What CDFIs Have Accomplished

CDFIs began addressing the needs of charter schools shortly after the first law was enacted. According to Charter School Facility Finance Landscape (LISC 2007), there are now twenty-five private nonprofit organizations offering financing to charter schools for their facilities. Collectively, these organizations have provided over $600 million in direct financial support to date. All of the twenty-five organizations surveyed in the report are either certified as CDFIs by the CDFI Fund or are

Figure 4.4 Charter School Loans (in millions)

Charter School Loans (in millions)

nonprofit organizations with common missions of providing development finance to one or more underserved markets.

When CDFIs entered the charter market, banks were absent from the scene, the option of tax-exempt bond financing was unthinkable, there were no public resources to address the facilities problem, and school founders were struggling to find solutions. Not only were financial resources scarce, most charter school operators were educators with little knowledge of how to develop and finance a school facility.

Figure 4.4 shows the aggregate growth of charter lending volume among the nine most active CDFIs, including Southwestern Pennsylvania Community Loan Fund (CLF), Illinois Facilities Fund (IFF), Local Initiatives Support Corporation (LISC), Low Income Investment Fund (LIIF), NCB Capital Impact, La Raza Development Fund, Nonprofit Facilities Fund, Self-Help, and The Reinvestment Fund (TRF). From 1997 to 2006, CDFI disbursements grew from $275,000 to $170 million. Cumulative disbursements over this period exceeded $460 million, a volume that approaches sufficient scale to impact an industry and attract attention of the capital markets. There were 436 loans made, financing over 200,000 school seats. Over 80 percent of the schools financed serve a majority of low-income children. CDFIs provided a range of products – loans for mortgages, leasehold improvements, and working capital. Loans were made in both senior and subordinate positions.

In the earliest days of the charter movement, schools had to open using their own funds. By 1994, however, the Clinton administration established a role for the federal government by creating a program to provide start-up seed funding under Title X of the Elementary and Secondary Education Act. This program alleviated the need for very high-risk start-up working capital loans. The problem of finding, leasing, or buying and renovating space then rose to the top of the list as the biggest barrier to opening schools. The first studies of charter schools commissioned by the DoE in the late 1990s showed they tended to be smaller than the average public school, with seven out of ten leasing space. This remains true today; average charter school enrollment is 40 percent less than conventional public schools, and only 30 percent of charter schools own their buildings (Center for Education Reform 2007). When it came to space, many schools had to improvise, occupying temporary spaces, church basements, vacant storefronts, or unused public school buildings. Accordingly, CDFIs made leasehold improvement loans as well as first mortgage loans to schools capable of owning their facilities. Loan amounts tended to be in the $250,000 to $2 million range.

Charter school portfolios held by CDFIs were performing well, as they continue to today, despite the perceived risks of the market. Most CDFIs were experiencing default rates of less than 1 percent, with no history of loan losses. Borrowers were beginning to establish creditworthiness; however, banks were still reluctant to get involved, and not more than a handful of bond deals had been executed. In 1999, Moody's Investment Services published its first analysis of the charter school market. Standard and Poor's and Fitch Ratings soon followed. While the bond market was beginning to pay attention, many were skeptical. Most bond deals were rated below investment grade, which meant charter schools were still paying relatively high rates for capital. In 2002, Fitch Ratings asserted that despite strong demand, "schools without three to 10 years of successful operating history or substantial credit-enhancing features will remain hard pressed to earn investment-grade ratings. Most proposed bonds in the sector possess credit features consistent with the 'BB' or 'B' rating categories." The continued growth in charter school demand put more pressure on those already willing to make charter loans.

When CDFIs first entered the market, they were making loans from their own balance sheet. However, demand for seats in new or existing charter schools continued unabated. Enrollment continues to grow at double-digit rates (see Figure 4.3). At the same time, charter schools began gaining more permanence in their communities. Charter operators needed room to grow and also wanted to upgrade their space to reflect their changing status. Occupying permanent space was a way to achieve both. Transaction sizes began to climb as a result, requiring CDFIs to find even more creative solutions to serve the market. Fortunately, the federal government devised a useful way to help.

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