CDFI Financing for Charter Schools Products & Considerations
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1 CDFI Financing for Charter Schools Products & Considerations Clearinghouse CDFI Low Income Investment Fund (LIIF) Musick, Peeler & Garrett LLP February 2015
2 Agenda Who We Are Typical Terms & Conditions Overview of Different Loan Types Legal Considerations Questions 1
3 Clearinghouse CDFI Community Development Financial Institution (CDFI) For-profit community impact lender Headquartered in Lake Forest, CA with L.A. office Operating In AZ, CA, NM and NV Mission to improve the quality of life for lower income communities Over $1 billion funded since inception Clearinghouse has been providing facilities financing to California charter schools for 17 years $100 million in charter school facilities financing 50% Core Loans 50% New Market Tax Credit Loans Provide debt financing for single site operators and CMOs 2
4 Low Income Investment Fund (LIIF) Community Development Financial Institution (CDFI) 501c3 / Non-profit lender Based in San Francisco with L.A. office national scope Mission of poverty alleviation, with $1.5 billion invested in strategies that support healthy families & communities LIIF has been providing facilities financing to California s charter schools for 16 years $406 million in charter school financings for both facilities and cash flow Over 62,000 seats created Work with both large & small CMOs, as well as strong single operators 3
5 Musick Peeler & Garrett LLP A law firm that specializes in representing charter schools in facilities financing transactions The firm has been practicing in California since 1954 Brian Holman has advised and represented clients in over $200 million of charter school facilities financing transactions 4
6 CDFI Financing Overview WHO s Qualified? WHAT s Available? HOW much can we borrow? WHAT are the terms? WHAT s the typical Down Payment? CHARTER SCHOOLS Serving Free & Reduced Lunch eligible students Strong academic, operational and financial performance FACILITIES FINANCING Acquisition Loans Construction Loans Mini-Permanent Financing CDFI Permanent Financing (new product) Leasehold Improvement Loans New Markets Tax Credits (NMTCs) Up to $6,000,000 Larger loan sizes available on a project-specific basis and for certain programs (NMTCs) Loan terms of up to 7 years for most products; permanent loan product can have term up to 29.5 years Interest-only or amortizing up to 25 years 10-20% equity contribution 5
7 Typical Terms and Conditions Loan amount Loan-to-value (LTV) Equity requirements: paid upfront Pricing Interest rate: fixed or variable Fees: origination fees, 3 rd party fees, legal costs Interest only versus amortization schedule: balloon payments Term of loan Typically shorter term; usually max of 7 years Collateral Real estate, Leasehold Deed of Trust, debt service reserves, UCC filing 6
8 Typical Loan Products Acquisition loans Interest-only, 6 36 month terms, capitalized interest Construction loans Interest-only, 6 18 month terms, capitalized interest Can convert to amortizing mini-permanent loan upon construction completion Leasehold improvement loans Requires longer term lease; leasehold mortgage / lease assignment as collateral Mini-Permanent loans Longer term (up to 7 years), fully amortizing or with balloon payment 7
9 Typical Loan Products: Strengths & Challenges Strengths Minimal complexity, no need for additional financing consultant Shorter execution timeframe Lower transaction costs than bond / NMTC Challenges Balloon payment will need to be refinanced at end of term; can be difficult to secure long-term financing Pricing may be slightly higher than bond / NMTC 8
10 CDFI Permanent Loan Product In 2014 CDFIs gained access to permanent capital through the CDFI Bond Guarantee Program For the first time, enables CDFIs to provide up to 29.5 year, fully-amortizing fixed rate loans Structured like a mortgage with typical closing costs (lower than bonds) and attractive rates Loan proceeds cannot be used for construction Schools must demonstrate several years of operating history Currently limited amount of funding available 9
11 New Market Tax Credits (NMTC) Flexible credit, can be used for wide range of businesses and property uses Not all projects qualify, need to be in qualifying census tract Better for larger deal sizes, more complex structures Minimum of $5MM deal size generally best Interest-only, refinance at seven years Complex, recommend consultant, unless strong internal capacity Requires multiple financing parties CDE / NMTC Allocatee, Equity Investor, Leverage Lender 10
12 NMTC Benefits Combination of debt and no-cost NMTC equity leads to an overall lower blended interest rate Equity forgiveness of roughly 20 25% Longer term (7 years) Although expensive to close, benefit of equity forgiveness / lower blended interest rate can far outweigh the cost Some CDEs provide flexible terms, such as: Non-traditional collateral, higher LTVs, subordinated debt, lower originations fees, lower DSCR, lower loan loss reserves 11
13 NMTC Challenges Limited credits available; highly competitive Not a permanent tax credit - subject to periodic reauthorization by Congress Expensive - high legal and transaction fees; multiple parties involved in each transaction Complicated federal guidelines that project needs to stay within No prepayment allowed during 7 year term Management of project timeline deals that are shovel ready have a better chance of securing credits 12
14 Comparison: Financing Options Traditional Products New Markets Tax Credits Loan Amount Loan amounts vary Typically $5 million + based on cost of issuance Tax Exempt Bonds Typically $5 million + based on cost of issuance Loan Structure Terms and amortization vary Generally 7 years, interest only Up to 30 years, amortizing Loan-to-Value Up to 90% Up to 90% 100% Benefits Appropriate for smaller, less complex transactions. Quicker underwriting. Interest only period; 20% 25% debt forgiveness ; attractive interest rates Long-term financing; attractive interest rates Challenges May have to refinance Property must be located in an eligible census tract; need to refinance after 7 years; complex transaction with higher legal costs; no prepayments; based on availability of allocation Only the strongest school applicants are eligible, can be difficult for new schools; complex transactions with higher legal costs; locked into longer terms 13
15 Comparison: Types of Lenders Lending Institutions Traditional Banks Community Development Lenders Loan Terms years Up to 7 years on standard products (29.5 years w/ perm loan product) Loan-to-Value 70-80% 80% - 90% (sometimes higher) Fees (include legal fees and closing costs) Benefits Bond Investors Up to 30 years Up to100% (sometimes higher) 1% 3% 1% 2% 5% - 10% Can provide higher loan sizes and multiple products (e.g. lines of credit) More flexible and nimble; often able to move faster through underwriting & closing process. Familiarity with school finance Provide longest term capital, often at the lowest cost to the borrower 14
16 Legal Perspectives Put Your Legal House In Order Hire Your Lawyer Early Develop an Appropriate Legal Structure Read Your Agreements Avoid Legal Pitfalls 15
17 Put Your Legal House in Order A facilities financing transaction requires strict adherence to various legal formalities. A charter school contemplating entering into a facilities financing transaction must put its legal house in order. The school should assemble its articles of incorporation, bylaws, minutes of board meetings, tax exemption applications, tax exemption determination letters, charter petitions, charter approvals, leases, loan agreements and other material contracts. 16
18 Hire Your Lawyer Early Too often, a charter school entering into a facilities financing transaction waits until after it has committed to acquire or develop a facility, after it has entered into a construction contract, or after it has received a loan commitment before hiring a lawyer. By this time, a lawyer s advice may come too late. The school should retain a lawyer before entering into binding agreements and before the submission of a loan term sheet for credit approval. 17
19 Develop an Appropriate Legal Structure By developing an appropriate legal structure for the facilities financing transaction, a charter school may be able to obtain funding under the Charter School Facility Grant Program (SB740) that can assist in financing the cost of the project. This commonly involves the creation of an affiliated limited liability company that acquires the facility and leases it to the charter school. 18
20 Develop an Appropriate Legal Structure The LLC may be owned by the charter school or by an affiliated nonprofit public benefit corporation. The affiliated corporation may be formed as a supporting corporation controlled by the charter school, or the affiliated corporation may be formed to control or serve the charter school and, possibly, other related charter school organizations. 19
21 Develop an Appropriate Legal Structure The selection of the appropriate legal structure requires careful consideration of the charter school s governance rules and culture, expansion plans, authorizer relationships, contribution income, tax position, and other matters. The personnel involved in any new entities must be selected to avoid conflicts of interest. 20
22 Read Your Agreements Do not rely on your lawyer to object to problematic provisions of proposed agreements, especially affirmative and negative covenants in loan agreements, and most especially financial covenants. If a covenant is clearly stated, the lawyer may have no comment even though the school may be unable to comply with the covenant. Read all the documents before signing them. 21
23 Avoid Legal Pitfalls Lenders instinctively demand guaranties, collateral, and restrictive lease or loan covenants in order to enhance their likelihood of being repaid. The charter school must consider whether submitting to a lender s demand for such matters will unduly restrict the charter school s freedom to operate or expand. The charter school should seek to preserve flexibility in operations and the ability to grow. 22
24 Avoid Legal Pitfalls The loan officer that assures the borrower before the loan documents are signed that the lender will not unreasonably withhold its required consent under a loan document may not be the same loan officer that administers the loan after the documents are signed. 23
25 Avoid Legal Pitfalls Loan documents can be structured in a way that reduces barriers to expansion. For example, a lender may contemplate making a loan to an LLC that will lease property to a CMO for use by one of several charter schools operated by the CMO. The lender may agree that, if the CMO defaults under the lease, the lender will look only to the revenues and assets of the charter school that was using the property and not those of any other charter schools operated by the CMO. 24
26 Brian L. Holman, Esq Attorney at Law With convenient locations throughout California One Wilshire Boulevard Suite 2000 Los Angeles, CA T
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