What Do Lenders Look For?

Brought to you by: Capital Impact Partners’ The Answer Key


Lenders want assurance that your project will be successful and you will be able to repay your loan as planned. Therefore, they will ask for information to assess the level of risks that would prevent you from making your loan payments, and they will structure the loan to reduce those risks as much as possible. When assessing risks, lenders typically evaluate your team’s experience and capacity to manage the project, your financial performance and ability to repay the loan with cash flow, your school model and how you compare with other schools, and the collateral you offer, in case the loan is in default.

(1) Your Team

Lenders want to understand how the school is run. They will also assess your staff and project development team’s level of experience.

Management Team

Lenders typically require resumes from your school’s leadership team (executive director, academic director, finance director, principal). The lenders will review the team’s qualifications and tenure to evaluate their level of experience and expertise. It is also important for lenders to understand how the daily operations are handled at the school. They want to know who manages the curriculum and student policies, how parents and the community are engaged, how the school manages the relationship with the charter authorizer, how the school works with the board, who is responsible for fundraising, and who manages the finances (does the school have the internal expertise, or does it contract with an experienced back-office provider?). Lenders will also ask questions about teachers’ credentials, professional development opportunities, and turnover.

Board of Directors

Lenders want to know your charter school’s governance structure. They will ask for board member biographies and review their expertise. They will also ask how the management team works with the board (how often they meet, whether there are subcommittees, etc.). Lenders may ask for copies of recent board reports. Make sure you have the ability to show that board members provide expertise in areas where staff need additional support, such as fundraising, real estate development, and financing.

Development Team

Lenders will evaluate and review the qualifications of your project development team, including your architect, general contractor, and project manager. Lenders also want to know if you have previously managed similar projects.

(2) School Model

Lenders are interested in your school model and student outcomes, and how they compare with other neighborhood district and charter schools. They will also review your charter.

Model

Lenders value the unique qualities your school offers (e.g., curriculum, size of school, teacher-student ratio, safety, accessibility, special programs, etc.) and take into consideration the demographics of the area the school serves. They evaluate demand for your programs and will ask for enrollment data from the past three years and the number of students you have on a waiting list. They will review your academic performance track record and assess student achievement. Some mission-driven lenders will have a comprehensive definition of school quality and will ask for information about school culture, community and parent engagement, teacher engagement, and more.

Competition

Lenders will inquire about your student’s local school options and will compare your school with other district and charter schools. In particular, they want to understand to what extent the district schools are effective.

Charter

Lenders will investigate the charter law in the state you are operating. They will review your charter, evaluate your relationship with the charter authorizer, and discern if the authorizer is charter-friendly, for example, by looking at the district’s policy and track record for charter approval and renewal. Some lenders may ask to contact the authorizer during their underwriting process. They will also compare the charter term with the loan term, and evaluate the charter renewal risks.

(3) Financial Performance

Lenders will review your historical financial statements to evaluate operating performance and financial strength. Lenders typically require three years of audited financials with audit reports, as well as most recent interim statements. They will review financial projections for the project to evaluate your capacity to repay the loan.


Income Statement

Lenders will evaluate your revenue sources and trends, as well as expenses, to see if your school operates at a surplus or deficit each year. They will evaluate how much of your revenue is from grants and fundraising, and calculate your facility “burden” (lease or debt payments for your facility as a percentage of your per-pupil funding).

Balance Sheet

Lenders will evaluate your assets (what the school owns), liquidity (how much cash you have), and liabilities (what the school owes). They will evaluate your ability to pay the bills every month and your capacity to make debt payments.

Cash Flow Statement

Lenders will assess whether or not your operating cash flow is sufficient to cover operating expenses and manage potential per-pupil funding deferrals. They will evaluate if your school has to borrow funds to cover operating losses or finance capital expense.

Audit Report

Lenders will verify if auditors identify any findings and proposed remediation action plans.

Financial Projections

Lenders will ask to provide five-year cash flow projections that display your projected enrollment, per-pupil funding, other funding and fundraising, personnel expenses, facility expenses, and supplies and other operating costs. They will calculate the cash flow available for debt service (projected operating revenue minus operating expense before depreciation and interest) and calculate a debt service coverage ratio (DSCR), which is the cash flow available for debt service divided by projected annual debt payments (principal and interest). See a sample Amortization Table.

(4) Collateral

Lenders will evaluate the collateral you can offer in the event the school cannot make loan payments and has to foreclose. Cash flow is the first source of repayment for the loan, and collateral is the second source of repayment. If cash flow is not sufficient to cover debt payments for a certain period of time — for example, before the school is fully enrolled — lenders may require guarantees from Charter Management Organizations (CMO) or third parties.

Real Estate Due Diligence

Lenders will require an appraisal to estimate the value of the school facility, environmental reports, and a property condition report, if your project renovates an existing building. They will evaluate any obstacles to properly perfecting the lenders’ security interest in the school property. Lenders will check if the school has clear title to property, and they also typically require a loan-to-value (LTV) of 70 to 90% (LTV= loan amount ÷ appraised value of the property).

Construction Due Diligence

Lenders will require qualification statements for the project’s architect, general contractor, and project manager. They will evaluate their experience and expertise, as well as their financial strength, to make sure the project’s parties will deliver on their contracts. Lenders will also review all contracts, and construction documents are assigned to lenders as part of their collateral package. Lenders usually hire a construction inspector to complete a plan and cost review, and to monitor construction progress.  

Leases

If the school is leasing the property instead of acquiring it, lenders will carefully review the lease and require leasehold mortgage or collateral assignment of the lease. The term of the lease will have to be at least as long as the term of the loan.

Mitigating Risks

Failure to meet enrollment goals or revocation of your charter would result in loss of operating revenue, the main source for repaying your loan. Lenders will ask you to explain your plan for mitigating those risks. The Red Flags: Mitigating Risks summarizes some potential risks a lender might see in a charter school loan request and how you can address these red flags.

This section assumes you use the traditional approach (design-bid-build). The architect and GC in this case are overseen by the charter school representative and are critical players on the development team early on.

Related link in Essential Resources: Red Flags: Mitigating Risks

Related link in Essential Resources: Monthly Cash Flow Projection Template

Related link in Essential Resources: Amortization Table Template

Legal Disclaimer:

Nothing in this material should be construed as investment, financial, brokerage, or legal advice. Moreover, the facts and circumstances relating to your particular project may result in material changes in the processes, outcomes, and expenses described herein. Consult with your own professional advisors, including your financial advisors, accountants, and attorneys, before attempting to consummate any transaction described in this material.