USDA Guarantee + NMTC Equity = Facility Financing for a Start Up Charter School

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1 USDA Guarantee + NMTC Equity = Facility Financing for a Start Up Charter School

2 Berkshire Arts & Technology Public Charter School Adams, MA The BArT Charter School opened its doors in the fall of 2004 in leased space a 36,425 sq ft hotel converted to commercial space in Located in Adams, MA a rural, physically and economically isolated part of western Massachusetts. Families have limited educational alternatives to the district public schools. 55% of BArT s students are low-income; 40% receive special ed services.

3 Berkshire Arts & Technology Public Charter School Adams, MA Goals of the School Serve 300 students in grades 6-12, integrating arts and technology into a college preparatory curriculum. Match capacity to pay debt service with required debt service. Establish schedule of payments matched to the school s planned schedule of growth. Create a stable home and a top quality facility for this young school. Minimize facility expense and maximize spending on student programming.

4 Berkshire Arts & Technology Public Charter School Adams, MA Challenges Essentially a start up, the school did not have a sufficient track record for Lender to sufficiently underwrite: The Management Team Academic Performance Operating Performance Fundraising Capacity While the school was adding grades there was insufficient cash flow to service conventional debt service.

5 Financing Overview Closing BCLF provided a $4.493 million Leverage Loan which will grow to $4.7 million over 7 years BCLF made a second loan ($4.6 million) directly to QALICB; CDE immediately purchased 95% of this loan with QEI funds to make the $4.370 million QLICI A note. BCLF holds the remaining $230,000 balance. USDA guarantees 90% of the $4.6 million loan 36 year term.

6 Sources & Uses of Funds at Closing Investor NMTC Allocatee $600 $151 $1,506,849 Fund $4,493,000 Leverage Lender $6.0 million QEI Originate $4.6 million USDA Loan; hold 5%, sell 95% to CDE Acquire Bldg Transaction Costs Working Capital Put Option Cash Reserves CDE $1,160,600 QLICI Loan B Cash Reserves Allocatee Fees CDE buy 95% of USDA Loan, QLICI Loan A from Originating Lender QALICB (School)

7 Financing Overview 7 th Year Exit Strategy CDE distributes CDE Reserve Balance (initial deposit of $390,000, growing to $547,000 over 7 years as interest is added to the balance) to reduce Leverage Loan Balance CDE distributes its 95% of QLICI A loan balance to Leverage Lender, fully satisfying Leverage Loan. Investor and Allocatee sell interests in Fund and CDE to QALICB QALICB dissolves Fund and CDE. BCLF holds a $4.3 million loan to the School, secured by a first mortgage on 36,500 sq ft commercial building with a minimum appraised value $5.0 million, 90% USDA guaranty, with up to $875,000 in cash reserves; and minimum 1.25 DSC.

8 Financing Overview BCLF will either: 1. Hold the note, Years Sell up to a 95% interest in the USDA guaranteed note, or 3. Borrower will refinance the debt at more favorable terms

9 Challenges in Using USDA Guarantys in a NMTC Structure 36 year, fully amortizing term USDA will not guaranty a loan with a balloon payment. USDA must approve the originator of a loan it will guaranty: Typically QLICI loan is made by the CDE, but the CDE could not obtain USDA approval. Solution was for Leverage Lender (BCLF) to originate the QLICI and sell 95% immediately to the CDE. USDA requires that the originator hold 5% of the loan; BCLF holds a small piece of the QLICI loan, in addition to the Leverage Loan. (this means that a portion of the transaction can not flow through the NMTC structure and generate equity value.)

10 Value Added through USDA Credit Enhancement USDA guarantee mitigated risks of lending to a start up school. operational track record, financial track record, community acceptance, fundraising track record, academic performance, charter renewal risk, special purpose collateral risk. USDA guarantee allowed BCLF to commit to a 36 year term loan. Liquid market for USDA guaranteed loans increased our confidence in a year 7 exit, allowing us to make a loan extending 30 years beyond the compliance period.

11 Lending in the Current Climate: Anticipate that all entities will seek increased compensation (higher fees) for more complex transactions to cover underwriting, sale of participation interests, asset management. Conservative assessment of real estate value in 7 th year will reduce amount willing to lend. More conservative LTV and DSC requirements. Volatile interest rate environment will impact loan amounts in structures which rely on deposited funds growing over time to provide a repayment source. Investor underwriting will be more stringent. And Lenders will underwrite Investors more stringently! Low appetite for non-amortizing and/or negative amortization structures. Confidence in ability to be refinanced out of transaction after 7 th year diminished. Capital is a scarce commodity; capital will flow to projects with the greatest mission fit, strategic fit, and least amount of risk.

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