Lending to Charter Schools. (Lending To)

By Nida, Thomas A. | The RMA Journal, May 2002 | Go to article overview

Lending to Charter Schools. (Lending To)


Nida, Thomas A., The RMA Journal


The number of students enrolled in charter schools--independent alternatives to public schools--could quadruple by 2010. City First Bank of D.C. has two years of lending to charter schools under its belt and in this article shares information about this relatively new lending opportunity.

Charter schools are independent schools that are publicly funded and regulated, operating under a charter to create an independent educational program free of public school bureaucratic controls. A combination of academic success and sound business management is necessary to maintain a charter for continued operations.

Since the first charter school law was passed in Minnesota in 1991, enabling legislation has been enacted in 39 states, the District of Columbia, and Puerto Rico. Heightened interest in education reform has caused rapid growth in recent years, and more than 2,500 charter schools now educate more than 550,000 children in grades K-12. These schools are especially likely to find homes in inner-city neighborhoods. In the District of Columbia, where enabling legislation was passed in 1996, 40 charter schools operate from 43 sites, enroll more than 15% of the total school-age population, and absorb more than $105 million in public funding support. The D.C. experience may become a precursor of exponential national growth.

A major challenge in this high-growth industry is securing facilities financing. Consider the following: An adequate school facility requires 75-100 square feet of total space per student, and of this total at least 50% should be classroom space (the remaining space comprises offices, hallways, cafeterias, libraries, auditoriums, gymnasiums, and bathrooms and utility space). The average charter school, with an enrollment of about 250 students, requires 20,000-25,000 square feet. Several recent surveys have shown that finding adequate space for present and projected enrollments is becoming a critical issue nationwide.

A survey conducted by the Charter Friends National Network and Ksixteen LLC in April 2001 generated responses from 280 schools attended by more than 80,000 students in 19 states. Responses revealed that:

* 79% of the schools lease their current facilities.

* 13% occupy space at little or no cost.

* The remainder own their property.

Some 60% of the surveyed schools plan to move or expand their facility, as the aggregate long-term enrollment projections indicate 63% growth. Another survey conducted by the Charter School Development Corporation in October 2001 produced responses from 109 schools in 20 states, with planned facilities expansion costs exceeding $846 million.

The U.S. Department of Education has tracked the growth in national enrollments in both public schools and in charter schools. Public school enrollment, estimated at more than 50 million students currently, has averaged 3.5% annual growth since 1996 and is expected to stabilize around 53 million through 2010. Realizing that the current charter school population is just over 1% of the national student total, it is likely that the present rate of growth for charter schools will continue. Consequently, the financing needs of these schools will also continue to grow, representing a potentially attractive market niche for lenders willing and able to meet these needs.

The Market

Currently, Arizona, Michigan, and California have 40% of the charter schools in the country and 60% of the total charter school student population. The demand for education reform, or choice, is reflected in steady growth throughout the country. In May 2001, the Center for Education Reform evaluated all of the states with enabling legislation, rating each on a variety of factors, such as:

* The level of political support and the general "environment" for charter schools.

* The quality of regulatory oversight and the level of budgetary support. …

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