Pub. 2 2012-2013 Issue 1

12 Primary Risk Factors So, once a bank chooses to partner with a charter school, what are the issues that keep us up at night? Based upon our underwriting experience and the broader experience reported by other charter school lenders, we have identified the following key risks in charter financing. 1. ENROLLMENT RISK: In evaluating existing schools, banks focus on historical student and teacher retention, CRT test results and waiting lists. But more than raw numbers, how does a school plan to grow, how will that growth affect the school’s personality and how does it serve the defined deficit in an incumbent district? 2. BUDGETOROPERATINGRISK: Acharter school canaccurately project revenue on day one, and there is no pricing risk. So the primary challenge is expense control, and 65%of that is person- nel costs. Controlling these is part budgeting and part matching staffing with enrollment. It’s a little art and a little science. 3. COMPLIANCE AND REPORTING RISKS: From admissions to audits, charters are a highly regulated industry; compliance and reporting can undo an otherwise great school. Properly coding and tracking students can also mean higher state and federal funding. 4. BUILDING RISK: Charter schools are not complex build- ings, but they do require specialized tenant improvements and very efficient buildings. Unlike the district, charter occupancy costs come out of operating revenue; too much expense can undermine the charter’s future. 5. SUCCESSION RISK: This key risk presents itself when founding board or staff members depart and are replaced by new people that may not share the founding vision. Conflicts can lead to personnel turnover and subsequent loss of enroll- ment. Management depth and independent board members promote continuity and stability. 6. STATE BUDGET CONSTRAINTS: Many states, includ- ing Utah, are facing ongoing budget pressure affecting K-12 appropriations. We see little risk of “defunding” charters, but flat or even declining State and Federal funding is a reality. Multiyear budgets that provide the flexibility to meet these unknowns are a must. At the end of the day the availability of WPU and the ability to repay a loan, is dependent on children sitting at desks. That is ultimately dependent on meeting the expectations of the charter school parent. By leaving the district public school, that parent has already demonstrated a willingness to move their child when expectations are not being met; that’s not likely to change. That willingness to move on will remain a feature of the market, and the charter must provide superior service with a WPU payment that is lower than the total revenue received at the district schools. Of course, there are alternatives to bank financing. In addi- tion to the municipal bond market, there is USDA financing, real estate investment trusts, mezzanine lenders that provide leasehold financing, and not for profit organizations that focus on assisting charter schools that serve at risk populations. In summary, every charter school is as unique as the team of teachers and the students they serve. One of the most enjoy- able parts of serving this industry is the opportunity to travel to so many different schools in different states and cities, and see how very creative people solve similar problems differ- ently. But there is a common theme; the successful charter is a warm and welcoming place with a core set of values about conduct and education that are non-negotiable for students and teachers alike. Conrad Freeman specializes in Charter School Financing at Vectra Bank Colorado, an affiliate of Zions Bancorporation, both of which have been actively lending to the charter school market since 2003. During that time they have financed more than 50 charter schools in six states, including 12 within the state of Utah. CONTINUED FROM PAGE 11 State of Utah enrollment data for the year ending June 2011, including 2012 projections