new facility and move from
cramped rented space. This health center’s board and management wanted
to construct a building that would be a focal point for their community but
wouldn’t, in their own words, “look like a clinic for poor people.” Business
planning assistance from Capital Link helped management develop a set of
growth projections and evaluate different financing options. For this project,
a $4 million construction and permanent loan from NCBDC complemented
the clinic’s $500,000 capital campaign to make the new building a reality.
Payments were structured to anticipate improved cash flow after an initial
ramp-up period, and NCBDC worked closely with management to structure
payments that matched expectations.
Developing Innovative Financing Pools
For many years NCBDC’s own balance sheet was adequate to provide the
bulk of their financing. And although they were able to provide loans under
terms not generally available to most health centers, their capital could only
take them so far and would only allow them to work with a comparatively
small number of health centers. Their desire to increase access to capital for
health centers necessitated a focus on developing new products and
services, which led to the creation of the HealthCAP loan program, a publicprivate partnership that leverages their limited resources.
HealthCAP is a $14 million loan pool developed in partnership with the
California Health Facilities Financing Authority and the Metropolitan Life
Insurance Company. Through the program, NCBDC makes loans to health
facilities, selling a portion of each loan to Metropolitan Life. NCBDC retains a
small percentage of each loan as subordinate debt, strengthening the
investor’s senior participation and, through a reduction in exposure and
leverage, helping the investor to reduce return requirements. At the same
time, NCBDC’s participation allows them to remain connected to each
transaction while freeing their balance sheet to make additional loans. Credit
enhancement from the state’s financing authority provides added security.
The HealthCAP program has proven to be quite popular, and NCBDC believes
that this is just the beginning.
NCBDC is eager to build on their successes in the health care market, and
are working to expand HealthCAP in California and develop new programs in
low-income communities all over the country. They are continually seeking
partnerships with interested investors and lenders. Through an innovative
structure designed to minimize their risk, the financing pools NCBDC has
created help to meet the unique financing needs of health centers and other
community-based organizations while at the same time allowing NCBDC to
leverage their balance sheet and offer a greater number of loans under
favorable terms. The investors and lender partners who join in the capital
pools gain an introduction to community health center financing. The health
centers benefit from modern facilities, and underserved communities benefit
from improved access to health care.
Technical Assistance and Consulting Services
by Mark Lurtz
Capital Link is a national nonprofit consulting organization that works with
health centers to prepare preliminary project feasibility analyses, business
plans and financial forecasting, space plan analyses, request for proposals,
and other planning assistance designed specifically for community health
center capital projects.
Capital Link contracts with the Bureau of Primary Health Care, a department
of the federal Health Resources and Services Administration under the
auspices of the Department of Health and Human Services, to provide these
services nationally. In addition to its contract with the Bureau of Primary
Health Care, Capital Link has agreements with the Tides Foundation in
California to provide services to health centers in California. As a result of
these grants and contracts, Capital Link provides many of its services
without charge to community health centers, making capital projects even
more affordable to centers seeking to expand their capacity.
Since 1995, Capital Link has assisted 73 health centers throughout the
country in securing over $160 million in debt financing and grant funding for
projects totaling more than $212 million. As health centers expand, so does
the need for financing options. Fortunately, with organizations like NCB
Development Corporation as a model, the job of educating lenders about
community health centers and the unique financial opportunities and
challenges they face has become less difficult.
Lenders, government agencies, economic development resources and
foundations are finding community health centers are more than health care
providers, they are economic engines. Capital Link works with community
health centers to quantify the impact that they have on the local community
with an economic modeling tool that uses multipliers to show the direct and
indirect effect of an organization providing jobs and income to employees
and other businesses, which then ripples through the local economy. In
some places, a community health clinic can serve as the catalyst for
revitalization.
So important is the need for community health clinics, that President Bush
increased federal operating support to enable community health centers to
double their capacity by opening 1,200 new or expanded service sites
between 2002 and 2006. In a recent speech,2 President George W. Bush
addressed this need and reaffirmed his continuing support of the growth and
expansion of community health centers with additional congressional dollars.
And while this federal expansion initiative, entitled the Health Center Growth
Initiative,3 provides increased operating support, the challenge remains to
identify financing for community health center capital projects, including
greater lender support.
Although community health centers face many concerns in providing care to
low-income individuals, the challenge of facilities development is not
insurmountable. Community health centers are essential community
resources with a real necessity for capital expansion financing dollars to
meet a growing health care need.
It is essential that lenders view community health centers as vital resources
and seriously consider them as viable borrowers. As outlined by Scott Sporte
of NCB Development Corporation in this article, there are ways to minimize a
lender’s risk including pooling of resources.
The results of participating in Community Health Center capital projects
include lenders having an opportunity to supply viable businesses with much
needed capital, health centers benefiting from modern facilities and
underserved communities receiving improved access to health care.
1
Survey information was provided by Capital Link from its report entitled,
California Health Centers and Clinics Financial Trends FY1999 – FY 2002,
January 14, 2004. This report was prepared with support from the
Community Clinics Initiative, a joint program of Tides and the California
Endowment.
2
http://www.georgewbush.com/HealthCare/ Read.aspx?ID=2331 (Beginning
with Paragraph 20)
3
http://www.ncsl.org/programs/health/hrsaslides1/sld001.htm
Scott Sporte is director of business development in NCB Development
Corporation’s Oakland, California, office. NCBDC is a national nonprofit
organization that acts as a catalyst seeking to change the systems for
delivering affordable housing and essential community services to the
nation’s underserved communities. The organization’s primary focus is on
the things that matter most to people living in low-income communities:
housing, health care, education, worker ownership and economic and
community development. NCBDC has consistently offered the financial
services and technical assistance needed to improve health care quality in
underserved communities, working with providers of a variety of health care
and mental health services covering a full spectrum from prenatal care to
services for the aging. In addition to their work with community health
centers, NCBDC has worked with substance abuse rehabilitation agencies,
job training and support organizations for people with physical disabilities,
PACE providers and adult day health organizations, and community hospitals
that provide a majority of their care to low-income populations. For more
information, visit www.ncbdc.org.
Mark Lurtz is marketing manager for Capital Link’s eight offices located in
Boston, MA; Bethesda, MD; Atlanta, GA; Austin, TX; Cary, NC; Jacksonville,
IL; Sacramento, CA and Seattle, WA. Capital Link is a national nonprofit
consulting organization that provides high-quality, affordable, innovative
advisory services related to planning and financing capital projects for
nonprofit community health centers to support and expand communitybased health care. For more information, visit Capital Link’s website at
www.caplink.org.
Community Investments Vol 16, Issue 1
Financing Facilities for Children
May 2004
ABCD Initiative
by Noni Ramos, Low Income Investment Fund
The overarching goal of the Affordable Buildings for Child Development
(ABCD) Initiative is to build a comprehensive and sustainable financing
system for high-quality child care facility development with the objective of
creating 15,000 spaces in five years with a particular focus on low-income
communities. However, experience has shown that it takes more than just
funding to meet the demand for affordable and high-quality childcare
facilities. That is why the ABCD initiative utilizes the expertise and capacity
of existing community organizations, while employing four interrelated
strategies.
ABCD Fund – Provides technical assistance, grants and loans for child care
centers, feasibility planning, acquisition, and construction costs, and longterm real estate financing needs.
ABCD Development Assistance – Utilizes the expertise of regional
community developers to increase statewide the construction of child care
facilities within educational, health, and housing facilities. Partners include
Bridge Housing, Los Angeles Community Design Center (LACDC), Mercy
Housing California and Child Development, Inc. (CDI).
ABCD Constructing Connections – Strengthens the facilities development
expertise of child care center operators and intermediaries, and improves
the regulatory and funding environment to support child care facilities as a
priority.
ABCD Campaign to Sustain Child Care – Brings together new coalitions of
representatives of a variety of sectors to advocate for increased child care
program operating subsidies from state and local governments.
Read The Next Stage in Childcare Facilities Development to learn more about
this four-pronged strategy.
Charter Schools
by Susan Harper, Low Income Investment Fund
Financing of charter schools is a way for banks to assist the public school
system. Many charter schools open in low- and moderate-income
communities and are created on derelict or long neglected property making
them a catalyst for revitalization and stabilization, an activity that is
supported by CRA.
In Funding Our Future: Charter School Finance 101, Susan Harper, the
program manager of the California Charter School Program at the Low
Income Investment Fund www.liifund.org (LIIF) writes about the financing
needs of charter school, including a discussion of traditional financing for
school facilities, and the critical need for cash flow financing of budget
shortages that occur due to mid-year school funding disbursements by
school districts.
Community Investments Vol 16, Issue 1
The Next Stage in Childcare Facilities
Development
Author(s): Noni Ramos, Director of Child Development and Education, Low
Income Investment Fund and Chief Credit Officer of Community Facilities,
ABCD Fund
May 2004
One of the charges of the district Fed banks is to provide
analysis and insight into regional economic development. State
and local governments have been debating how to best use
public funds to encourage economic growth, and research has
shown that early childhood development programs should be
viewed as economic development.
-
Minneapolis Fed Vice President James Lyon at The Economics of Early
Childhood Development: Lessons for Economic Policy conference,
October 20, 2003 hosted by the Minneapolis Fed and Minnesota’s
McKnight Foundation in cooperation with the University of Minnesota1
What’s At Stake?
The socioeconomic impact of inadequate child care, in terms of lost potential
to promote healthy growth and development, cannot be underestimated.
According to the Chicago Longtitudinal Study (2000),2 quantitative savings
in terms of crime, welfare dependency, and special education will result in a
return of more than $7 for every $1 invested in quality early-intervention
child care. The study calculated a potential savings of $2.6 billion for every
100,000 children participating in the programs.
Limited Supply
Lack of facilities is probably the greatest challenge facing early childhood
programs. In California, the supply of licensed child care, estimated at nearly
900,000 spaces in more than 40,000 child care businesses, meets only 22
percent of spaces needed.3 The child care needs of the estimated 2.3 million
California children in poverty are particularly acute with more than 200,000
low-income children on waiting lists for subsidized child care. The alarming
shortage of affordable, high-quality child care is a significant barrier to
families aiming for economic self-sufficiency. Child care is frequently
financially out of reach for low-income families, and there simply are not
enough child care spaces to meet the demand for children of any income.
The problem is not prevalent just in California, but nationwide.
The need for a stable and efficient source of capital to finance the
development of child care facilities across the nation is critical. Without
sufficient funding for high-quality facilities, low-income families are forced
either to refrain from working in order to care for their children, or place
their children in unlicensed and perhaps unsafe child care environments.
Ultimately, the critical need and value of child care spaces, particularly for
low-income families, is clear, as is the necessity for a well-developed
financing system to support the continued development of high-quality child
care facilities throughout the nation. Seeking to address this shortage, the
David and Lucile Packard Foundation, and its partners, launched the
Affordable Buildings for Children’s Development (ABCD) initiative in 2002.
Addressing the Need
The overarching goal of the ABCD initiative is to build a comprehensive and
sustainable financing system for high-quality child care facility development
with the objective of creating 15,000 spaces in five years with a particular
focus on low-income communities. The initiative adopts a four-pronged
approach of finance, technical assistance, construction advice and advocacy
to achieve this goal. The Low Income Investment Fund (LIIF), a community
development financial institution, was chosen to assume leadership of the
initiative in 2003 (see box 1).
The ABCD initiative adapts a proven model drawn from the affordable
housing financing system of using private capital to leverage public funds.
Even in good economic times, it is doubtful that the public sector could
sufficiently supply the capital investment to support construction of the
number of child care facilities required. As such, ways must be found to
attract and sustain new sources of private investments, including loans. The
ABCD initiative operates from the hypothesis that increased involvement of
private capital will expand public dollars and increase the commitment of
lenders and investors who have historically been involved in other areas of
community development such as housing and small business. As the
financial industry increases their commitment, their overall support and
interest in children and child care will become not simply philanthropy but
“good business.” In other words, just as private investors have joined
government funders for today’s affordable housing initiatives, the private
sector will come to value the investment potential in child care facilities
development through ABCD.
Since its inception in January 2003, ABCD has made solid progress,
including:
committing approximately $4 million in grants and loans that will
support development of nearly 1,800 child care spaces;
raising $10 million from a consortium of insurance companies for the
ABCD Fund, through the New Markets Tax Credit program; and
receiving a $3 million grant over three years from the First 5 California
Commission for ABCD Constructing Connections (see box 2).
Getting Involved
In order for the ABCD Initiative to be successful, LIIF will require the
participation of financial institutions in the following ways:
1. lending the ABCD Fund, low cost, flexible capital to be used to make
child care center loans;
2. providing grants to LIIF for re-granting to child care centers for
planning facility projects; and
3. providing grants to LIIF for the operations of the ABCD Fund.
The ABCD Fund is currently capitalized at $10 million with an additional $10
million currently being closed with a consortium of insurance companies.
LIIF’s goal is to grow the Fund to between $30 and $40 million in capital
available for lending.
Because traditional financial institutions do not typically have experience in
making loans for the development of child care centers, LIIF can play a
critical role in serving as the intermediary between the financial institutions
that have the capital to lend and the borrowers developing child care
centers. In most instances, the borrowers are first time borrowers,
unfamiliar with the loan underwriting process. Over the years, LIIF has
developed an expertise in lending for the purpose of child care center
facilities development and by lending to LIIF --an established CDFI with a
strong track record-- rather than to individual child care center, financial
institutions can take advantage of this experience and expertise.
Additionally, such characteristics as often being unsecured, having high loanto-value ratios when secured by real estate, lower than typical debt service
coverage ratios, and cash flow that is dependent on annual appropriations of
child care subsidies tend to make them weaker than usual borrowers from a
financial perspective. By lending to LIIF, many of these risks can be
mitigated because of LIIF’s expertise in lending to this field.
The ABCD Initiative as a Model for Other States
The ABCD initiative is most concerned with putting into place key elements
that will ensure a sustainable system for child care facility financing and
serve as the underpinning of affordable child care facilities development for
years to come. These elements include:
enlisting new and diverse partners such as employers, health care
providers, and housing owners to provide support such as sites or
other resources;
working to ensure that investors see childcare center financing as an
attractive community development opportunity;
mobilizing substantial new public and private dollars for facility
development and organizational support of the child care sector; and,
increasing financing options for childcare providers.
The four components of the ABCD Initiative summarized in Box 2 are an
attempt to address the elements that are believed to be critical to the
system building that we have identified as being necessary for accomplishing
the overall goals of the ABCD Initiative.
Box 1
Who is LIIF?
Since its inception in 1984, LIIF has provided capital and technical assistance
totaling over $353 million in 35 states across the nation to hundreds of
community organizations serving the nation's hardest-to-reach populations.
LIIF's assistance, in turn, has leveraged investments in poor communities of
more than $3.2 billion.
LIIF, which operates nationally, has developed expertise in lending to
borrowers with unconventional revenue streams and provides financing for
all phases of a development project (including permanent mortgages), as
well as operating lines of credit for nonprofit organizations. A prominent
board of directors, drawn nationally from the banking industry and the
national housing development and policy fields, governs LIIF.
To learn more about LIIF’s role in facilitating community development
finance and investments, visit their website at www.liif.org
Box 2
The Four Components of the ABCD Initiative
Experience has shown that it takes more than just funding to accomplish
these goals. That is why the ABCD Initiative utilizes the expertise and
capacity of existing community organizations while employing four
interrelated strategies:
ABCD Fund – Provides technical assistance, grants and loans for child care
centers, feasibility planning, acquisition, and construction costs, and longterm real estate financing needs.
ABCD Development Assistance – Utilizes the expertise of regional
community developers to increase statewide the construction of child care
facilities within educational, health, and housing facilities. Partners include
Bridge Housing, Los Angeles Community Design Center (LACDC), Mercy
Housing California and Child Development, Inc. (CDI).
ABCD Constructing Connections – Strengthens the facilities development
expertise of child care center operators and intermediaries, and improves
the regulatory and funding environment to support child care facilities as a
priority.
ABCD Campaign to Sustain Child Care – Brings together new coalitions of
representatives of a variety of sectors to advocate for increased child care
program operating subsidies from state and local governments.
1
Link to proceedings from the The Economics of Early Childhood
Development: Lessons for Economic Policy conference.
(http://www.mcknight.org/cfc/news_detail.aspx?itemID=
355&catID=55&typeID=2)
2
The Chicago Longitudinal Study (CLS), a report completed by the University
of Wisconsin and published in August of 2000, investigates the educational
and social development of 1,539 low-income children who grew up in highpoverty areas in Chicago. (http://www.waisman.wisc.edu/cls/index.html)
3
Child Care Portfolio, 2001; a bi-annual report analyzing the supply and
demand for child care by county in the state of California created by the
California Child Care Resource and Referral Network.
(http://www.rrnetwork.org/rrnet/index.htm)
For more information, you may contact Noni Ramos at the ABCD Fund,
510-893-3811, ext. 319, or via email.
Community Investments Vol 16, Issue 1
Funding our Future: Charter School Finance
101
Author(s): Susan Harper, Community Facilities Senior Loan Officer, Low
Income Investment Fund and Program Manager, California Charter School
Program
May 2004
Introduction
A charter school is an independent public school established and operated
under a charter for a fixed period of time.1 Charter schools have the
flexibility to operate free of many of the rules and regulations that govern
traditional public schools’ educational program, facilities and operations in
exchange for increased accountability and scrutiny. They must be nonsectarian and must admit on a first-come, first-served basis or select from a
lottery if demand exceeds capacity.
Minnesota was the first state to pass charter legislation in 1991; California
followed in 1992. There are now 3,000 charter schools operating nationwide,
serving approximately 690,000 students in 40 states plus Washington, D.C.
and Puerto Rico (see box 1).2
Unlike district public schools, charter schools do not have direct taxing or
bonding authority—two vehicles for financing traditional public school capital
expenditures. While a handful of states have begun to create new programs
to help charter schools finance capital and other start-up expenditures, most
states still require charter schools to finance their start-up and facilities
expenditures out of general operating revenues, privately raised funds, or
partnerships with other organizations.
LIIF’s Involvement
Without sufficient public funding for quality facilities, charter schools face
considerable uncertainty and instability as they often begin in temporary
space not intended for educational purposes and must deal with the
disruption of moves to new locations. One such example is a project in
Inglewood that is converting a hospital to a school (see box 2). With the
growth in the charter school field including 155 new charter schools in
California since 2000 there is clearly a significant need for widely available,
reliable capital to finance charter school facilities.
Because of its ability to aggregate capital, provide technical assistance, and
creatively finance community facility projects, the Low Income Investment
Fund (LIIF) is well equipped to add value to the charter school field to help
solve the facilities challenge. As a national community development financial
institution (CDFI), LIIF is a steward for capital invested in housing, child
care, education, and other community-building initiatives including workforce
development. LIIF currently has access to over $200 million in capital for
community development projects: $100 million in on-balance sheet assets
and the remaining $100 million in off-balance sheet capital for which LIIF is
the sole administrator.
In 1999, LIIF formally incorporated education into its strategic plan,
believing that education is a key component in economic mobility and asset
growth for low-income households. Additionally, a number of LIIF’s nonprofit
community development borrowers want to serve a broad range of needs in
their communities, recognize that the demand for quality alternatives to
public education in certain neighborhoods is high, and seek communitybased responses to those needs.
All of LIIF’s charter school lending to date has supported schools that serve
low-income and disadvantaged populations and/or poor communities. This
charter school lending activity, inclusive of participation amounts from LIIF’s
lending partners, has consisted of nine loans approved to eight schools
totaling $12.6 million. LIIF’s loans have ranged in size from $100,000 to
$6.3 million, providing schools with a range of facility acquisition,
construction, and renovation financing and supporting 1,957 quality charter
school spaces.
LIIF’s demonstrated expertise in capital market financing, knowledge of the
charter school market, and successful underwriting of loans to communitybased organizations resulted in LIIF’s being awarded a grant of $3 million in
the first round of the U.S. Department of Education (DoE) Charter School’s
Facilities Financing Demonstration Program. This grant, one of five
competitive grants made nationwide at the time, was made to help LIIF
implement a lending program for charters schools in California. LIIF is using
this grant as loan loss reserve funds to leverage $64 million in private capital
that LIIF and its partners are actively raising for further financing of charter
school facilities. With a pipeline of over $30 million in projects that will
require financing in the next two years alone, LIIF is currently looking to tap
new capital sources.
Underwriting Charter Schools
LIIF has had no losses on its charter school portfolio, despite the perceived
risks of lending to charter schools, which include a limited charter life,
uncertainty over public funding, and newness of the market. LIIF has
provided financing to both start-up and existing schools, schools that receive
assistance from management companies, and those managed
independently. As a result of the variety of these transactions, LIIF has firsthand knowledge of the complexity of underwriting charter school loans.
Below LIIF presents a summary guide to underwriting charter schools. While
there are many other factors to consider than those presented, this
discussion focuses on aspects of charter schools with which commercial real
estate lenders may be unfamiliar.
Financial Analysis
LIIF reviews the systems, policies, and procedures that a school has
developed to monitor, analyze, and manage its finances. It is important to
ensure the quality of financial reports and financial management because of
charter schools’ reliance on public funding and accountability. Beginning with
the ’04-05 school year, recently passed California legislation requires charter
schools to produce quarterly financial statements and annual audits.
The majority of charter school revenue is calculated based on average daily
attendance (ADA) – not on enrollment. For example, if a school has enrolled
100 students, but only 90 percent ADA, the school will receive funding for 90
students. The vast majority of school revenue comes from public sources. All
California charter schools automatically receive General Purpose Block Grant,
Categorical Block Grant, and Lottery funding. Other programs are only
available if the school enrolls low-income students (e.g., federal Title I
funding) or applies specifically for that funding (e.g., staff development
money). It is important to understand the timing, reliability, and conditions
associated with each revenue source.
Because of the relatively low per-pupil funding for California charter schools,
(as compared to public schools, which have access to capital funding, and
other states’ overall spending) many schools depend on some level of
fundraising. Obviously, if a school is reliant on fundraising, it is important
that they demonstrate a strong fundraising track record and pipeline.
Schools may also need to attain certain milestones to draw down the funding
and adhere to a set schedule by which the funding is released. Fortunately,
California charter schools are also eligible to apply to the California
Department of Education (CDE) for a grant of up to $450,000 for planning
and implementation costs, which is released over a three-year period.
Finally, LIIF asks such schools to prepare a budget showing viability with
only committed funds.
Personnel expenses are the single-largest category of expenses for charter
schools, often representing 50 to 70 percent of the budget. And although
charter schools have more flexibility over public schools since the union and
wage scales that affect public schools do not usually apply, personnel
budgets must be sufficient to attract talented teachers and administrators
and to meet target teacher-student ratios. Other significant expenses include
curriculum materials, books, computers, equipment, and supplies, which
typically range from five to fifteen percent of a school’s budget. In addition,
charter schools often contract with outside companies to manage their
financial and operational needs. These fees can range from five to twenty
percent of the budget.
Facility costs will vary based on factors such as the nature of ownership or
lease and the age, location and size of the facility. An ideal school facility
provides 75-100 square feet per student; of this amount, about 50 percent
should be allocated for classroom space. (However, many schools, whether
by choice or limited budgets, make do with less space.) Occupancy costs
should not exceed 20 percent of revenue; a 2001 study of charter schools
nationwide indicated an average of 12 percent.3
Finally, California state law requires districts to charge a one percent
administrative fee for services provided to charter schools, and, if the district
provides a facility for the school, they can charge up to three percent. It is
important to ask whether and what level of operating reserve the school’s
charter requires. In addition, LIIF will typically also require a replacement
reserve, in the range of $0.50-$1.50 per square foot.
Repayment Risk
Understanding the school’s track record in attracting, retaining, and
increasing its enrollment is critical in terms of assessing a school’s ability to
repay a loan. Many funders consider 300 to be a minimum enrollment for a
school that is seeking to take on financing, although the type and need of
the facility and financing will influence that level and LIIF has successfully
financed schools with less than 150 students. LIIF monitors a school’s
waiting list and student attrition rate to ensure that the school remains on
target to receive its budgeted revenue. (Approximately two-thirds of charter
schools nationwide have waiting lists.)
Needless to say, charter schools can benefit from economies of scale with
larger enrollments. However, many charter schools open by offering one
grade of instruction and gradually increasing enrollment by adding one grade
a year until they reach capacity. While this growth pattern has educational
advantages and enables the school to build operational capacity slowly, it
presents a challenge in structuring a long-term facility loan so that it can be
repaid while the school is still increasing enrollment. (For this reason, many
operators will lease temporary space for one-to-three years while they build
up the financial resources and capacity to make larger facilities and financing
more feasible.) When a school budgets for enrollment growth, not only will
teacher costs increase, but the school will also have to allow for additional
equipment, books, and supplies for the new children. After the school
reaches capacity, costs in these areas, on an annual basis, should actually
decline, with on-going replacement costs less than start-up costs.
LIIF also reviews the marketing plan for attracting new students and
families. For example, where will the school advertise, how often, and what
are possible feeder schools? It is also important to determine the break even
enrollment and ADA, below which a school could no longer service its debt,
and how likely it is that projections will fall to those levels.
In addition to strong demand and enrollment, accumulated reserves will also
mitigate the repayment risk. However, only schools in their third year or
beyond are likely to have much of a cushion built up (unless they have been
unusually successful in raising private contributions). In the past, California
has enacted legislation whereby schools in low-income communities are
reimbursed at $750 per ADA up to 75 percent of annual facility lease costs,
which has enabled several schools to build up cash reserves. (This funding
has been proposed for FY05, although its long-term prospects are
uncertain.)
School Management
Because of the importance of strong management to oversee the
complicated finances of charter schools and to attract and maintain the
enrollment that drives loan repayment, LIIF places a strong emphasis on this
area. LIIF analyzes the depth and breadth of management’s experience, the
recruitment plan for bringing on new staff, and the school’s hiring and
evaluation criteria. It is particularly important to get a sense of
management’s track record in operating programs of a similar size. While
the experience of the founder is important, it is also critical to ensure that
the school has an established management structure in place, with clearly
identified roles and responsibilities and, ideally, a clear succession plan.
California requires that teachers of all “core classes” be certified. Schools
then hire “classified” staff to teach non-core classes. Some amount of
turnover is to be expected, particularly during a school’s first few years.
What is important is to ascertain the reasons behind the turnover (e.g., poor
recruiting, lack of professional development, weak administration). Another
discussion to have with the school surrounds the lessons learned from any
turnover and the adjustments made to bring about a more stable
environment.
In many cases, strong educators come together to form a school, and then
seek to supplement their backgrounds by contracting with a variety of thirdparty management assistance providers for on-going school management.
Services provided range from specific technical assistance with finance,
curriculum, or real estate development to a comprehensive approach
whereby a school’s founding body contracts out the entire management and
operations of the school to a third party.
There is a range of governance structures in charter schools. In California,
some charter schools, referred to legally as "dependent" charter schools, are
established or remain a legal arm of the school district or county office of
education that granted their charter. Other charter schools, known legally as
"independent" charter schools, function as independent legal entities and are
usually governed by or as public benefit ("not-for-profit") corporations. Still
other charter schools form some sort of legal hybrid or "in-between"
structure, in which some governance powers remain with the district or
county and others rest with the school governing body. The school’s
governance structure will be clearly described in the charter.
Another important aspect of a school’s governance that LIIF reviews is the
board of directors. Not only does LIIF look to see that a school has recruited
members with a wealth and diversity of educational and professional
experience (e.g., legal, finance, real estate, business or nonprofit
management) but also members that represent the community. The
relationship between the board, management and the community are also
important considerations. For example, does the board have open meetings
and are parents and the community involved in shaping the design of the
school?
School Charter and Design
Since the charter is what allows the school to operate, it is important to
carefully review the charter petition and approval documents from the
school’s authorizer. A charter school petition includes a description of the
school’s educational program, student policies and recruitment, human
resources, governance and management structure, financial projections, and
clarification of the roles and responsibilities of key parties. A school’s charter
in California is approved for five years (three years if initially approved by
the State Board of Education, as noted below). The charter-granting agency
has the responsibility to ensure that its charter schools are meeting the
charter terms, are fiscally managed well, and are in compliance with all
applicable laws. Charters in California can only be revoked or not reinstated
for reasons of material non-performance.
Clearly, quality is an important factor, yet it is often hard to assess. LIIF
analyzes a school as a business—how will management attract and retain its
customers (children and families), what is its competitive advantage, (i.e.,
what distinguishes it from other schools) and what is its mission? One place
to go for some data on academic performance is to review the school’s
Academic Performance Index (API) score. California schools receive an API
score annually. Recent legislation mandates that for a charter to be
renewed, the school must pass one of four tests; one of which is achieving
an API score of “4.”
Since the school will be measured against its student achievement goals, it
is important to assess how achievable the goals are: can the school’s
curriculum and program not only meet the needs of the surrounding
community but also help improve student performance; has the curriculum
been used before; and what additional resources will be required, given the
needs of the students or the special features of the school?
Political
Charter schools remain controversial politically. Many districts are reluctant
to approve new charters, in part due to the monitoring required of them as
authorizers. Thus, the relationship between the school and its
district/authorizer must be carefully considered. In California, the vast
majority of schools must first approach the district in which they will be
located for a charter. If denied on that level, the school can apply to their
county’s Board of Education. If further denied, the school then has the
option of applying to the state Board of Education. There is proposed
legislation right now that would allow public colleges and universities to
charter schools; however, the prospects of such legislation are uncertain.
LIIF also researches the district’s prior and current relationship with charter
schools – how many have they approved, rejected, or revoked? What level
of monitoring does the district perform? What conditions must the school
meet before it can open? LIIF also assesses the degree of community
support for the school and involvement of community partners.
Collateral and Construction Completion Risk
In analyzing charter school loan requests, the emphasis noted above on cash
flow, management, and the school’s program becomes all the more
significant given the difficulty of valuing charter school real estate collateral.
The special purpose nature of school facilities, the lack of comparable
facilities, and the urban locations which are often undervalued of many
schools complicate traditional loan to value analyses.
Schools that do not use state bond money for the acquisition or renovation
of their facility or are not locating on school district property do not have to
follow traditional public school construction procedures. Of course they must
still follow local permitting requirements and code compliance. In LIIF’s
experience, charter schools often underestimate the time, costs, and skills
required to undertake a facility development project. As such, LIIF strongly
urges schools to contract with qualified project management personnel and
with architects and general contractors that have experience with school
projects. It is important to ensure that a school plans and budgets for a
back-up facility, in case the renovation of its future home takes longer than
expected, potentially delaying school opening in the fall.
Important characteristics of charter school locations include proximity to the
students, access to transportation, safety, and age and size of facility.
Lenders must be aware that the ability of charter schools to offer a sizable
equity contribution or additional collateral varies widely, resulting in the
need to creatively structure charter school financings.
Conclusion
LIIF has long recognized the need for all CDFIs to broaden their sources of
financing and is a leader in creatively identifying and structuring nontraditional sources of financing for all types of community development
facilities, including charter schools. LIIF has had no capital losses on its
charter school portfolio, and its 19-year loss rate on all lending is 0.16
percent.
LIIF is actively seeking to raise new capital for a charter school fund and is
anxious to bring in financing partners that may be new to this field, whether
through contributing capital to a charter school fund or working with LIIF on
individual deals. This article was written to provide such partners with a
background on underwriting charter school and bridge the information gap,
so as to encourage them to participate with us. The need for facilities
financing among charter schools is significant, will continue to increase in
the coming years, and will require all of us to work creatively to solve the
facilities challenge.
Box 1
California leads the nation in number of charter school students. Almost one
quarter of the 684,000 charter school students in the United States are
located in California. Approximately 2.5% of California’s 6,142,000 K-12
students attend charter schools.
Since the law authorizing charter schools was enacted in 1993, California
has authorized 471 charters schools and enrolled 170,000 K-12 students.
The 471 charter schools operating in California in 2003 represented a 13
percent increase over the prior year. Since 2000, 155 charter schools have
opened in the state.
Recent estimates by the Center for Education Reform (www.edreform.com)
have tallied nearly 154,000 students enrolled in California charter schools.
The states with the next highest levels of enrollment are Arizona (73,542),
Texas (60,562), Michigan (62,236), and Florida (53,350).
Of California’s charter schools, most (70 percent) are startups, or entirely
new schools created by community members. The rest are conversions, or
traditional public schools that have successfully petitioned for charter status.
About 65 percent of the charter schools are site based, meaning that
instruction takes place primarily on a school campus. Another 13 percent are
independent study programs. The rest (22 percent) have a hybrid setup, a
combination of students attending school on a regular campus with a
substantial independent study component in the program. In the history of
California’s charter movement, there have been about 20 charter
revocations and 30 closures.
Box 2
On May 26, 2004, LIIF approved a loan of up to $6,300,000 to repay a
$750,000 predevelopment/ acquisition loan approved by LIIF and to
complete the renovation of the property for educational use. The property, a
74,722 sq ft, six-story former hospital, will serve as the permanent home for
Animo Inglewood, a charter high school that opened in Fall 2002.
The project will result in the expansion of Animo Inglewood allowing the
school to increase enrollment from 280 9th and 10th grade students to 405
students in grades 9-11 in fall 2004, and 525 students in grades 9-12 by Fall
2005. Renovations to the property will include demolishing interior walls
(except for corridor walls); reconstructing restrooms, teacher offices,
classrooms, and windows on floors 2-5; and developing administrative
offices and a student dining area on the first floor. Renovations are expected
to be completed by September 2004.
Animo Inglewood is the second of three charter high schools currently
operated by Green Dot, a nonprofit charter school developer incorporated in
2000 that currently operates three schools and will open two additional
schools in fall 2004. NCB Development Corporation is participating with LIIF
on the loan.
-------------------------------------------------------------------------------1
In California, charters are approved for up to five year terms. Some
charters have been able to negotiate “evergreen” charters, whereby each
year their authorizer approves them for a five-year term, so they have a
rolling five-year charter. But, that is the exception rather than the rule.
2
Center for Educational Reform, June 2004 (http://www.edreform.com).
3
Charter School Facilities: Report from a national survey of Charter Schools;
Charter Friends National Network and Ksixteen LLC, April 2001
(http://www.charterfriends.org/facilities-survey.pdf).
@FedFRASER