**Implementation of the Credit Enhancement for Charter School Facilities
Program**

By:

Kenneth Temkin

Grace Hong

Laurel Davis

Optimal Solutions Group, LLC

Baltimore, Md.

William Bavin

Education Capital Group

Washington, D.C.

Prepared for:

U.S. Department of Education

Office of Planning, Evaluation and Policy Development

Policy and Program Studies Service

2008

This report was prepared for the U.S. Department of Education under
GS10F0586N; Order No.: ED05DO0056 with Optimal Solutions Group. Patricia
Butler served as the contracting officer's representative. The views
expressed herein do not necessarily represent the positions or policies
of the U.S. Department of Education. No official endorsement by the U.S.
Department of Education is intended or should be inferred.

**U.S. Department of Education**

Margaret Spellings

*Secretary*

**Office of Planning, Evaluation and Policy Development**

Bill Evers

*Assistant Secretary*

**Policy and Program Studies Service**

Alan Ginsburg

*Director*

**Program and Analytic Studies Division**

David Goodwin

*Director*

April 2008

This report is in the public domain. Authorization to reproduce it in
whole or in part is granted. While permission to reprint this
publication is not necessary, the suggested citation is: U.S. Department
of Education, Office of Planning, Evaluation and Policy Development,
Policy and Program Studies Service, *Implementation of the Credit
Enhancement for Charter School Facilities Program*, Washington, D.C.,
2008.

Copies of this report may be ordered in the following ways:

> • **Mail.** Write to:
>
> ED Pubs
>
> Education Publications Center
>
> U.S. Department of Education
>
> P.O. Box 1398
>
> Jessup, MD 20794-1398
>
> • **Fax.** 301-470-1244.
>
> • **Telephone** (toll-free). 1-877-433-7827 (1-877-4-ED-PUBS). If 877
> service is not yet available in your area, call 1-800-872-5327
> (1-800-USA-LEARN). Those who use a telecommunications device for the
> deaf (TDD) or a teletypewriter (TTY) should call 1-800-437-0833.
>
> • **Electronic mail.** Send your request to: edpubs@inet.ed.gov.
>
> • **Online.** Order a copy of the report at: www.edpubs.ed.gov. This
> report may also be downloaded from the Department's Web site at:
> www.ed.gov/about/offices/list/opepd/ppss/reports.html#title.
>
> • **Alternate formats.** Upon request, this publication is available
> in alternate formats such as Braille, large print, or computer
> diskette. For more information, please contact the Department's
> Alternate Format Center at 202-260-9895 or 202-205-8113.

**Contents**

LIST OF EXHIBITS v

[Acknowledgments ix](#acknowledgments)

[Executive Summary xi](#executive-summary)

[Key Findings xi](#key-findings)

[Program Description xii](#program-description)

[Data Sources and Analysis Strategy
xii](#data-sources-and-analysis-strategy)

[Findings xiv](#findings)

[Chapter 1: Introduction 1](#chapter-1-introduction)

[Chapter 2: Program Description 3](#chapter-2-program-description)

[Chapter 3: The Grantees 5](#chapter-3-the-grantees)

[Models of service used by Grantees to implement the Program
9](#models-of-service-used-by-grantees-to-implement-the-program)

Chapter 4: Methodology 13

[Data sources 13](#data-sources)

[Grantee applications and annual performance reports
13](#grantee-applications-and-annual-performance-reports)

[Interviews 14](#interviews)

[Secondary data 15](#secondary-data)

[Limitations of the study 15](#limitations-of-the-study)

[Chapter 5: Findings 17](#chapter-5-findings)

[Does the Program, as implemented, provide for improved access of
charter schools to capital markets for facilities?
17](#does-the-program-as-implemented-provide-for-improved-access-of-charter-schools-to-capital-markets-for-facilities)

[Overall charter school lending market
19](#overall-charter-school-lending-market)

[Are grantees supporting higher volumes of lending compared with their
lending volumes prior to the Program?
20](#are-grantees-supporting-higher-volumes-of-lending-compared-with-their-lending-volumes-prior-to-the-program)

[Are unsuccessful Program applicants able to support lending without the
support of the Program?
21](#are-unsuccessful-program-applicants-able-to-support-lending-without-the-support-of-the-program)

[Assisted schools' ability to qualify for loans before the Program
23](#assisted-schools-ability-to-qualify-for-loans-before-the-program)

[Does the Program bring new lenders and intermediaries into the charter
school lending market?
24](#does-the-program-bring-new-lenders-and-intermediaries-into-the-charter-school-lending-market)

[Do Grantees offer products or support new types of transactions?
25](#do-grantees-offer-products-or-support-new-types-of-transactions)

[Do schools assisted under the Program exhibit higher levels of credit
loss risk to lenders?
25](#do-schools-assisted-under-the-program-exhibit-higher-levels-of-credit-loss-risk-to-lenders)

[Does technical assistance provided by Grantees improve charter schools'
abilities to secure financing?
27](#does-technical-assistance-provided-by-grantees-improve-charter-schools-abilities-to-secure-financing)

[Does the Program, as implemented, provide for better rates and terms on
financing than would otherwise be available?
27](#does-the-program-as-implemented-provide-for-better-rates-and-terms-on-financing-than-would-otherwise-be-available)

[Are rates and terms offered by the Grantees after implementation of the
Program different from what they were before implementation of the
Program?
28](#are-rates-and-terms-offered-by-the-grantees-after-implementation-of-the-program-different-from-what-they-were-before-implementation-of-the-program)

**Contents (cont\'d.)**

[How do the rates and terms of the loans supported by the Program
compare with benchmarks?
29](#how-do-the-rates-and-terms-of-the-loans-supported-by-the-program-compare-with-benchmarks)

[How do rates and terms of Directly Enhanced loans compare with those
without Program-funded loans?
31](#how-do-rates-and-terms-of-directly-enhanced-loans-compare-with-those-without-program-funded-loans)

[What is the relative efficiency of different models of service used by
Grantees?
31](#what-is-the-relative-efficiency-of-different-models-of-service-used-by-grantees)

[What are the differences in lending volume and risk of schools assisted
between different types of models of service?
32](#what-are-the-differences-in-lending-volume-and-risk-of-schools-assisted-between-different-types-of-models-of-service)

[Is the Program serving communities with the greatest need for public
school choice?
38](#is-the-program-serving-communities-with-the-greatest-need-for-public-school-choice)

[Proposed Grantee selection criteria for choosing schools to assist
39](#proposed-grantee-selection-criteria-for-choosing-schools-to-assist)

[Demographic characteristics of assisted schools
45](#demographic-characteristics-of-assisted-schools)

[Social and economic characteristics of counties containing assisted
schools
47](#social-and-economic-characteristics-of-counties-containing-assisted-schools)

[Use of loan funds by assisted schools
53](#use-of-loan-funds-by-assisted-schools)

[What is the evidence of innovative methods?
62](#what-is-the-evidence-of-innovative-methods)

[Direct borrowing on the private market
62](#direct-borrowing-on-the-private-market)

[Cost-saving solutions such as space sharing
63](#cost-saving-solutions-such-as-space-sharing)

[New forms of organizational arrangements such as real estate trusts and
intermediaries
63](#new-forms-of-organizational-arrangements-such-as-real-estate-trusts-and-intermediaries)

[What are the major issues with Program implementation?
64](#what-are-the-major-issues-with-program-implementation)

[How Grantees view the Program 64](#how-grantees-view-the-program)

[How assisted schools view the Program
65](#how-assisted-schools-view-the-program)

[References 67](#references)

[Appendix A: Glossary of Terms Used in This Report
69](#appendix-a-glossary-of-terms-used-in-this-report)

[Appendix B: Interviews Conducted 73](#appendix-b-interviews-conducted)

[Appendix C: Discussion Guides 77](#appendix-c-discussion-guides)

[Appendix D: Characteristics of Census Tracts and Counties in Which
Schools Assisted by Grantees Between FY 2003 and FY 2005 Were Located
91](#appendix-d-characteristics-of-census-tracts-and-counties-in-which-schools-assisted-by-grantees-between-fy-2003-and-fy-2005-were-located)

[Appendix E: Program Grant Recipients: FY 2002--FY 2007
101](#appendix-e-program-grant-recipients-fy-2002fy-2007)

**Exhibits**

[Exhibit ES-1 Racial and ethnic composition of students enrolled in
schools assisted under the Program between FY 2003 and FY 2005, all
charter schools, and all U.S. public schools
xviii](#__RefHeading___Toc188879019)

[Exhibit ES-2 Selected characteristics of Census tracts and counties, as
of the 2000 U.S. Census, with schools assisted by Grantees between FY
2003 and FY 2005 xix](#__RefHeading___Toc188879020)

[Exhibit 3‑1 Program awards: FY 2002 to FY 2004 (\$ in Millions)
5](#__RefHeading___Toc188879022)

[Exhibit 3‑2 Organizational summary of Grantees
6](#__RefHeading___Toc188879023)

[Exhibit 3‑3 Description of Vertically Integrated and Fully Distributed
models of service 10](#__RefHeading___Toc188879024)

[Exhibit 4‑1 Crosswalk of research questions and data sources
16](#__RefHeading___Toc188879026)

[Exhibit 5‑1 Grantees' Directly Enhanced loan volume by type of loan
between FY 2003 and FY 2005 20](#__RefHeading___Toc188879027)

[Exhibit 5‑2 Comparative analysis of Grantee lending volume in the year
preceding receiving a Program grant to Directly Enhanced lending volume
in the year following receiving a Program grant
21](#__RefHeading___Toc188879028)

[Exhibit 5‑3 Comparison of proposed and actual Directly Enhanced lending
volume between FY 2003 and FY 2005 for four unsuccessful Program
applicants and Grantees 22](#__RefHeading___Toc188879029)

[Exhibit 5‑4 Weighted average spread and weighted average coupon of
Directly Enhanced acquisition and construction and leasehold improvement
loans supported by Grantees between FY 2003 and FY 2005
30](#__RefHeading___Toc188879030)

[Exhibit 5‑5 Efficiency measures for Directly Enhanced loans supported
by Grantees by model of service between FY 2003 and FY 2005
33](#__RefHeading___Toc188879031)

[Exhibit 5‑6: Assisted schools' mean number of months in operation,
number of start-up schools, number of assisted schools, mean enrollment
of schools assisted by Grantees between FY 2003 and FY 2005
34](#__RefHeading___Toc188879032)

[Exhibit 5‑7 Weighted average spread and coupon for Directly Enhanced
acquisition and construction loans supported by Grantees between FY 2003
and FY 2005 by Grantee model of service
36](#__RefHeading___Toc188879033)

[Exhibit 5‑8 Weighted average spread and coupon for Directly Enhanced
leasehold improvement loans supported by Grantees between FY 2003 and FY
2005 by Grantee model of service 37](#__RefHeading___Toc188879034)

[Exhibit 5‑9 Summary of Grantee selection criteria for Directly Enhanced
loans 40](#__RefHeading___Toc188879035)

[Exhibit 5‑10 Number of assisted schools, enrollment, and percent of
students eligible for free and reduced-price lunches by state
45](#__RefHeading___Toc188879036)

[Exhibit 5‑11 Racial and ethnic composition of students enrolled in
schools assisted under the Program between FY 2003 and FY 2005, all
charter schools, and all U.S. public schools
46](#__RefHeading___Toc188879037)

[Exhibit 5‑12 The median household income, as of 2000, for Los Angeles
County Census tracts, the location of schools assisted by Grantees
between FY 2003 and FY 2005, all charter schools, and all public schools
48](#__RefHeading___Toc188879038)

[Exhibit 5‑13 The median household income, as of 2000, for Hennepin
County and Ramsey County Census tracts, the location of schools assisted
by Grantees between FY 2003 and FY 2005, all charter schools, and all
public schools 49](#__RefHeading___Toc188879040)

[Exhibit 5‑14 The median household income, as of 2000, for Philadelphia
County Census tracts, the location of schools assisted by Grantees
between FY 2003 and FY 2005, all charter schools, and all public schools
50](#__RefHeading___Toc188879041)

[Exhibit 5‑15 The median household income, as of 2000, for Washington,
D.C., Census tracts, the location of schools assisted by Grantees
between FY 2003 and FY 2005, all charter schools, and all public schools
51](#__RefHeading___Toc188879042)

[Exhibit 5‑16 Selected characteristics of Census tracts and counties, as
of the 2000 U.S. Census, with schools assisted by Grantees between FY
2003 and FY 2005 52](#__RefHeading___Toc188879043)

[Exhibit D-1 Median household income, as of 2000, in tracts and counties
with schools assisted by Grantees between FY 2003 and FY 2005
92](#__RefHeading___Toc188879044)

[Exhibit D-2 Poverty rates, as of 2000, in tracts and counties with
schools assisted by Grantees between FY 2003 and FY 2005 93](#OLE_LINK1)

[Exhibit D-3 Proportion of population aged 18 and under, as of 2000, in
tracts and counties with schools assisted by Grantees between FY 2003
and FY 2005 94](#__RefHeading___Toc188879046)

[Exhibit D-4 Percent of households receiving public assistance, as of
2000, in tracts and counties with schools assisted by Grantees between
FY 2003 and FY 2005 95](#__RefHeading___Toc188879047)

[Exhibit D-5 Percentage white residents, as of 2000, in tracts and
counties with schools assisted by Grantees between FY 2003 and FY 2005
96](#__RefHeading___Toc188879048)

[Exhibit D-6 Percentage black residents, as of 2000, in tracts and
counties with schools assisted by Grantees between FY 2003 and FY 2005
97](#__RefHeading___Toc188879049)

[Exhibit D-7 Percentage American Indian residents, as of 2000, in tracts
and counties with schools assisted by Grantees between FY 2003 and FY
2005 98](#__RefHeading___Toc188879050)

[Exhibit D-8 Percentage of other race residents, as of 2000, in tracts
and counties with schools assisted by Grantees between FY 2003 and FY
2005 99](#__RefHeading___Toc188879051)

[**Exhibit D-9 Percentage of Hispanic residents, as of 2000, in tracts
and counties with schools assisted by Grantees between FY 2003 and FY
2005 100**](#__RefHeading___Toc188879052)

#   {#section .unnumbered}

#   {#section-1 .unnumbered}

# Acknowledgments

The authors received invaluable assistance from numerous people to
complete this study. The Working Group (TWG) members: Frederic Cooper,
president, Community Development Concepts Advisory Services; John
Kinghorn, vice president, Social Investments, Prudential Financial,
Inc.; Eva Rainer, who served as vice president of the City First Bank of
D.C. and is currently deputy director, the Educational Facilities
Financing Center of Local Initiatives Support Corporation; and Linda
Sorden, director, National Trust Loan Funds, National Trust for Historic
Preservation, provided insightful comments on the overall research
approach and helped identify industry participants for research team
members to interview. Patricia Butler, Policy and Program Studies
Service, and Jim Houser, Office of Innovation and Improvement, both of
the U.S. Department of Education, have been important sources of
information and have sharpened the project's research focus and methods.
Research team members conducted interviews with many industry
participants, including representatives of assisted schools, grantees,
unsuccessful program applicants, lenders, investment banks, and rating
agencies and are grateful to each interviewee for his or her time and
for sharing insights about the charter school lending market. Although
the authors could not have completed this study without this help, any
errors or omissions are solely the authors' responsibility.

#   {#section-2 .unnumbered}

# Executive Summary

Since the first charter school began operating in 1991 in Minnesota, the
number of charter schools has grown rapidly from 250 in 1995 to about
4,000 by 2007. Charter schools now enroll more than 1.1 million students
in the United States (National Alliance for Public Charter Schools
2007). Charter schools face many challenges when they attempt to
purchase or lease permanent facilities and frequently operate in
temporary space that is poorly suited for delivering educational
services (Dolan, Murray, and Walsh 1998). Unlike regular public schools,
they typically do not have separate facilities funding from their school
districts. Moreover, charter schools generally cannot issue bonds backed
by property taxes to finance facilities. Finally, since charter schools
often lack tangible assets and an operating history that could be used
to support a loan application, securing facilities financing is
particularly problematic (Dolan, Murray, and Walsh 1998).

In response to this problem, the U.S. Department of Education (ED)
established, in 2001, the Credit Enhancement for Charter School
Facilities Program (the Program). The Program makes available grants on
a competitive basis to eligible entities---state or local government,
private nonprofits, or consortia---which use Program funds for credit
enhancements so that lenders will make loans for the following two
purposes:

-   The acquisition (by purchase, lease, donation, or otherwise) of an
    interest (including an interest held by a third party for the
    benefit of a charter school) in improved or unimproved real property
    that is necessary to commence or continue the operation of a charter
    school; and

-   The construction of new facilities, or the renovation, repair, or
    alteration of existing facilities, necessary to commence or continue
    the operation of a charter school (Title V, Part B, Subpart 2, §5224
    of the *Elementary and Secondary Education Act of 1965*, as amended
    by the *No Child Left Behind Act*).

## Key Findings

-   **The nine organizations that received Program grants in FY 2002
    through FY 2004 (the Grantees) supported a total of \$168 million
    worth of Directly Enhanced loans to 84 schools between FY 2003 and
    FY 2005;**[^1]

-   **Many of the assisted schools,**[^2] **according to
    Grantee**[^3]**, commercial lender, investment bank, and rating
    agency representatives, would not have received facility loans *at
    any price* before the Program, because lenders believed that these
    schools reflected a prohibitively high level of risk; and**

-   **Over 23,000 students are enrolled in the 84 charter schools
    assisted under the Program by the Grantees during FY 2003 and
    FY 2005. These students are more likely to be low-income and
    minority compared with students enrolled in all charter schools and
    all U.S. public schools.**

## Program Description

Recipients of Program grants must establish reserve accounts in which
Program funds are deposited. These funds must be invested in obligations
issued or guaranteed by the United States or a state, or in other
similarly low-risk securities. Any earnings on these funds received must
be deposited in the reserve account and used in accordance with the
Program's following allowable activities (Title V, Part B, Subpart 2,
§5225 of the *Elementary and Secondary Education Act of 1965*, as
amended by the *No Child Left Behind Act*):

-   Guaranteeing, insuring, and reinsuring bonds, notes, evidences of
    debt, loans, and interests therein;

-   Guaranteeing and insuring leases of personal and real property;

-   Facilitating financing by identifying potential lending sources,
    encouraging private lending, and other similar activities that
    directly promote lending to, or for the benefit of, charter schools;
    and

-   Facilitating the issuance of bonds by charter schools, or by other
    public entities for the benefit of charter schools, by providing
    technical, administrative, and other appropriate assistance
    (including the recruitment of bond counsel, underwriters, and
    potential investors and the consolidation of multiple charter school
    projects within a single bond issue).

Between FY 2002 and FY 2007, ED awarded \$197 million to 18 recipients.
Through FY 2006, the recipients assisted a total of 138 schools and
leveraged over \$407 million worth of financing for charter schools so
that they could acquire or renovate their facilities, according to ED.
As the activities supported by the grants progress over their 10- to
20-year life span, ED anticipates that the benefits they produce will
continue to grow.

## Data Sources and Analysis Strategy

The findings presented below are based on analyses of organizations that
received awards in the first three years of the Program between FY 2002
and FY 2004. During this period, ED made a total of \$87 million of
awards to the following Grantees:

-   America's Charter School Finance Corporation (America's Charter);

-   Center for Community Self-Help (Self-Help);

-   Charter Schools Development Corporation (CSDC);

-   District of Columbia Office of the State Superintendent of Education
    (OSSE);

-   Local Initiatives Support Corporation (LISC);

-   Low Income Investment Fund Inc. (LIIF);

-   Massachusetts Development Finance Agency (MassDevelopment);

-   NCB Capital Impact (NCBCI); and

-   Raza Development Fund Inc. (RDF).

The Grantees between FY 2003 and FY 2005 supported \$168 million worth
of Directly Enhanced loans to 84 schools. These schools, located in 21
states (including Washington, D.C.), enrolled 23,162 students at the
time they received their Directly Enhanced loan. The unpaid principal
balance for the Directly Enhanced loans, as of Sept. 30, 2005, was
\$155.5 million.

The purposes of this study are to describe how the Grantees implemented
their activities, as outlined in their Program document. Our analysis
will address the following research questions:

1\. How does the Program achieve its legislative purpose?

> a\. Does the Program, as implemented, provide for improved access of
> charter schools to capital markets for facilities?
>
> b\. Does the Program, as implemented, provide for better rates and
> terms on financing than would otherwise be available for the charter
> schools served by the Program Grantees?

2\. What is the relative efficiency of Grantees' models of service?

3\. What is the evidence of innovative method use?

4\. Is the Program serving the communities with the greatest need for
public school choice?

5\. What are the major issues with Program implementation? Do Grantees
and charter schools served by the Grantees have insights into how the
Program might be improved?

The analyses were conducted with data collected from three sources: (1)
Grantee-provided information in their Program applications and Annual
Performance Reports submitted to ED in FY 2003, FY 2004, and FY 2005;
(2) secondary data sources including the U.S. Census, the National
Center for Education Statistics' (NCES) Common Core of Data (CCD), and
the U.S. Treasury Web site; and (3) interviews with representatives of
Grantees, assisted schools, unsuccessful Program applicants, commercial
lenders, rating agencies, educational management organizations (EMOs),
developers and investment banks. With these sources of information, the
research team analyzed the characteristics of Directly Enhanced loans
supported by Grantees, the location of assisted schools, the
characteristics of students enrolled in assisted schools, and the types
of solutions used by Grantees to facilitate charter school loans.

##  

## Findings

**1a. Does the Program, as implemented, provide for improved access of
charter schools to capital markets for facilities?**

**Yes.** **Many charter schools are unable to qualify for loans that
could be used for facilities-related purposes because lenders perceive
them to be too great a risk. The credit enhancements funded by the
Program reduce lenders' exposure to losses in the event that a charter
school defaults on its loan. As a result, the Program has improved
charter schools' access to capital markets, resulting in more lending
than would have occurred without the Program.**

Some of the increased lending volume generated by the Program came from
organizations that made loans directly to charter schools before the
Program. These lenders increased their charter school loan volume
because of the credit enhancements available under the Program. In
addition, the Program attracted new lenders who either supported a
modest number or no charter school loans before the Program. These
conclusions are based on the following findings:

-   Grantees that made loans directly to charter schools before
    participating in the Program increased their lending volume after
    receiving their grants. The six Grantees that made loans directly to
    charter schools before receiving their award supported a total of
    \$5.3 million in charter school facility loans in the year before
    they received their awards. These same six organizations supported a
    total of \$27.7 million of Directly Enhanced loans in the year after
    receiving their grants. According to Grantee representatives, this
    increase would not have been possible without Program funds. Despite
    the higher risks associated with schools receiving loans under the
    Program, only one loan has required a Grantee to make use of its
    Program funds because of a loan delinquency during the study's
    timeframe.

-   Representatives of assisted schools interviewed for this study
    indicated that they were often told by commercial lenders, before
    the Program, not to submit a loan application, because the lender
    would likely deny the loan request without a credit enhancement.

-   Commercial lenders and Grantee representatives indicated that, due
    to the Program, new lenders supported loans to charter schools and
    invested in loan pools credit enhanced by Grantees. Grantees used
    the funds provided by investors to finance charter school facilities
    loans.

**1b. Does the Program, as implemented, provide for better rates and
terms on financing than would otherwise be available for the charter
schools served by the Program Grantees?**

**Yes**. **Many of the assisted schools, according to representatives of
Grantees, commercial lenders, investment banks, and rating agencies,
would not have received facility loans *at any price* before the
Program, because lenders believed that these schools reflected a
prohibitively high level of risk. With the credit enhancements made
available by the Program, assisted schools received loans with rates and
terms that were better than would otherwise be available.**

This conclusion is based on the following findings:

-   According to the Grantees that made loans directly to charter school
    loans before receiving an award, the rates and terms for Directly
    Enhanced loans they supported were at least the same, and in some
    cases better than the loans offered by the Grantees before they
    received Program funds. Moreover, some of the Grantees used the
    Program funds to offer more flexible underwriting standards, which
    allowed schools to be approved for loans that, before the Program,
    they would not have received.

-   In the debt markets, loans typically are priced relative to the
    prevailing risk-free rate of interest on a comparable term loan. The
    financial markets call the difference between the nominal interest
    rate on a loan and the risk-free rate of interest the "spread." The
    risk-free rate is measured by the yields on U.S. Treasury
    securities, because they are considered to have nearly assured
    returns (and so have no credit risk) and can be easily sold by their
    owners (and thereby have no liquidity risk). The spread typically
    reflects the level of risk that a lender believes is evidenced by a
    particular borrower.

> The average spread for Directly Enhanced acquisition and construction
> loans was 2.42 percentage points greater than comparable term Treasury
> yields, and the average spread for Directly Enhanced leasehold
> improvement loans supported by Grantees was 3.23 percentage points
> greater than comparable term Treasury yields. The spreads for Directly
> Enhanced acquisition and construction loans and leasehold improvement
> loans were slightly higher than those for commercial real estate
> mortgages made during the same period. This difference, according to
> representatives of Grantees, commercial lenders, and rating agencies,
> is appropriate, because Directly Enhanced loans were made to more
> risky charter schools.

**2. What is the relative efficiency of the models of service being used
by Grantees of the Program?**

Grantees are categorized into one of three broad types of models of
service:

-   *Vertically Integrated*. Four Grantees (Vertically Integrated
    Grantees) are using a variant of this model of service in which they
    take the lead in evaluating applications and making charter school
    loans.

-   *Fully Distributed.* Two Grantees (Fully Distributed Grantees) are
    using a variant of this model of service in which they use the
    Program funds to enhance charter school loans already approved by
    third-party lenders.

-   *Mixed.* Two Grantees are using this model of service in which they
    make loans directly to charter schools and also provide credit
    enhancements for loans made by third-party lenders.

Because the two Grantees using a Mixed model of service are using a
variety of dissimilar strategies rather than a core set of common
strategies, the efficiency analysis is restricted to Grantees using
either a Vertically Integrated or a Fully Distributed model of service.

**As detailed below, the Vertically Integrated and Fully Distributed
methods of service may provide a trade-off in terms of start-up time to
support loans and the types of charter schools that receive Directly
Enhanced loans. After receiving their grant, Fully Distributed Grantees
support loans more quickly than Vertically Integrated Grantees but serve
less risky charter schools than Vertically Integrated Grantees.**

*Pros and Cons Associated with the Vertically Integrated and Fully
Distributed Methods of Service*

Grantees that use a Vertically Integrated model of service generally
must identify and negotiate with lenders and investors, given the
available credit enhancement. Based on the observations of the Grantees
and commercial lenders, these negotiations take time, because different
investors have to agree on a standard set of underwriting requirements
that the Grantee can use when evaluating charter school loan
applications. Furthermore, each investor may add an underwriting
criterion, resulting in cumulative criteria that few charter schools can
meet. Alternatively, investors may agree to underwriting standards for
loans supported by the Grantee that were more flexible than those used
for loans directly made by the lender because the lender's risk is
spread out over a pool of loans made to charter schools.

Grantees that use a Fully Distributed model of service do not have to
work with lenders and investors to agree to underwriting standards in
advance of making loans. Rather, Grantees using a Fully Distributed
model of service, according to Grantee representatives, try to allocate
their funds on an as-needed basis to make charter schools "bankable" to
commercial lenders or bond investors by enhancing loans that were
already approved by banks, subject to a credit enhancement. Grantees
using the Fully Distributed model of service may be able to move more
quickly once receiving their Program grant funds to close transactions,
as compared to Grantees that use a Vertically Integrated model of
service.

The two models of service have resulted in different types of lending
outcomes and efficiency measures. This conclusion is based on the
following findings:

-   Based on data for Directly Enhanced loans supported by Grantees
    between FY 2003 and FY 2005,[^4] it appears that Grantees that use
    the Fully Distributed model of service were able to support charter
    schools relatively quickly, because they use the enhancement for
    loans that have already been negotiated by charter schools with
    their lenders. The initial lending volume for Grantees that use a
    Vertically Integrated model of service was relatively slower,
    perhaps because of the complexities involved in establishing the
    terms and conditions associated with loan pools started by these
    Grantees, with the exception of one such Grantee using this model
    and lending with its own assets.

-   The lending volume to date may be lower for Grantees using a
    Vertically Integrated model of service, but they appear more willing
    to serve slightly more risky charter schools than those supported by
    the credit enhancements provided by Grantees using a Fully
    Distributed model of service. The reason may be due, in part, to the
    more rigorous underwriting standards used by commercial lenders that
    make loans to charter schools with credit enhancements from Fully
    Distributed Grantees.

The results regarding the differences between the two models of service
are preliminary. The analysis does not provide conclusive evidence that
favors one model over another. Rather, the data suggest that both models
of service play a significant role in facilitating capital investment in
charter schools that otherwise would not be able to secure conventional
financing.

**3. Is the Program serving the communities with the greatest need for
public school choice?**

The research team evaluated whether Grantees used selection criteria to
choose assisted schools that include the following three factors ED uses
to evaluate Program applications:

-   The extent to which the applicant selects geographic service areas
    in which a large proportion or number of public schools have been
    identified for improvement, corrective action, or restructuring
    under Title I of the *Elementary and Secondary Education Act of
    1965*, as amended by the *No Child Left Behind Act*;

-   The extent to which the applicant selects geographic service areas
    in which a large proportion of students perform below proficient on
    state academic assessments; and

-   The extent to which the applicant selected communities to serve with
    large proportions of low-income students.

The analysis of the extent to which Grantees selected service areas in
need of school choice contained two parts. In the first part, the
research team examined the types of criteria Grantees used to select
charter schools, and compared these criteria with the same factors that
ED uses to evaluate Program applications.

To determine whether the Grantees made decisions to assist schools that
were consistent with their selection criteria, the research team, in the
second part, examined the demographic characteristics of students
enrolled in the 84 assisted schools and compared these characteristics
to students enrolled in charter schools and the overall U.S. K--12
student population. Finally, the analysis included a comparison of the
economic and demographic characteristics of the Census tracts in which
assisted charter schools were located relative to the characteristics of
the county in which the assisted school was located.

**All but one of the Grantees used selection criteria that took into
account whether an area requires school choice. Furthermore, Directly
Enhanced loans, on average, were made to charter schools in which lower
income and minority students comprised a larger share of enrollment as
compared to all charter schools and all U.S. public schools.**

All but one of the Grantees used selection criteria that took into
account at least one of the following factors: (1) academic performance
of schools in an area; (2) academic performance of students in an area;
or (3) income of families in an area. The remaining grantee proposed to
match program priorities with the overall national characteristics of
charter schools. The characteristics of the students enrolled in the
assisted schools and the Census tracts in which the assisted schools
were located suggest that the Grantees made decisions based on their
selection criteria.

Fifty-nine percent of the 23,162 students enrolled in assisted charter
schools were eligible for free or reduced price lunches, compared to 39
percent of all U.S. students in public schools and 44 percent of all
charter school students. Minority students accounted for a larger share
of students in schools assisted by Grantees between FY 2003 and FY 2005
compared to students enrolled in all charter schools and all U.S. public
schools. The proportion of white students in schools assisted by
Grantees between FY 2003 and FY 2005 was 24 percent, the proportion of
such students in all charter schools was 42 percent, and in all public
schools was 58 percent (exhibit ES-1).

[]{#__RefHeading___Toc188879019 .anchor}Exhibit ES-1: Racial and ethnic
composition of students enrolled in schools assisted under the Program
between FY 2003 and FY 2005, all charter schools, and all U.S. public
schools

![](media/image1.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** The proportion of white students in schools assisted
by Grantees between FY 2003 and FY 2005 was 24 percent, the proportion
of such students in all charter schools was 42 percent, and in all
public schools was 58 percent.

Sources: 1. Information related to assisted schools: Grantee Annual
Performance Reports.

> 2\. Information related to all charter and public schools in United
> States: Common Core of Data (CCD), "Public Elementary/Secondary School
> Universe Survey," 2004--05 (Preliminary) at http://nces.ed.gov/ccd/bat

**Finally, the assisted charter schools themselves were located in
Census tracts with lower median household incomes and a larger share of
minority residents than the counties in which the schools were
located.** As of 2000, the average median household income for tracts
that contained assisted schools was \$36,000, or 83 percent of the
average \$43,000 median household income of all assisted schools'
counties. Whites accounted for 69 percent of residents in counties in
which assisted schools were located, compared to 52 percent of residents
in Census tracts in which assisted schools were located (exhibit ES-2).

[]{#__RefHeading___Toc188879020 .anchor}Exhibit ES-2: **Selected
characteristics of Census tracts and counties, as of the 2000 U.S.
Census, with schools assisted by Grantees between FY 2003 and FY 2005**

![](media/image2.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** Whites accounted for 69 percent of county residents
in which assisted schools were located, compared to 52 percent of
residents in tracts where assisted schools were located.

Note: The data used to prepare the information in this exhibit are
presented in appendix D.

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

**4. What is the evidence of innovative method use?**

The Program emphasizes that organizations that receive grants use
innovative methods to facilitate loans to charter schools. There is no
industry standard as to what constitutes an "innovative" method. Hassel
and Esser (2004) identified the following types of innovative methods
that could be used to generate charter schools facilities financing:

-   Direct borrowing on the private market;

-   Sale or lease of existing facilities;

-   Cost-saving solutions, such as space sharing with community agencies
    and higher education institutions;

-   New uses of community resources by education students through
    off-campus internships, service learning projects or field research
    or use of distance education; and

-   New forms of organizational arrangements, such as establishing real
    estate trusts and intermediaries.

**Based on a review of loan-level data and information provided by
Grantees and assisted schools, there was evidence that Grantees are
using innovative methods, especially related to helping charter schools
borrow directly from private lenders**.

This conclusion is based on the following findings:

-   Charter schools receiving loans under the Program were smaller and
    in operation for a fewer number of years than charter schools
    receiving loans from commercial banks or through the bond market.
    Therefore, schools assisted by the Program were able to tap into
    sources of funds for smaller and newer charter schools that were
    previously not available.

-   Grantees that operate a Fully Distributed model provide credit
    enhancements to loans made by third party lenders, oftentimes
    commercial banks. As a result, charter schools assisted by such
    Grantees were able to borrow directly from the private market.
    Grantees and assisted school representatives that received such
    loans indicated that these assisted schools did not have the
    sufficient down payment or operating history to meet private
    lenders' underwriting standards.

-   In some cases Grantees have used innovative real estate solutions
    that created opportunities for charter schools to share space until
    they could purchase a building. A Grantee negotiated an agreement to
    purchase a 23,500 square-foot facility and obtained the necessary
    \$2.4 million to renovate the building and turn it into classrooms,
    administrative offices, and multipurpose space for two charter
    schools that operated in the building. One school moved into its own
    facility, and the other school will purchase the property.

-   As a result of the lending volume facilitated by Grantees,
    investment bankers and other industry participants are now examining
    the potential for creating a secondary market for Directly Enhanced
    loans. Such a market would allow Grantees and other lenders to sell
    loans and use the proceeds from such sales to fund additional
    charter school lending. If successful, a secondary market for
    charter school loans could, as with residential and commercial
    mortgages, provide a significant and efficient source of money for
    charter school loans in the future.

**5. What are the major issues with Program implementation? Do Grantees
and charter schools served have insights into how the Program might be
improved?**

**Overall, the Grantees and assisted schools were highly positive about
the Program and believe that it is making a difference in the market**.
In response to open-ended questions regarding implementation challenges
they face and areas in which the Program could be improved, Grantee
representatives indicated that the combination of the one-time
allocation equal to one-quarter of 1 percent of the grant amount (e.g.,
\$25,000 for a \$10 million grant) for administrative expenses provided
for in the Program's statute and the income earned from fees and
interest rate spreads was not sufficient to cover the costs associated
with complying with the reporting requirements, some of which are
specified in the Program's statute. Some Grantee representatives
indicated that they had to find other sources of funds to cover
administrative costs or, in some cases, reduce services to assisted
schools as a cost-savings measure.

The Grantee's responses should be taken in the context of their
expressed overall level of satisfaction with the Program. Additional
research, beyond the scope of this study, would be required to (1)
assess the extent of this perceived problem; (2) identify potential
changes, if any, to the reporting requirements that would reduce costs
to Program grant recipients and still provide ED with information needed
for effective oversight; and (3) evaluate the potential benefits of
increasing the administrative fee provided by the Program's statute.

In addition to changing the statute's administrative cap, which was
recommended by all Grantees, a Grantee indicated that it could earn more
income if it could use Program funds as a source of charter school
loans, rather than being restricted to placing these funds in a reserve
fund. Another Grantee indicated that the Program should be changed so
that Grantees could support predevelopment loans, which many charter
schools need to establish plans to acquire or rehabilitate facilities.
Predevelopment loans are loans that a school might obtain to pay for the
cost of determining whether a site is suitable for development, such as
a study to determine whether a site is contaminated with environmental
hazards.

Assisted schools did not mention many challenges. Only one assisted
school expressed any criticism or concern during the interviews. This
representative indicated that Grantees could provide information about
fees on a timelier basis.

# Chapter 1: Introduction

The purpose of this study is twofold: (1) describe the implementation of
the Credit Enhancement for Charter School Facilities program (the
Program); and (2) document the Program's lending-related outcomes for
charter schools in its first three years of operation. The study
analyzes the activities of the eight organizations that received grants
(the Grantees) in FY 2002 through FY 2004 to address the following
research questions:[^5]

1\. How does the Program work in achieving its legislative purpose?

> a\. Does the Program, as implemented, provide for improved access of
> charter schools to capital markets for facilities financing?
>
> b\. Does the Program, as implemented, provide for better rates and
> terms on financing than would otherwise be available for the charter
> schools served by the Program Grantees?

2\. What is the relative efficiency of service models being used by
Grantees of the Program?

3\. Is the Program serving the communities with the greatest need for
public school choice?

4\. What is the evidence of innovative method use?

5\. What are the major issues with Program implementation? Do Grantees
and charter schools served have insights into how the Program might be
improved?

Since the first charter school began operating in 1991 in Minnesota, the
number of charter schools has grown rapidly from 250 in 1995 to about
4,000 by 2007. Charter schools now enroll more than 1.1 million students
in the United States (National Alliance for Public Charter Schools
2007). Charter schools face many challenges when they attempt to
purchase or lease permanent facilities and frequently operate in
temporary space that is poorly suited for delivering educational
services (Dolan, Murray, and Walsh 1998). Charter schools, unlike
traditional public schools, typically do not have separate facilities
funding from their school districts. Moreover, these schools generally
cannot issue bonds backed by property taxes to finance facilities.
Finally, because charter schools often lack tangible assets and an
operating history that could be used to support a loan application,
securing facilities financing is particularly problematic (Dolan,
Murray, and Walsh 1998).

A recent study of charter school finance summarized the challenges of
securing facilities funding as follows:

> "Facilities can be a problem for several reasons. Rarely is a vacant
> school building available in good condition and in a suitable
> location. Often a space must be adapted or upgraded, which adds to the
> expense. Some charter schools have benefactors to help pay for a
> facility or even donate one, but most, especially in lower-income
> areas, do not.... Low-cost, charity-rate loans and mortgages for large
> amounts are scarce. And on the conventional market, charter schools
> tend to encounter additional charges rather than discounts. Lenders
> and landlords, in dealing with an unfamiliar type of applicant, may
> naturally try to cover the perceived risk by asking for extra loan
> guarantees, security deposits, and/or premium rates---which the
> schools, in many cases, cannot afford" (The Ewing Marion Kauffman
> Foundation 2005, pp. 2--3).

In addition to the financial risks presented by charter schools, lenders
face a "renewal risk," in which the charter school that takes out a loan
may not have its charter renewed before a loan matures, thereby leaving
the school with no revenue to pay its loan. Recognizing these risks, the
Program was established so that grant recipients could make credit
enhancements available to lenders. These credit enhancements, by
providing some level of guaranteed loan payments or recoveries in the
event of a foreclosure, reduce the financial and renewal risks
associated with charter school facility loans, thereby increasing the
likelihood that lenders will make such loans.

Federal credit programs, including credit enhancement programs, exist
because they have the potential to benefit many customers and can
potentially cost less than providing direct cash aid to the same number
of customers. Charter school facilities can be expensive. Some of them
cost \$20 million or more. If a charter school facilities program were
designed to provide direct cash grants and received between \$25 million
and \$37 million a year in funding, the program would not serve many
charter schools. The credit enhancement approach allows Grantees to
leverage their funds, since the credit enhancements under this Program
do not typically guarantee 100 percent of a given loan amount for the
duration of the loan. Rather, the typical credit enhancement guarantees
only a portion of the loan, and so the dollar volume of loans credit
enhanced by the Program is greater than the amount of Program funds used
to support the loans.

The following chapter presents background information about the Program.
Chapter 3 describes the Program and is followed, in Chapter 4, by a
discussion of the research methodology. The report concludes, in Chapter
5, with a presentation of the study's findings to each research
question.

# Chapter 2: Program Description

This chapter describes the Program's purposes, allowable activities and
administrative requirements. The Program makes available grants on a
competitive basis to eligible entities, including state or local
governments, private nonprofits, or consortia. These entities, in turn,
use Program funds for credit enhancements so that lenders will make
loans for the following two purposes:

-   The acquisition (by purchase, lease, donation, or otherwise) of an
    interest (including an interest held by a third party for the
    benefit of a charter school) in improved or unimproved real property
    that is necessary to commence or continue the operation of a charter
    school;

-   The construction of new facilities, or the renovation, repair, or
    alteration of existing facilities, necessary to commence or continue
    the operation of a charter school (Title V, Part B, Subpart 2, §5224
    of the *Elementary and Secondary Education Act of 1965*, as amended
    by the *No Child Left Behind Act*).

Eligible entities' applications are evaluated according to criteria set
forth in regulation (34 CFR Part 225, §225.11). Recipients of Program
grants must establish reserve accounts in which grant funds are
deposited. These funds must be invested in obligations issued or
guaranteed by the U.S. government, a state government, or in other
similar low-risk securities. Any earnings on these funds received must
be deposited in the reserve account and used in accordance with the
Program's following allowable activities (Title V, Part B, Subpart 2,
§5225 of the *Elementary and Secondary Education Act of 1965*, as
amended by the *No Child Left Behind Act*):

-   Guaranteeing, insuring, and reinsuring bonds, notes, evidences of
    debt, loans, and interests therein;

-   Guaranteeing and insuring leases of personal and real property;

-   Facilitating financing by identifying potential lending sources,
    encouraging private lending, and other similar activities that
    directly promote lending to, or for the benefit of, charter schools;
    and

-   Facilitating the issuance of bonds by charter schools, or by other
    public entities for the benefit of charter schools, by providing
    technical, administrative, and other appropriate assistance
    (including the recruitment of bond counsel, underwriters, and
    potential investors and the consolidation of multiple charter school
    projects within a single bond issue).

Most grantees used their grants for the first allowable purpose.

Once the grant is received, a recipient may draw down funds after
signing a Performance Agreement acceptable to ED. Performance Agreements
include a grantee's target amount of funding that it will leverage for
charter schools to acquire, construct, and renovate school facilities,
and the number of charter schools it will serve. The Performance
Agreement also describes the ways in which the grantee will accomplish
the purposes of the Program. An eligible entity may draw down and spend
a limited amount of funds prior to reaching an acceptable Performance
Agreement provided that the Grantee requests to draw down and spend a
specific amount of funds and ED approves the request in writing (34 CFR
Part 225, §225.20).

Program grant recipients must maintain financial statements in
accordance with generally accepted accounting principles and are subject
to an annual audit by an independent public accountant. In addition,
Grantees submit to ED an annual report of their operations and
activities that includes the following (Title V, Part B, Subpart 2,
§5227 of the *Elementary and Secondary Education Act of 1965*, as
amended by the *No Child Left Behind Act*):

-   A copy of the most recent financial statements, and any accompanying
    opinion on such statements, prepared by the independent public
    accountant reviewing the financial records of the eligible entity;

-   A copy of any report made on an audit of the financial records of
    the eligible entity that was conducted under subsection (a) during
    the reporting period;

-   An evaluation by the eligible entity of the effectiveness of its use
    of the federal funds provided under this subpart in leveraging
    private funds;

-   A listing and description of the charter schools served during the
    reporting period;

-   A description of the activities carried out by the eligible entity
    to assist charter schools in meeting the Program's objectives; and

-   A description of the characteristics of lenders and other financial
    institutions participating in the activities undertaken by the
    eligible entity under this subpart during the reporting period.

Program grant recipients may recover costs associated with conducting
activities under the Program, including direct personnel expenses tied
to the four allowable uses of the reserve account. Administrative
activities that are not directly tied to these uses are capped at
one-quarter of 1 percent of the total grant (Title V, Part B, Subpart 2,
§5226 of the *Elementary and Secondary Education Act of 1965*, as
amended by the *No Child Left Behind Act*).

ED must recover all of the funds in a Grantee's reserve account if the
ED secretary determines, not earlier than two years after the date on
which the grantee first received funds under the Program, that the
participant has failed to make substantial progress in carrying out the
purposes of the Program. ED must reclaim all or a portion of the funds
in a reserve account established by a participant that has permanently
ceased to use all or a portion of the funds in such account to
accomplish any purpose consistent with the Program (Title V, Part B,
Subpart 2, §5229 of the *Elementary and Secondary Education Act of
1965*, as amended by the *No Child Left Behind Act*).

# Chapter 3: The Grantees

The Credit Enhancement for Charter School Facilities Program has awarded
\$197 million to 18 recipients to assist charter schools in obtaining
suitable facilities for their operation. Of that amount, \$87 million
was awarded to nine recipients in the first three years of the program,
between FY 2002 and FY 2004.[^6] This chapter provides a description of
these nine Grantees (listed below) and the models of service they used
to provide charter school facilities loans during the Program's first
three years of operation. (See Appendix E for a full list of recipients
and award amounts by year.)

-   America's Charter School Finance Corporation (America's Charter);

-   Center for Community Self-Help (Self-Help);

-   Charter Schools Development Corporation (CSDC);

-   District of Columbia Office of the State Superintendent of Education
    (OSSE);

-   Local Initiatives Support Corporation (LISC);

-   Low Income Investment Fund Inc. (LIIF);

-   Massachusetts Development Finance Agency (MassDevelopment);

-   NCB Capital Impact (NCBCI); and

-   Raza Development Fund Inc. (RDF).

NCBCI received the largest amount of funding---\$18 million. CSDC, with
\$15 million, received the next largest amount of funds. Three of the
Grantees---CSDC, NCBCI, and RDF---received two awards in the study
period; the remaining six Grantees received only one award during the
same period (exhibit 3-1).

[]{#__RefHeading___Toc188879022 .anchor}Exhibit 3‑1: Program awards: FY
2002 to FY 2004 (\$ in Millions)

  ---------------------- ----------- ---------- ------------- -----------
                         **Program                            
                         grant                                
                         amount**                             

  **Grantee**            **FY 2002** **FY       **FY 2004**   **Total**
                                     2003**                   

  America's Charter      \$4.96                               \$4.96

  CSDC                   \$10.00                \$5.00        \$15.00

  OSSE                                          \$5.00        \$5.00

  LISC                               \$10.00                  \$10.00

  LIIF                   \$3.00                               \$3.00

  MassDevelopment                    \$10.03                  \$10.03

  NCBCI                  \$10.00     \$8.00                   \$18.00

  RDF                    \$5.00                 \$7.95        \$12.95

  Self-Help                          \$8.00                   \$8.00

  Total                  \$32.96     \$36.03    \$17.95       \$86.94
  ---------------------- ----------- ---------- ------------- -----------

**Exhibit reads:** ED made \$87 million worth of grants in three years,
\$33 million toward grants originally awarded in the first year, \$36
million to those awarded in the second year, and \$18 million to those
awarded in the third year.

Note: In some cases ED supplemented grants that were made in prior
years. The table shows the full amount of these funds in the year the
grant was originally awarded when this was the case, even if some of the
funding came from a subsequent year.

Source: Unpublished tabulation and chart prepared (October 2007)
by Office of Innovation and Improvement, U.S. Department of Education.

The Grantees represent a variety of organizations, ranging from
nonprofit lenders to relatively new organizations that provide credit
enhancements for charter school loans (exhibit 3-2). Some Grantees made
loans directly to charter schools prior to receiving their grant.

[]{#__RefHeading___Toc188879023 .anchor}Exhibit 3‑2: Organizational
summary of Grantees

  -------------------------------------------------------------------------------
  **Organizational description**           **Location of **Market     **Number of
                                           Grantee**     area**       schools
                                                                      assisted
                                                                      (as of the
                                                                      end of
                                                                      FY2005)**
  ---------------------------------------- ------------- ------------ -----------
  **America's Charter**                                               

  America's Charter is a nonprofit         Washington,   Nationwide   9
  organization with a mission to support   D.C.                       
  the creation and expansion of                                       
  high-quality charter schools throughout                             
  the nation by providing them with                                   
  creative and customized facilities                                  
  financing products and services. Founded                            
  in 2000, America's Charter offers                                   
  financing and financial counseling                                  
  services for charter schools. In                                    
  addition, America's Charter works with                              
  private sector foundations and companies                            
  that are interested in education and                                
  education reform to increase awareness                              
  of the difficulties charter schools face                            
  in finding appropriate and affordable                               
  facilities.                                                         

  **CSDC**                                                            

  CSDC, a 501 (c)(3) nonprofit             Hanover, Md.  Nationwide   29
  organization with offices in the                                    
  Washington, D.C., metropolitan area, and                            
  Phoenix, Ariz., offers programs to meet                             
  the facilities needs of public charter                              
  schools nationwide. Established in 1997,                            
  CSDC provides facility solutions for                                
  charter schools through real estate                                 
  development, financing, and credit                                  
  enhancement services.                                               

  **LIIF**                                                            

  Established in 1983, LIIF invests        San           California   6
  capital and provides technical           Francisco,                 
  assistance to community development      Calif.                     
  organizations in three program areas:                               
  housing, child care, and education. In                              
  1999, LIIF began financing charter                                  
  schools in response to growing demand in                            
  low-income neighborhoods.                                           
  -------------------------------------------------------------------------------

**Exhibit 3-2: Organizational summary of Grantees (cont.)**

  ------------------------------------------------------------------------------------------------------------
  **Organizational description**                       **Location   **Market area**                **Number of
                                                       of Grantee**                                schools
                                                                                                   assisted
                                                                                                   (as of the
                                                                                                   end of
                                                                                                   FY2005)**
  --------------------------------------- ------------ ------------ --------------- -------------- -----------
  **LISC**                                                                                         

  LISC has more than 25 years of history.              New York,    Nationwide                     3
  It helps resident-led, community-based               N.Y.                                        
  development organizations transform                  (National                                   
  distressed communities and                           Office)                                     
  neighborhoods into healthy ones---good                                                           
  places to live, do business, work, and                                                           
  raise families. By providing capital,                                                            
  technical expertise, training, and                                                               
  information, LISC supports the                                                                   
  development of local leadership and the                                                          
  creation of affordable housing;                                                                  
  commercial, industrial, and community                                                            
  facilities; businesses; and jobs.                                                                

  **MassDevelopment**                                                                              

  MassDevelopment provides the financial  Worcester,                Massachusetts                  3
  tools and real estate expertise needed  Mass.                                                    
  to stimulate economic growth across the                                                          
  state of Massachusetts. It works with                                                            
  businesses and local officials to                                                                
  address blighted areas, help create                                                              
  jobs, and address overarching issues                                                             
  that affect economic development, such                                                           
  as housing affordability.                                                                        

  **NCBCI**                                                                                        

  NCBCI, formerly known as NCB            Arlington,                                Florida,       8
  Development Corporation (NCBDC), is the Va.                                       Georgia,       
  nonprofit affiliate of National                                                   Minnesota,     
  Consumer Cooperative Bank, a                                                      Wisconsin, and 
  cooperative financial service company.                                            Mid-Atlantic   
  NCBCI's mission is to provide solutions                                           states         
  based on cooperative principles that                                                             
  empower underserved communities to                                                               
  address the problems poverty creates in                                                          
  America. Its programs cover areas                                                                
  including affordable cooperative                                                                 
  homeownership, assisted living,                                                                  
  housing, and services for the frail and                                                          
  elderly, and facilities for health care                                                          
  centers and charter schools. NCBCI has                                                           
  been a charter school lender for more                                                            
  than 11 years.                                                                                   
  ------------------------------------------------------------------------------------------------------------

**Exhibit 3-2: Organizational summary of Grantees (cont.)**

  ---------------------------------------------------------------------------------------------------
  **Organizational description**                     **Location   **Market                **Number of
                                                     of Grantee** area**                  schools
                                                                                          assisted
                                                                                          (as of the
                                                                                          end of
                                                                                          FY2005)**
  --------------------------------------- ---------- ------------ ---------- ------------ -----------
  **RDF**                                                                                 

  RDF is a support corporation of the     Phoenix,                           Nationwide   18
  National Council of La Raza (NCLR).     Ariz.                                           
  Established in 1998 RDF is the                                                          
  community development lending arm of                                                    
  NCLR. The mission of RDF's Hope Fund is                                                 
  to provide flexible but high-quality                                                    
  loans, along with technical assistance,                                                 
  to entities that provide services and                                                   
  opportunities to low-income Latino                                                      
  families, a mission that is consistent                                                  
  with and complementary to the mission                                                   
  of NCLR. RDF provides capital for a                                                     
  wide variety of community development                                                   
  projects, including predevelopment,                                                     
  construction, and rehabilitation loans;                                                 
  lines of credit; and acquisition and                                                    
  mini-permanent loans for charter                                                        
  schools, community health centers,                                                      
  program facilities, and affordable                                                      
  housing.                                                                                

  **Self-Help**                                                                           

  The nonprofit Center for Community      Durham,                            North        8
  Self-Help, with its financing           N.C.                               Carolina,    
  affiliates, Self-Help Credit Union, and                                    Florida,     
  Self-Help Ventures Fund, is a community                                    Georgia,     
  development financial institution based                                    Tennessee,   
  in Durham, N.C. Its mission is to                                          Texas, and   
  create ownership and economic                                              South        
  opportunities for minorities, women,                                       Carolina     
  rural residents, and low-wealth                                                         
  families. Self-Help's Community                                                         
  Facilities Fund serves the nonprofit                                                    
  and human services sectors, including                                                   
  adult and child day care providers,                                                     
  educational institutions, community and                                                 
  religious organizations, supportive                                                     
  housing and health care facilities,                                                     
  Head Start programs, affordable housing                                                 
  developers, and arts organizations.                                                     
  ---------------------------------------------------------------------------------------------------

## Models of service used by Grantees to implement the Program 

Grantees were categorized into one of three kinds of models of service
detailed below, based on how they complete financing, underwriting,
marketing, servicing, and technical assistance activities, as detailed
in exhibit 3-3.

*Vertically Integrated model of service:* Grantees that use a Vertically
Integrated model of service (Vertically Integrated Grantees) have
underwriters and other staff with expertise in charter school loan
production. They take applications, process them, and make credit
decisions. Four Grantees---Self-Help, RDF, LIIF, and NCBCI---are using a
variation of this model of service. Three of these Vertically Integrated
Grantees (RDF, LIIF, and NCBCI) use their Program funds to credit
enhance a loan pool that is funded by investors, who commit to finance a
set level of charter school loans so long as the Grantee uses
underwriting standards established in advance by the investors.
Alternatively, Self-Help uses its credit enhancement to raise funds from
investors, but does not use these funds to establish a separate loan
pool. Instead, the funds raised by Self-Help with the credit enhancement
are assets on that organization's balance sheet.

*Fully Distributed model of service:* Two Grantees, America's Charter
and CSDC (Fully Distributed Grantees) are using a Fully Distributed
model of service, in which the lender or bond issuer assumes a large
share of the underwriting and processing responsibilities. Instead of
making loans to charter schools, Fully Distributed Grantees work with a
lender or bond insurer to establish an amount of credit enhancement
required by a lender. The lender, with the credit enhancement, makes a
loan to a charter school. Fully Distributed Grantees typically make
credit enhancements available to charter schools that have entered into
negotiations with a lender. The lender, in such cases, has provided the
charter school with a term sheet, which has the proposed rates and terms
associated with the loan subject to the charter school securing an
enhancement. For example, a lender may provide a charter school with a
term sheet subject to the school's ability to raise the lender's
required 20 percent equity. The charter school would then work with CSDC
or America's Charter and the lender to secure a 20 percent guarantee for
the loan.

Grantees that use a Fully Distributed model do not have to work with
lenders and investors to agree to underwriting standards in advance of
originating loans. Rather, Fully Distributed Grantees, according to
Grantee representatives, try to allocate their funds on an as-needed
basis to make charter schools "bankable" to commercial lenders or bond
investors by enhancing loans that were already approved by banks,
subject to a credit enhancement. Grantees using the Fully Distributed
model of service may be able to move more quickly once receiving their
Program grant funds to close transactions, as compared to Grantees that
use a Vertically Integrated model of service.

[]{#__RefHeading___Toc188879024 .anchor}Exhibit 3‑3: Description of
Vertically Integrated and Fully Distributed models of service

+---------------------+-------------------------+---------------------+
| **Program element** | **Vertically Integrated | **Fully Distributed |
|                     | model of service**      | model of service**  |
+=====================+=========================+=====================+
| *Financing:* How a  | -   Investors (banks,   | -   Lenders make    |
| Grantee raises      |     insurance           |     facility loans  |
| funds that are used |     companies, other    |     to charter      |
| for charter school  |     capital sources)    |     schools         |
| loans*.*            |     provide a Grantee   |     directly. The   |
|                     |     with funds that     |     credit          |
|                     |     capitalize a loan   |     enhancement     |
|                     |     pool for charter    |     grant provides  |
|                     |     school facilities.  |     mortgage        |
|                     |     Investors provide   |     insurance that  |
|                     |     such funds for a    |     pays the lender |
|                     |     guaranteed interest |     100 percent of  |
|                     |     rate for a          |     a loan's unpaid |
|                     |     specified term paid |     balance in the  |
|                     |     by the Grantee. In  |     event of        |
|                     |     some cases          |     default.        |
|                     |     financing is        |                     |
|                     |     provided            | -   The Grantee     |
|                     |     exclusively by the  |     determines the  |
|                     |     Grantee.            |     expected        |
|                     |                         |     default rate    |
|                     | -   The credit          |     and total       |
|                     |     enhancement grant   |     unpaid balances |
|                     |     is used by the      |     for such loans; |
|                     |     Grantee in the      |     these estimates |
|                     |     event that charter  |     determine the   |
|                     |     school loan         |     total           |
|                     |     payments, due to    |     origination     |
|                     |     delinquency and     |     volume that can |
|                     |     default, are less   |     be supported    |
|                     |     than payments to    |     with the grant. |
|                     |     investors.          |                     |
|                     |     Investors determine |                     |
|                     |     the required level  |                     |
|                     |     of credit           |                     |
|                     |     enhancement, which  |                     |
|                     |     limits the leverage |                     |
|                     |     available under the |                     |
|                     |     Program.            |                     |
+---------------------+-------------------------+---------------------+
| *Underwriting:* The | -   The Grantee         | -   Individual      |
| guidelines and      |     develops            |     lenders         |
| processes used by a |     underwriting        |     establish their |
| Grantee to          |     guidelines that are |     own             |
| determine whether a |     used to evaluate    |     underwriting    |
| charter school loan |     loan applications   |     standards,      |
| application will be |     from charter        |     perhaps in      |
| approved.           |     schools. Grantee    |     consultation    |
|                     |     staff underwrite    |     with the        |
|                     |     and approve or deny |     Grantee.        |
|                     |     loan applications.  |     Lenders         |
|                     |                         |     underwrite loan |
|                     |                         |     applications    |
|                     |                         |     and             |
|                     |                         |     approve/deny    |
|                     |                         |     individual loan |
|                     |                         |     applications    |
|                     |                         |     that contain    |
|                     |                         |     guarantees from |
|                     |                         |     the Grantee.    |
+---------------------+-------------------------+---------------------+
| *Marketing:* The    | -   The Grantee is      | -   Third parties,  |
| processes a Grantee |     responsible for     |     such as lenders |
| uses to attract     |     marketing the       |     and trade       |
| charter school loan |     Program to charter  |     groups, market  |
| applications*.*     |     schools in its      |     the Program to  |
|                     |     coverage area.      |     charter schools |
|                     |                         |     in the coverage |
|                     |                         |     area.           |
+---------------------+-------------------------+---------------------+

**Exhibit 3-3: Description of Vertically Integrated and Fully
Distributed models of service (cont.)**

+---------------------+-------------------------+---------------------+
| **Program element** | **Vertically Integrated | **Fully Distributed |
|                     | model of service**      | model of service**  |
+=====================+=========================+=====================+
| *Servicing:* The    | -   The Grantee is      | -   Lenders are     |
| processes a Grantee |     responsible for     |     responsible for |
| uses to collect     |     servicing           |     servicing       |
| payments and, in    |     performing loans    |     performing      |
| the case of a loan  |     and any workouts    |     loans and any   |
| delinquency, work   |     for delinquent      |     workouts for    |
| with a charter      |     loans.              |     delinquent      |
| school to prevent a |                         |     loans. Lenders  |
| foreclosure.        |                         |     may sell        |
|                     |                         |     servicing       |
|                     |                         |     rights or       |
|                     |                         |     contract with   |
|                     |                         |     third parties   |
|                     |                         |     to perform      |
|                     |                         |     servicing       |
|                     |                         |     functions.      |
+---------------------+-------------------------+---------------------+
| *Technical          | -   The Grantee         | -   Lenders provide |
| Assistance:* The    |     provides technical  |     technical       |
| services offered to |     assistance to       |     assistance to   |
| charter schools to  |     charter schools     |     charter schools |
| assist them with    |     regarding financing |     regarding       |
| identifying         |     alternatives.       |     financing       |
| potential sources   |                         |     alternatives.   |
| of financing and    |                         |                     |
| completing a loan   |                         |                     |
| application.        |                         |                     |
+---------------------+-------------------------+---------------------+

In addition to credit enhancing commercial loans made by third parties,
America's Charter and CSDC are using grant funds to support bond
transactions. Typically, the Grantee guarantees a letter of credit
provided by commercial banks that can be used to repay bondholders in
the event of a charter school's default. In other transactions, the
Grantee uses Program funds as a partial credit enhancement for the bond,
which can be used in the event of a default.

*Mixed model of service:* The two remaining Grantees---LISC and
MassDevelopment---have elements of both models of service.[^7] LISC is
using its grant funds to credit enhance 10 Local Facility Funds (LFFs).
The LFFs raise money from investors to make charter school loans in
their communities. MassDevelopment uses its grant funds to guarantee
debt issued on behalf of charter schools. The proceeds of these bonds
can be used by charter schools acquisition, construction, renovation,
and leasehold improvement of charter school facilities. Most of the
bonds will be issued by third-party commercial lenders, but
MassDevelopment also expects to use its grant funds to credit enhance
debt issued by the organization itself.

The LISC and MassDevelopment approaches do not fit neatly into either
the Vertically Integrated or Fully Distributed models of service. LISC
is not a direct lender, but provides credit enhancements to help
establish loan pools similar to Grantees operating under a Vertically
Integrated model of service. MassDevelopment makes available credit
enhancements to third-party lenders, similar to the two Grantees
operating under a Fully Distributed model of service, but may also be a
direct lender. As a result, these two Grantees were categorized as
operating a Mixed model of service.

#   {#section-4 .unnumbered}

# Chapter 4: Methodology 

# 

This chapter describes the data sources and methods used to address the
study's research questions. This study uses information from three
sources: (1) information provided in Program applications and Annual
Performance Reports; (2) secondary databases; and (3) results of
discussions with representatives to answer the five research questions.
Exhibit 4-1 summarizes the types of information that will be the primary
source of data to address each of five research questions.

## Data sources

A range of quantitative and qualitative information from three sources
was used to answer each research question. This section describes each
data source and the data collection methodology used for each source.
Overall, the following information was collected for each Grantee funded
in FY 2002 through FY 2004:

-   Information provided in Grantee Program applications and Annual
    Performance Reports submitted for FY 2003, FY 2004, and FY 2005;

-   Secondary databases that provide information regarding the
    demographic or social characteristics of neighborhoods in which
    schools assisted under the Program were located; and

-   Interviews with representatives of Grantees, charter schools
    assisted under the Program, unsuccessful Program applicants,
    commercial lenders, investment bankers, bond insurers, educational
    management organizations and rating agencies.

### Grantee applications and annual performance reports

Applicants provide information that allows ED to evaluate proposals with
four categories of selection criteria: (1) the quality of the design and
potential significance of the proposed grant project; (2) the quality of
the proposed services; (3) the business and organizational capacity to
carry out the proposed grant project; and (4) the qualifications of the
grant project team. Therefore, all of the Program applications include
information regarding the Program grant recipients' proposed activities
and experience with previous lending programs.

This application information details specific strategies that the
applicant intends to use to facilitate charter school facilities
lending. In particular, the application provides details about the
division of specific functions between the organization and third
parties. The application also specifies the types of credit enhancements
that the applicant will support with grant funds. This information was
used to classify a Grantee as a Fully Distributed, Vertically Integrated
or Mixed Grantee. The application also outlines the selection criteria
that the organization will use when choosing a charter school to assist.
These criteria can include the characteristics of either students
enrolled in the school or the residents in the geographic area in which
the assisted school was located. This information was used to assess how
Grantees selected areas that are in need of public school choice.

Grantees provide ED with Annual Performance Reports that include a
narrative description of activities conducted under the Program,
including a discussion of the types of credit enhancements provided and
how those enhancements facilitate each transaction supported by the
Program. These descriptions were used to identify innovative financial
and real estate solutions implemented by Grantees. In addition to this
narrative discussion of programmatic activities, Annual Performance
Reports include the assisted schools' names and detailed information
about the demographic characteristics of students enrolled. (Schools
that received Directly Enhanced loans between FY 2003 and FY 2005 are
referred to in this report as assisted schools.) This information was
used to determine the extent to which the Program serves areas in need
of public school choice.

In their Annual Performance Reports, Grantees provide loan-level
information about the amount, interest rate, term, fees and purpose of
loans that either are made by a third-party lender with a credit
enhancement provided by a Grantee with Program funds or are made by a
Grantee to a charter school from a loan pool that is credit enhanced
with Program funds. Both types of loans are defined in this study as
Directly Enhanced loans. These are the loans that lenders made as a
direct result of the Program. Moreover, Grantees in many cases do not
report information about the rates and terms for loans that assisted
schools receive but are not credit enhanced by Grantees. As a result, it
is not possible to compute financial measures that include these loans.
The loan-level data provided by Grantees about Directly Enhanced loans
were used to calculate financial and efficiency measures that are
calculated for all Grantees by type of loan and by model of service.

### Interviews

The research team conducted interviews with representatives of four
groups of organizations: Grantees, unsuccessful Program applicants,
industry participants, and schools assisted by Grantees. The team
completed interviews with eight of nine Grantees. (The ninth Grantee did
not support any Directly Enhanced loans between FY 2003 and FY 2005.)

Research team members also completed interviews with representatives of
five unsuccessful Program applicants. The sampled organizations were
selected from 15 unsuccessful Program applicants who received a score
above 45 on their Program applications.

The sample of assisted schools was selected after grouping all of the
assisted schools according to the model of service (Vertically
Integrated, Fully Distributed, and Mixed) used by the Grantee that made
the school's Directly Enhanced loan. The assisted schools selected to be
interviewed reflects these proportions. The research team contacted 13
assisted schools,[^8] and was able to complete eight assisted school
interviews.

The 15 industry participants included representatives of commercial
lenders, investment banks, bond rating agencies, charter school
developers, and educational management organizations (EMOs). These
interviewees provided different perspectives about the Program's
effects. The research team selected industry participants to interview
with the assistance of Working Group members, ED staff, and, in some
cases, the interviewees themselves.

### Secondary data

Data from two kinds of secondary sources were used in the study: Census
data and public databases of financial information. To assess the
neighborhood conditions of assisted charter schools, geographic
information systems were used to geocode the location of schools
assisted under the Program to the Census tract and county in which the
assisted school was located.[^9] U.S. Census data were used to calculate
measures of the socioeconomic conditions of the tracts and counties that
contain charter schools assisted under the Program. Publicly available
databases with information about Treasury yields and commercial loan
rates were used to complete comparative analyses of Program rates and
terms to loans available from non-Program sources.

### Limitations of the study

Overall, the study examined information related to the eight grantees,
which assisted a total of 84 charter schools between FY 2003 and FY
2005. The limited data provides descriptive evidence of the program's
implementation and outcome. However, because of the Program's short
history, the results of the study were based on a small number of
grantees and loans, and must be viewed as preliminary.

[]{#__RefHeading___Toc188879026 .anchor}Exhibit 4 ‑4: Crosswalk of
research questions and data sources

+----------------------+------+-----+-------+----------+------+------+
|                      | **In |     |       | **       | **S  |      |
|                      | terv |     |       | Grantee- | econ |      |
|                      | iews |     |       | provided | dary |      |
|                      | wit  |     |       | inf      | data |      |
|                      | h:** |     |       | ormation | fro  |      |
|                      |      |     |       | from:**  | m:** |      |
+======================+======+=====+=======+==========+======+======+
|                      | **Gr | *   | **Un  | **Annual | **Ce | **F  |
|                      | ante | *As | succe | per      | nsus | inan |
|                      | es** | sis | ssful | formance | da   | cial |
|                      |      | ted | pr    | reports  | ta/C | inf  |
|                      |      | sch | ogram | and      | CD** | orma |
|                      |      | ool | ap    | applic   |      | tion |
|                      |      | s** | plica | ations** |      | Web  |
|                      |      |     | nts** |          |      | sit  |
|                      |      |     |       |          |      | es** |
+----------------------+------+-----+-------+----------+------+------+
| **1. How does the    |      |     |       |          |      |      |
| Program work in      |      |     |       |          |      |      |
| achieving its        |      |     |       |          |      |      |
| legislative          |      |     |       |          |      |      |
| purpose?**           |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+
| > 1a. Does the       | X    | X   | X     | X        |      |      |
| > Program, as        |      |     |       |          |      |      |
| > implemented,       |      |     |       |          |      |      |
| > provide for        |      |     |       |          |      |      |
| > improved access of |      |     |       |          |      |      |
| > charter schools to |      |     |       |          |      |      |
| > capital markets    |      |     |       |          |      |      |
| > for facilities?    |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+
| > 1b. Does the       | X    | X   | X     | X        |      | X    |
| > Program, as        |      |     |       |          |      |      |
| > implemented,       |      |     |       |          |      |      |
| > provide for better |      |     |       |          |      |      |
| > rates and terms on |      |     |       |          |      |      |
| > financing than     |      |     |       |          |      |      |
| > would otherwise be |      |     |       |          |      |      |
| > available from     |      |     |       |          |      |      |
| > Grantees?          |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+
| **2. What is the     |      |     |       | X        |      |      |
| relative efficiency  |      |     |       |          |      |      |
| of the models of     |      |     |       |          |      |      |
| service being used   |      |     |       |          |      |      |
| by Grantees?**       |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+
| **3. Is the Program  |      | X   |       | X        | X    |      |
| serving the          |      |     |       |          |      |      |
| communities with the |      |     |       |          |      |      |
| greatest need for    |      |     |       |          |      |      |
| public school        |      |     |       |          |      |      |
| choice?**            |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+
| **4. What is the     | X    | X   |       | X        |      |      |
| evidence of          |      |     |       |          |      |      |
| Grantees' innovative |      |     |       |          |      |      |
| method use?**        |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+
| **5. What are the    | X    | X   |       |          |      |      |
| major issues with    |      |     |       |          |      |      |
| Program              |      |     |       |          |      |      |
| implementation?**    |      |     |       |          |      |      |
+----------------------+------+-----+-------+----------+------+------+

# Chapter 5: Findings

This chapter presents findings for each of the study's research
questions. A preliminary discussion that includes the methods used to
address each study question and a summary of findings is presented for
each research question. This preliminary discussion is then followed by
a detailed analysis of each study question.

## Does the Program, as implemented, provide for improved access of charter schools to capital markets for facilities?

To determine whether Grantees increased their lending volume after
receiving Program funds, the research team calculated, for each Grantee,
the changes in lending volume in the year before and in the year after
the Grantee received its grant. The data regarding a Grantee's lending
volume in the year before receiving its grant come from interviews. The
lending volume in the year after receiving a grant was calculated from
data provided by Grantees in their Annual Performance Reports.

Grantees may have been able to increase their lending volume even
without the Program, if they could find other sources of funds for
credit enhancements. To determine whether other sources were available,
the research team interviewed representatives of unsuccessful Program
applicants to determine how successful these organizations were in
attracting funding from non-Program sources to support charter school
lending. In addition, the research team used information provided by
unsuccessful Program applicants in interviews about their lending volume
subsequent to applying for their grant, and compared this amount to
their proposed lending volume.

One way the Program can improve access to capital markets is by making
loans to charter schools that are more risky than charter schools that
receive loans from non-Program sources. To determine if Grantees served
charter schools that are more risky than charter schools that can
qualify for non-Program sources of funds (such as standard commercial
loans) the research team, in interviews with representatives of assisted
schools, asked whether their charter school had previously been denied a
loan. The analysis also includes a comparison of the characteristics of
assisted schools with those that receive financing from non-Program
sources.

The technical assistance that Grantees provide under the Program may
help to make loans more accessible to charter schools. To determine the
extent to which technical assistance funded by the Program had such an
effect, the research team interviewed Grantee and assisted school
representatives about the effects (if any) of technical assistance.

The above approach used a combination of quantitative and qualitative
data to examine the Program's effects on charter schools' access to
facility loans. Overall, the Program improved charter schools' access to
facilities' loans. This conclusion is based on an analysis of the
following issues:

-   *Are Grantees supporting higher volumes of lending compared with
    their lending volumes prior to the Program?* The six Grantees that
    made loans directly to charter schools before receiving their award
    made a total of \$5.3 million in charter school facility loans in
    the year before they received their awards. These same six
    organizations supported a total of \$27.7 million of Directly
    Enhanced loans in the year after receiving their grant. According to
    Grantee representatives, this increase was not possible without
    Program funds.

-   *Does the Program bring new lenders and intermediaries into the
    charter school lending market*? Commercial lenders and Grantee
    representatives indicated that lenders, which before the Program
    made few if any charter school loans, are making loans to charter
    schools or investing in loan pools. These lenders are new to charter
    school lending because of the credit enhancements funded by the
    Program.

-   *Were assisted schools previously denied loans, based on interviews
    with assisted school representatives*? One school that received a
    Directly Enhanced loan applied for a loan before the Program, but
    was rejected. Representatives of the other charter schools that
    received Directly Enhanced loans indicated that, before the Program,
    they were often told by commercial lenders not to submit a loan
    application, because the lender would likely deny the loan request.

[]{.mark}

-   *Do schools assisted under the Program exhibit higher levels of
    credit loss risk to lenders?* Compared to charter schools that
    issued bonds, the assisted schools were more risky, because they had
    smaller enrollments and shorter (or nonexistent, in the case of
    start-ups) operating histories. This finding is consistent with the
    information provided by representatives of Grantees and commercial
    lenders, who indicated that the assisted schools were able to
    receive loans even though they did not meet standard commercial
    underwriting guidelines related to down payment, debt service
    coverage ratio, and number of years in operation.

[]{.mark}

-   *Do Grantees offer new products or support new types of
    transactions?* Grantees offered charter schools loans with longer
    maturities and for different uses (such as leasehold improvements)
    than available from commercial lenders.

-   *Are unsuccessful Program applicants able to support lending without
    the support of the Program?* Four unsuccessful Program applicants
    provided information about proposed lending targets. These four
    organizations proposed to support a total of \$594 million worth of
    loans. However, only one of the organizations supported any charter
    school loans at all through the end of FY 2005. This organization,
    which received a New Market Tax Credit allocation, supported \$7
    million worth of charter school loans during the period covered by
    the study. New Market Tax Credits is a federal program that permits
    taxpayers to receive a credit against federal income taxes for
    making qualified equity investments in Community Development
    Entities, investment funds that serve low- and moderate-income
    communities.

-   *Does technical assistance provided by Grantees improve charter
    schools' ability to secure financing?* The representatives of the
    eight assisted schools interviewed for this study indicated that
    technical assistance did not play a large role in their ability to
    obtain facility loans. Most of the schools indicated that they had
    board members who were familiar with the terms of commercial loans.
    This knowledge may have assisted them in determining whether the
    rates and terms of loans provided through the program were
    reasonable. It is not possible to generalize these findings to all
    of the assisted schools.

### **Overall charter school lending market** {#overall-charter-school-lending-market .Style-Heading-3-+-Not-Bold-Underline}

Grantees supported a total of \$168 million worth of Directly Enhanced
loans between FY 2003 and FY 2005 (of which \$155.6 million was
outstanding as of Sept. 30, 2005).[^10] The volume of Directly Enhanced
loans increased every year between FY 2003 and FY 2005, from \$37
million to \$78 million (exhibit 5-1). This pattern likely reflects some
start-up time required by Grantees to establish loan pools and determine
requirements for providing credit enhancements.

The total volume of loans directly enhanced by grantees during the study
period was \$168 million. As a comparison, Standard and Poor's rated
\$590.7 million of charter school facilities bonds through 2006
(Standard and Poor's 2006). In addition to rated bonds, charter schools
have raised funds through issuing nonrated debt and also from commercial
loans. Commercial lender, investment bank and bond insurer
representatives estimated that charter schools, since 1999, have raised
a total of \$1 billion (through bonds or loans) from investors for
facilities. Given the \$1 billion estimated cumulative amount of loans
made to charter schools since 1999, Directly Enhanced loans account for
about 17 percent of all loans received or bonds issued by charter
schools for facilities since the late 1990s.

[]{#__RefHeading___Toc188879027 .anchor}Exhibit 5‑5: Grantees' Directly
Enhanced loan volume by type of loan between FY 2003 and FY 2005

![](media/image3.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** Grantees supported \$36.9 million worth of Directly
Enhanced loans in FY 2003, \$53.2 million worth of Directly Enhanced
loans in FY 2004 and \$78.0 million of Directly Enhanced loans in FY
2005. Acquisition and construction loans accounted for the largest share
of any FY's total.

Source: Grantee Annual Performance Reports.

### **Are grantees supporting higher volumes of lending compared with their lending volumes prior to the Program?** {#are-grantees-supporting-higher-volumes-of-lending-compared-with-their-lending-volumes-prior-to-the-program .Style-Heading-3-+-Not-Bold-Underline}

Six Grantees made loans directly to charter schools before receiving
their Program grant. These six organizations made a total of \$5.3
million worth of loans the year before they received their grants
(exhibit 5-2). The same organizations supported \$27.7 million worth of
Directly Enhanced loans in the year after they received their grants.
Two Grantees did not support any charter school loans before they
received their grants; these two organizations supported \$29 million
worth of Directly Enhanced loans in the year after they received their
grants. All of the Grantee representatives indicated that the Program
funds were critical in allowing them to increase (or start) their school
lending activity. As a result, it is likely that the increases shown in
exhibit 5-2 resulted from the Program.

[]{#__RefHeading___Toc188879028 .anchor}Exhibit 5‑6: Comparative
analysis of Grantee lending volume in the year preceding receiving a
Program grant to Directly Enhanced lending volume in the year following
receiving a Program grant

![](media/image4.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** Grantees supported \$56.7 million worth of Directly
Enhanced loans in the year after they received their grant. Of this
total, Grantees that made loans directly to charter schools before
receiving their grant supported \$27.7 million worth of Directly
Enhanced loans, \$22.4 million greater than the amount of charter school
loans these Grantees made in the year before they received their grant.

Sources: 1. Grantee interviews.

2\. Grantee Annual Performance Reports.

### **Are unsuccessful Program applicants able to support lending without the support of the Program?** {#are-unsuccessful-program-applicants-able-to-support-lending-without-the-support-of-the-program .Style-Heading-3-+-Not-Bold-Underline}

Overall, unsuccessful Program applicants were largely unable to support
charter school lending without Program funds. Representatives of four of
the five unsuccessful Program applications indicated that they did not
seek funding to support charter school lending from non-Program sources
because they believed that such sources were unavailable. Only one of
the unsuccessful Program applicants supported any charter school loans
at all through the end of FY 2005. This organization, which received a
New Market Tax Credit allocation, supported \$7 million worth of charter
school loans during the period covered by the study.[^11]

Four of the five unsuccessful Program applicants proposed specific
lending volume targets in their application. Collectively, these four
organizations proposed to support a total of \$594 million worth of
loans. The volume of lending supported by the sampled unsuccessful
Program applicants was much lower than the level of lending supported by
the Grantees. Between FY 2003 and FY 2005, the Grantees supported a
total of \$168 million of Directly Enhanced loans. For the same period,
the nine Grantees proposed to support a total of \$272.5 million worth
of charter school facility loans. Overall, Grantees supported 62 percent
of the Directly Enhanced loans (in dollar volume) that they proposed in
their applications (exhibit 5-3).

This relatively low level of charter school lending (both in absolute
terms and as a proportion of proposed lending volume) supported by
unsuccessful Program applicants could be the result of differences
between the institutional capacity of these organizations and the
Grantees. The unsuccessful Program applicants were selected in a way to
minimize this potential for bias; only those unsuccessful Program
applicants who received a score of at least 45 when their application
was evaluated were sampled. Moreover, the unsuccessful Program
applicants, even had they received a grant, may not have met their
relatively ambitious targets.

[]{#__RefHeading___Toc188879029 .anchor}Exhibit 5‑7: Comparison of
proposed and actual Directly Enhanced lending volume between FY 2003 and
FY 2005 for four unsuccessful Program applicants and Grantees

  --------------------------------------------------------------------------------
                 **Proposed      **Actual lending  **Difference**   **Percentage
                 lending         volume between FY                  of actual to
                 volume^a^**     2003 and FY                        proposed
                                 2005^b^**                          volume**
  -------------- --------------- ----------------- ---------------- --------------
  **Four         \$594,000,000   \$7,000,000       -\$587,000,000   1.0%
  unsuccessful                                                      
  Program                                                           
  applicants**                                                      

  **Grantees**   \$272,515,000   \$168,157,315     -\$104,357,685   62.0%
  --------------------------------------------------------------------------------

**Exhibit Reads:** Four organizations that unsuccessfully applied for
the Program proposed that they would support \$594 million worth of
loans with their Program funds. Without the Program funds these Grantees
supported only \$7 million worth of loans. Grantees proposed to support
\$272.5 million worth of loans, and actually supported \$168.2 million
of Directly Enhanced loans. This suggests that organizations that did
not get Program funds were unable to find other sources of support for
charter school lending.

Sources: a. For unsuccessful Program applicants: unsuccessful
applicant's proposal. Exhibit shows the total proposed amount of lending
for the entire grant. Timeframes vary by applicant. For Grantees:
Performance Agreements.

> b\. For unsuccessful Program applicants: unsuccessful Program
> applicant interview. For Grantees: Annual Performance Reports. Exhibit
> shows the total actual lending volume of directly enhanced loans.

Nonetheless, the large differences in the amount of lending supported by
unsuccessful Program applicants and the Grantees suggest that the
Program funds provide credit enhancement funding that is not readily
available from other sources, and so the increased lending supported by
the Grantees can be attributed to the Program. Of course, this
conclusion is subject to the caveat that the experiences of the
unsuccessful Program applicants interviewed for this study are similar
to other organizations that seek funding to support charter school
lending.

### **Assisted schools' ability to qualify for loans before the Program** {#assisted-schools-ability-to-qualify-for-loans-before-the-program .Style-Heading-3-+-Not-Bold-Underline}

Assisted school representatives indicated that they were unable to
qualify for loans before they received their Directly Enhanced loan. As
detailed below, one of the assisted schools had its loan application
denied. More commonly, though, lenders told assisted school
representatives that they should not apply for a loan because it was
unlikely to be approved.

One of the assisted charter schools interviewed for this study submitted
a facilities loan application to a commercial lender before applying for
a loan from a Grantee. According to that interviewee, the school's staff
started discussions with three local lenders in late 2002. Some of these
lenders indicated that they were interested in making a loan to the
school, and subsequently the charter school submitted an application to
one lender in early 2003. After several months, the lender had not made
a decision regarding the loan application, despite repeated queries from
the school.

Representatives of the other assisted schools interviewed for this study
indicated that lenders, without the credit enhancements offered under
the Program, were unwilling even to consider an application for a
facilities loan. According to these representatives, their charter
school either did not approach a lender because they knew that the
school could not meet standard commercial loan underwriting requirements
or was discouraged, after preliminary discussions with a commercial
lender, from submitting an application.

One representative of an assisted charter school indicated that the
school started to explore potential sources of facilities loans around
2000. Given the attitude of commercial lenders in the area, this
interviewee indicated that the school "did not hold out a lot of hope
that a commercial bank would \[provide\] a loan." The reason, according
to this interviewee, was that commercial lenders did not understand, as
of 2000, how charter schools operated and how they were financed.

Some of the assisted schools initiated preliminary discussions with
lenders who expressed an interest in making a charter school facilities
loan. After these preliminary discussions, however, the lenders
contacted by these charter schools either discouraged the school from
submitting a loan application or denied their loan application. One
school had a prominent investment banker as a board member. This board
member, through personal contacts, was able to schedule meetings with
senior executives of several large commercial banks. These senior
executives expressed an interest in making a loan to the charter school
and referred the charter school's representatives to loan officers, who
evaluated the school's loan application. Despite the referrals from
senior executives, these loan officers, after examining the financial
resources of the school, told the school's representatives that they
would not approve an application submitted by the school.

One assisted school initiated discussions with a Grantee that makes
loans directly to charter schools before the Grantee received a Program
grant. This lender's local representative told the charter school that
its application was too risky. Once the lender received a grant under
the Program, however, it made a loan to the school. In another case, an
assisted school identified a local lender who expressed interest in
making a loan; however, after further conversations with representatives
of the charter school, the lender indicated that it would make a loan
only if the school obtained a 100 percent guarantee.

The experiences of the eight assisted schools interviewed for this study
indicate that they likely would not have received a loan from a
commercial lender without the credit enhancement funded by the Program.
In one case an assisted school submitted an application to a local
commercial lender, but never received a decision. More commonly, local
lenders expressed a preliminary interest in making a loan to the charter
school, but, according to assisted school representatives, discouraged
the school from submitting an application after these preliminary
conversations progressed to more detailed discussions of the school's
financial condition. Some of the assisted schools did not expect to
receive a loan from a commercial lender, and so did not explore the
possibility of submitting an application. If the experiences of these
eight assisted schools were common to all of the 84 schools assisted by
Grantees between FY 2003 and FY 2005, it suggests that the Program
improved charter schools' access to facilities loans.

### **Does the Program bring new lenders and intermediaries into the charter school lending market?** {#does-the-program-bring-new-lenders-and-intermediaries-into-the-charter-school-lending-market .Style-Heading-3-+-Not-Bold-Underline}

The Program, according to commercial lenders and Grantees, attracted
lenders that otherwise would not have made charter school loans, and
encouraged lenders that already were making charter school loans to
increase their lending volume. A commercial lender, now an investor in a
multimillion-dollar loan pool started by a Grantee, indicated that her
company made only two charter school loans through 2002 due to the
difficulties associated with evaluating the quality of loan applicants\'
proposed educational plan and the extent to which proposed plans would
generate the enrollment levels sufficient to support revenue to make
loan payments. This lender agreed to participate in a loan pool managed
by a Grantee that has the expertise to evaluate charter school loan
applicants' educational plans. Another commercial lender, now an
investor in a large loan pool, indicated that his bank did not fund any
charter school loans prior to the Program because of renewal risks. Due
to the credit enhancement funded by the Program, this lender is less
concerned about renewal risk.

This commercial lender indicated that charter school loan applications
are difficult to evaluate because the lender must assess the quality of
the proposed educational plan and the extent to which the proposed plan
will generate the enrollment levels sufficient to support revenue to
make loan payments. This lender agreed to participate in a loan pool
managed by a Grantee that has the expertise to evaluate charter school
loan applicants' educational plans. Another commercial lender, now an
investor in a large loan pool, indicated that his bank did not fund any
charter school loans prior to the Program because of renewal risks. Due
to the credit enhancement funded by the Program, this lender is less
concerned about renewal risk.

Another Grantee's representative indicated that lenders, at the start of
the Program, were unfamiliar with charter schools, and so the Grantee's
staff spent time meeting with commercial lenders to explain how such
schools operated, how they were funded, and how the Program mitigated
risks associated with loans to such schools. In a change from the early
years of the Program, this Grantee's representative indicated that more
commercial banks are willing to make loans to charter schools and that
these lenders are starting to adjust their underwriting standards,
especially related to discounting appraisals when they evaluate charter
school facility loan applications.

Overall, the observations of Grantees and commercial lenders, and the
experiences of assisted schools, suggest that the Program has attracted
new lenders who would not have funded charter school facilities loans
without the credit enhancements made available by the Program.

### **Do Grantees offer products or support new types of transactions?**  {#do-grantees-offer-products-or-support-new-types-of-transactions .Style-Heading-3-+-Not-Bold-Underline}

Representatives of Grantees that made charter school loans before
receiving their grant indicated that the Program allows them to provide
larger loans, with longer terms and higher loan-to-value ratios. For
example, one of the Grantees made charter school loans from a revolving
loan fund before receiving a Program grant. The weighted average
maturity for loans made with this revolving fund could not be greater
than 3.5 years, but any one loan could be for a longer or shorter term.
In addition to this restriction on loan terms, the revolving loan fund
could not have more than \$3 million of outstanding loans at a time.
Under the Program, this Grantee established a \$26 million pool that is
available for charter school lending. Compared to its original revolving
loan fund, the loans made from the \$26 million pool are for larger
amounts and longer terms.

Another Grantee that made charter school loans prior to receiving
Program funds could not make loans to start-up schools. The average size
of loans made by the Grantee before the Program was below \$500,000 and
was limited to purchases of existing buildings. With Program funds, this
Grantee can make larger loans, which can be used for leasehold
improvements and construction financing. Similarly, another Grantee
prior to receiving Program funds did not make leasehold improvement
loans, and required borrowers to provide a guarantee from its management
organization. In addition, this organization required a 25 percent down
payment from its borrower before the Program and a debt service coverage
ratio of 1.25. This means that borrower's net operating income had to be
25 percent greater than the borrower's total debt payments, including
payments required by the new loan. This Grantee now requires only a 10
percent down payment and approves loans to charter schools with a debt
service coverage ratio as low as 1.10.

### **Do schools assisted under the Program exhibit higher levels of credit loss risk to lenders?**  {#do-schools-assisted-under-the-program-exhibit-higher-levels-of-credit-loss-risk-to-lenders .Style-Heading-3-+-Not-Bold-Underline}

According to investment bankers, commercial lenders, and a rating agency
representative, most commercial real estate loans (including those made
to charter schools) require a borrower to have a down payment of 20
percent and a debt service coverage ratio (which is the ratio of a
company's net operating income to total debt payments) of at least 1.20.
In addition to meeting these financial ratios, the commercial lender and
the rating agency interviewee indicated that commercial lenders and bond
underwriters require charter schools to document a stable three-year
cash flow. The schools assisted under the Program, according to Grantees
and the representatives of the assisted schools typically do not meet
these requirements, and so were more risky.

According to Grantees, Program funds were sometimes used when a charter
school does not have sufficient funds to make a 20 percent down payment.
In a \$1 million transaction, for example, a lender would require a
charter school to contribute \$200,000 as a down payment, and would then
make an \$800,000 loan. With the credit enhancement, the bank makes a
\$1 million loan. A Grantee can use Program funds to guarantee \$200,000
of the \$1 million loan in the event of a foreclosure and loss from the
eventual sale of the property. The guarantee acts as a substitute for
the down payment, thereby providing the lender with the same level of
risk exposure as for a loan in which a borrower is able to make a 20
percent down payment.

Grantees also indicated that Program funds were used so that charter
schools could meet lenders' debt service reserve requirements. In such
cases, a lender may require a school to deposit funds into a reserve
account so that the account has six months of loan payments. This
requirement increases the amount of cash a borrower must have on hand
(in addition to any down payment requirement) at closing. Grantees,
rather than the charter school itself, can use Program funds to
establish such a reserve fund, and thereby bring the assisted charter
school into compliance with the lender's underwriting requirements.

Grantees that make loans directly to charter schools generally use
different underwriting standards, with respect to the required down
payment, debt service coverage ratio, and years in operation, from those
used by commercial lenders.[^12] For example, two Grantees require a
borrower to provide a 10 percent down payment and a debt service
coverage ratio of 1.10, rather than the down payment of 20 percent and
debt service coverage ratio of 1.20 typically required by commercial
lenders. Another Grantee that acts as a direct lender indicated, "\[We\]
intentionally \[do\] not have strict policies on criteria such as
loan-to-value and debt coverage ratios. This flexibility has allowed
\[Grantees\] to adapt creatively to the charter school market. As a
result, \[Grantees have\] found ways to implement flexible terms,
conditions, and pricing, to allow for approval of loans that do not meet
more standard criteria."

Some charter schools have been able to raise funds by issuing bonds
rated by Wall Street rating agencies. These schools have a median
enrollment of 745 students and, on average, started operating in 1997;
none of the schools were start-ups (Hitchcock and Breeding 2007). The
schools that issued rated bonds were very different from those that
received loans under the Program. Fifteen of the 84 schools that
received Directly Enhanced loans between FY 2003 and FY 2005 (18
percent) were start-ups. The average enrollment for non start-up schools
that received Directly Enhanced loans was 346 students at the time the
schools received their loan, less than half of median enrollment for
schools that issued a rated bond.

These differences indicate that, compared to charter schools that issued
bonds, the schools that received Directly Enhanced loans were more
risky. Despite the higher risk, Grantees used their Program funds only
once because of a loan delinquency during the study period, and the
school later reimbursed this Grantee.

### **Does technical assistance provided by Grantees improve charter schools' abilities to secure financing?** {#does-technical-assistance-provided-by-grantees-improve-charter-schools-abilities-to-secure-financing .Style-Heading-3-+-Not-Bold-Underline}

Representatives of the Grantees and assisted schools had different
perspectives about the effects of technical assistance on the charter
schools\' ability to secure facilities loans. Grantee representatives
indicated that they provide technical assistance to schools on an
as-needed basis. Sometimes schools do not ask for technical assistance.
Nonetheless, Grantee representatives indicated that some schools
required their help to assess potential financing options. In some
cases, Grantee representatives indicated that they participated in
negotiations between a school and the school's lender. By offering this
type of technical assistance, Grantees indicated that they made it
possible for charter schools to get facility loans with the most
favorable terms and conditions possible even for schools that do not
have financial expertise.

The representatives of the assisted schools interviewed for this study
indicated that they had board members who were familiar with the terms
of commercial loans. This knowledge may have assisted them in
determining if the rates and terms of loans provided through the Program
were reasonable. As a result, the representatives of assisted schools
interviewed for this study indicated that the technical assistance
offered by Grantees did not play a large role in improving access to
facility loans. It is possible, however, that schools not interviewed
for this study benefited from technical assistance, and so these results
may not be generalizable to all schools that received Directly Enhanced
loans.

## Does the Program, as implemented, provide for better rates and terms on financing than would otherwise be available? 

To answer the above question, the research team analyzed information
regarding rates and terms provided by Grantees in their Annual
Performance Reports and developed a comparative analysis of Directly
Enhanced loan rates and terms with appropriate benchmark instruments,
based on loan purpose. This quantitative analysis was supplemented with
information provided by Grantees regarding the process that they used to
set rates and terms for Directly Enhanced loans and how this process
differs from before receiving Program grant funds. In addition, the
analysis of this question includes information provided by assisted
schools regarding their experiences (if any) with applying for loans
before receiving a Directly Enhanced loan. These analyses support the
following conclusions:

-   *How do rates and terms offered by the Grantees after the
    implementation of the Program differ from before the implementation
    of the Program?* According to the Grantees, Directly Enhanced loan
    rates and terms from Grantees that made charter school loans before
    the Program were at least the same as, and in some cases better than
    before the Program. Some of these Grantees, in addition to providing
    better rates and terms, make Directly Enhanced loans using more
    flexible underwriting standards, which allow schools that could not
    receive loans from the Grantee before the Program to qualify for
    such loans.

-   *How do the rates and terms of the loans supported by the Program
    compare with comparable term treasury yields?* The average interest
    rate for Directly Enhanced loans was 2.42 percentage points greater
    than comparable term, risk-free Treasury yields. The average
    interest rate for Directly Enhanced leasehold improvement loans was
    3.23 percentage points greater than comparable term, risk-free
    Treasury yields.

-   *How do the rates and terms of the loans supported by the Program
    compare with those of loans not supported by the Program?* The
    differences in the average interest rate or "spreads" between
    comparable term Treasury yields and the average interest rates for
    Directly Enhanced acquisition and construction loans and leasehold
    improvement loans were slightly higher than for more standard
    commercial real estate mortgages made during the same period. This
    difference, according to representatives of Grantees, commercial
    lenders, and rating agencies, is appropriate, because Directly
    Enhanced loans were made to assisted schools that usually did not
    have enough funds to make the down payment typically required for a
    commercial real estate loan. As a result, Directly Enhanced loans
    were usually more risky than commercial mortgages.

### **Are rates and terms offered by the Grantees after implementation of the Program different from what they were before implementation of the Program?** {#are-rates-and-terms-offered-by-the-grantees-after-implementation-of-the-program-different-from-what-they-were-before-implementation-of-the-program .Style-Heading-3-+-Not-Bold-Underline}

Six Grantees made charter school loans before receiving a grant.
According to representatives of these organizations, the interest rates
and fees charged to assisted schools under the Program were lower under
the Program than the rates and fees they charged to charter schools
before receiving a grant.

One Grantee, for example, indicated that the charter school loans it
made before receiving a grant had higher interest rates than other types
of loans it made, due to the higher level of expected losses resulting
from charter school loans. A representative of this Grantee indicated
that it charged interest rates for charter school loans, before
receiving its grant, at the maximum level that a particular project
could bear, given its available cash flow. This Grantee used its Program
funds to enhance a loan pool that made loans available to charter
schools with lower interest rates than before the Program.

Another Grantee operated a relatively small loan pool that was funded by
investors prior to receiving its grant. Loans made from this pool had an
interest rate that was 4.00 percentage points greater than the Grantee's
cost of capital. With the grant funds, this Grantee established a larger
loan pool. The loans funded from this pool have longer terms and carry
interest rates that were 2.00 percentage points lower than those made
from the original loan pool.

A third Grantee indicated that before participating in the Program, it
set interest rates for charter school loans the same way as for
conventional commercial loans. Since participating in the Program, this
Grantee has offered assisted schools a 0.40 percentage point discount to
its typical commercial rates. In addition, some of the charter school
loans made by this Grantee were funded through the New Market Tax Credit
program. These loans were made with even lower interest rates: 1.50
percentage points lower than charter school loans made without New
Market Tax Credit funds.

###  {#section-6 .Style-Heading-3-+-Not-Bold-Underline}

### **How do the rates and terms of the loans supported by the Program compare with benchmarks?** {#how-do-the-rates-and-terms-of-the-loans-supported-by-the-program-compare-with-benchmarks .Style-Heading-3-+-Not-Bold-Underline}

In this analysis, the interest rates and loan-to-value ratios were
calculated for all of the Directly Enhanced loans supported by Grantees
between FY 2003 and FY 2005. The interest rates were compared to the
Treasury yields, as of the date the loan was made to the school, for the
same term. For example, if a seven-year loan is made to a school, that
interest rate for that loan is compared to the seven-year Treasury
yield. The difference between the interest rate for the loan made to the
school and the Treasury yield is the "spread" between the Directly
Enhanced loan and a risk-free loan. (Treasury yields are considered to
be risk-free, because they carry the full faith and credit of the U.S.
government.) The spread reflects a "risk premium" that charter schools
pay in the form of higher interest rates, because they represent a
higher credit risk than U.S. Treasury bonds.

The risk-premium for a Directly Enhanced loan was calculated as follows.
Assume that a charter school received a 10-year Directly Enhanced
acquisition or construction loan at an interest rate of 7 percent during
the same week the yield for a 10-year Treasury was 4.5 percent. In this
case the spread between the Directly Enhanced loan and its comparable
term Treasury yield is 2.5 percentage points. Spreads were calculated
separately for Directly Enhanced acquisition or construction and
leasehold improvement loans, because leasehold improvement loans are
more risky, because the lender that makes a leasehold improvement loan
does not have a lien on the property.

Two loan-level interest rates and spreads were aggregated into a
weighted average coupon (WAC) and a weighted average spread (WAS). The
WAC is the average interest rate for all Directly Enhanced loans and the
WAS is the average spread between Directly Enhanced loans and comparable
term Treasury yields. The WAC for the acquisition and construction loans
(based on the interest rate at origination if the loan carries a
variable interest rate) was 6.1 percent. This means that Directly
Enhanced loans supported under the Program between FY 2003 and FY 2005
had an average interest rate of 6.1 percent (exhibit 5-4). The interest
rates for Directly Enhanced acquisition and construction loans varied
from a low of 3.25 percent to a high of 9.75 percent.

The WAS for Directly Enhanced acquisition and construction loans between
FY 2003 and FY 2005 was 2.4 percentage points higher than a risk-free
Treasury yield of the same term. This spread varied (exhibit 5-4). In
some cases the Directly Enhanced acquisition and construction loan had
an interest rate lower than the comparable term Treasury yield (as much
as 1.43 percentage points in one case). The highest spread for a
Directly Enhanced acquisition and construction loans was 6.54 percentage
points greater than the comparable term Treasury yield.

The 6.89 WAC (or average interest rate) for Directly Enhanced leasehold
improvement loans was higher than the WAC for Directly Enhanced
acquisition and construction loans (exhibit 5-4). This is not
surprising, since leasehold improvement loans, as discussed earlier,
reflect a higher level of risk to the lender. The range of interest
rates for Directly Enhanced leasehold improvement loans was narrower
(from 4.65 percent to 8.76 percent) as compared to Directly Enhanced
acquisition and construction loans.

The WAS (or average spread between the interest rate and comparable term
Treasury yield) for Directly Enhanced leasehold improvement loans was
higher than for acquisition and construction loans: 3.23 percentage
points versus 2.40 percentage points. The higher WAS for leasehold
improvement loans, as compared to acquisition and construction loans,
also is expected, given their higher risk.

[]{#__RefHeading___Toc188879030 .anchor}Exhibit 5‑8: Weighted average
spread and weighted average coupon of Directly Enhanced acquisition and
construction and leasehold improvement loans supported by Grantees
between FY 2003 and FY 2005

![](media/image5.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** The weighted average coupon for Directly Enhanced
leasehold improvement loans supported by Grantees between FY 2003 and FY
2005 was 6.89 percent; the weighted average coupon for Directly Enhanced
acquisition and construction loans for the same period was 6.10 percent.

Source: Grantee Annual Performance Reports.

Commercial real estate loans typically are made for an amount that is no
more than 80 percent of a property's value. To compare this standard,
the research team calculated the weighted loan-to-value ratio (WLTV) for
Directly Enhanced acquisition and construction loans.[^13] The WLTV for
all of the Directly Enhanced acquisition and construction loans was 81
percent, ranging from a low of 21 percent to a high of 219 percent. On
average, Directly Enhanced acquisition and construction loans provided
funds that were 81 percent of the appraised value of the property that
was built or acquired, which is in line with typical commercial real
estate lending practices. But in some cases the Directly Enhanced loan
amount was more than twice the value of the property that the assisted
school either built or acquired. Such loans may result, according to
Grantees, from appraisals in areas in which there were very few
comparable sales that can be used to estimate the value of the property
either built or acquired by an assisted school. On the other end of the
scale, some Directly Enhanced acquisition and construction loan amounts
were as little as 20 percent of the value of the property.

### **How do rates and terms of Directly Enhanced loans compare with those without Program-funded loans?** {#how-do-rates-and-terms-of-directly-enhanced-loans-compare-with-those-without-program-funded-loans .Style-Heading-3-+-Not-Bold-Underline}

The interest rates for Commercial Mortgage Backed Securities (CMBS) is
the best available proxy for the interest rates for charter school loans
made without credit enhancements funded by the Program. According to
discussions with rating agencies, Grantee representatives, and
investment bankers interviewed for this study, most charter schools
assisted by the Program would not be rated as an investment-grade risk
with the criteria used by most bond rating agencies. At most, these
interviewees agreed, *some* (and by no means all) of the assisted
schools *may* have received the lowest investment-grade rating, which is
BBB minus. For the most part, the interviewees believe that a large
share of the assisted schools would be classified as below
investment-grade risk (BB plus or lower).

Between August 2003 and August 2004, the interest rates for BBB minus
CMBS bonds were between 1.60 percentage points and 2.20 percentage
points higher than comparable U.S. Treasury yields (McDonnell Investment
2004). Recall that the weighted average spread for all of the Directly
Enhanced acquisition and construction loans under the Program between FY
2003 and FY 2005 was 2.40 percentage points, with the spread ranging
from below 0 to a high of 6.54 percentage points. The relatively small
difference between the WAS for Directly Enhanced acquisition and
construction loans and spread between BBB minus CMBS and U.S. Treasury
yields suggests that the rates paid by assisted charter schools for
acquisition and construction loans were better than they would receive
without the Program.

## What is the relative efficiency of different models of service used by Grantees?

[]{.mark}

Grantees, for the purposes of this study, were categorized as using
either a Vertically Integrated or Fully Distributed model of service.
The Grantees using a Vertically Integrated model of service (LIIF,
NCBCI, RDF and Self-Help, collectively referred to as Vertically
Integrated Grantees) typically make loans directly to charter schools
with funds from investors. The Grantees using a Fully Distributed model
of service (America's Charter and CSDC are collectively referred to as
Fully Distributed Grantees) use their Program funds to credit enhance a
loan made by a lender or a bond purchased by an investor. LISC and
MassDevelopment use elements of both the Vertically Integrated and Fully
Distributed models of service, and are defined as Mixed Grantees.

The results detailed below suggest that the Fully Distributed Grantees
supported loans relatively quickly after receiving their grant, as they
often use the enhancement for loans that have already been approved by
lenders, subject to a credit enhancement. Vertically Integrated Grantees
take longer to make their loans after receiving their grant because they
had to establish the terms and conditions for loan pools that they
created from funds raised by investors. But, as discussed below,
Vertically Integrated Grantees supported loans to more risky charter
schools than Fully Distributed Grantees. The efficiency measures
presented in exhibit 5-5 and discussed below show higher lending volumes
and a greater number of schools served and transactions per grant dollar
for Fully Distributed Grantees compared to Vertically Integrated
Grantees. On the other hand, as shown in Exhibit 5-6, Fully Distributed
Grantees served smaller and more start-up schools, both of which are
more risky, than Vertically Integrated Grantees.[^14]

As a last note, these results are preliminary and were based on a modest
amount of transactions from a small number of Grantees. These data
cannot provide conclusive evidence that one approach is superior to
another. Rather, these data suggest that both approaches play a vital
role in facilitating capital to charter schools that would otherwise not
be able to secure financing from commercial lenders or through the bond
market.

### **What are the differences in lending volume and risk of schools assisted between different types of models of service?** {#what-are-the-differences-in-lending-volume-and-risk-of-schools-assisted-between-different-types-of-models-of-service .Style-Heading-3-+-Not-Bold-Underline}

The two Fully Distributed Grantees, between FY 2003 and FY 2005,
supported \$4.4 worth of Directly Enhanced loans for each dollar of
Program funds received (exhibit 5-5). This per-Program fund volume was
more than two times that for Vertically Integrated Grantees, which have
supported \$1.9 worth of Directly Enhanced loans for each dollar of
Program grant funds. In addition to higher levels of volume, the Fully
Distributed Grantees have supported more loans than they proposed. Fully
Distributed Grantees supported five more Directly Enhanced loans between
FY 2003 and FY 2005 than proposed, as compared to Vertically Integrated
Grantees, which supported 27 fewer Directly Enhanced loans than they
proposed during the same time period. Moreover, Fully Distributed
Grantees have assisted nearly two schools for every \$1 million worth of
grant funds they received, as compared to about one school per \$1
million of grant funds received by Vertically Integrated Grantees.

These differences likely reflect the time needed by Vertically
Integrated Grantees to establish loan pools after receiving their
grants. For example, one Vertically Integrated Grantee makes loans with
funds raised by a third party through a New Markets Tax Credit
Allocation. This Grantee indicated that, shortly after receiving its
grant in 2003, started negotiations with the third. These did not end
until late 2005. Now that the agreement is in place to use the New
Markets Tax Credit funds, this Grantee's loan volume should increase.
The same Grantee established another loan pool with investment from
foundations and commercial lenders. As with the New Market Tax Credit
pool, this Grantee spent a considerable amount of time working with the
pool's investors to develop guidelines and procedures that were
acceptable to all parties.

[]{#__RefHeading___Toc188879031 .anchor}Exhibit 5‑9: Efficiency measures
for Directly Enhanced loans supported by Grantees by model of service
between FY 2003 and FY 2005

  --------------------------------- --------------- -------------- ----------- -----------
  **Efficiency measure**            **Model of                                 **Overall
                                    service**                                  total**

                                    **Fully         **Vertically   **Mixed**   
                                    Distributed**   Integrated**               

  **Lending Volumes**                                                          

  Directly Enhanced loan volume     \$4.42          \$1.92         \$0.87      \$1.93
  between FY 2003 and FY 2005 for                                              
  every dollar of Program grant^a^                                             

  Reported amount of funds          \$6.52          \$2.67         \$1.27      \$2.80
  leveraged for every dollar of                                                
  Program grant                                                                

  Unpaid principal balance of       \$4.10          \$1.42         \$0.70      \$1.79
  Directly Enhanced loans as of                                                
  Sept. 30, 2005, for every dollar                                             
  of Program grant                                                             

  Difference between actual and     \$1.27 more     \$0.21 more    \$2.31 less \$0.14 less
  proposed Directly Enhanced        than proposed   than proposed  than        than
  lending volume for every dollar                                  proposed    proposed
  of Program grant^b^                                                          

  **Transactions and Assisted                                                  
  Schools**                                                                    

  Number of schools that received   1.90            1.03           0.30        0.97
  Directly Enhanced loans between                                              
  FY 2003 and FY 2005 per million                                              
  dollar of Program grant                                                      

  Number of students enrolled in    439.97          303.93         91.39       250.21
  schools that received Directly                                               
  Enhanced loans between FY 2003                                               
  and FY 2005 per million dollar of                                            
  Program grant                                                                

  Difference between actual and     5 more than     27 fewer than  42 fewer    64 fewer
  proposed number of                proposed        proposed       than        than
  transactions^c^                                                  proposed    proposed
  --------------------------------- --------------- -------------- ----------- -----------

**Exhibit Reads:** The total volume of Directly Enhanced loans supported
per Program grant dollar for Fully Distributed Grantees was \$4.42,
compared to \$1.92 for Vertically Integrated Grantees and \$0.87 for
Mixed Grantees.

Notes: a. If a lease guarantee was to secure improvement of a site, the
worth of the improvement was counted toward the origination volume as a
directly credit enhanced loan.

> b\. Difference between the Proposed and Actual Lending Volumes =
> \[Actual Lending Volume as of Sept. 2005\] -- \[Proposed Lending
> Volumes as of Sept. 2005\]. If there was no lending target to be met
> by Sept. 2005, proposed lending volume was prorated from the lending
> target closest to Sept. 2005. For example, if a Grantee proposed to
> support \$10 million in loans from Jan. to Dec. 2005, the proposed
> lending target used to compute the difference by Sept. 2005 would be
> \$7.5 million.
>
> c\. Difference between the Actual and Proposed Number of Assisted
> Schools = \[Actual Number of Assisted Schools as of Sept. 2005\] --
> \[Proposed Number of Assisted Schools as of Sept. 2005\]. If there was
> no target to be met by Sept. 2005, proposed number of was prorated
> from the target closest to September 2005. For example, if a Grantee
> proposed to assist 12 schools from Jan. to Dec. 2005, the proposed
> number of assisted schools used to compute the difference by Sept.
> 2005 would be 8.

Source: Grantee Annual Performance Reports.

Vertically Integrated Grantees, supported loans to more risky charter
schools as compared to Fully Distributed Grantees. The reason may be due
in part to the more rigorous underwriting standards used by commercial
lenders that made loans to charter schools that received credit
enhancements from Fully Distributed Grantees. Vertically Integrated
Grantees, in total, supported loans to more start-ups (which were more
risky than schools with an established operating history) than did Fully
Distributed Grantees (exhibit 5-6). Of the 38 schools assisted between
FY 2003 and FY 2005 by Grantees using a Fully Distributed model of
service, three (8 percent) were start-ups. In comparison, Grantees using
a Vertically Integrated model of service assisted nine start-up schools
during the same period, which was 21 percent of the 43 schools they
assisted between FY 2003 and FY 2005.

[]{#__RefHeading___Toc188879032 .anchor}Exhibit 5‑10: Assisted schools'
mean number of months in operation, number of start-up schools, number
of assisted schools, mean enrollment of schools assisted by Grantees
between FY 2003 and FY 2005

  ---------------------- ------------- -------------- ------------- -----------
  ** **                  **Fully       **Vertically   **Mixed model **Total**
                         Distributed   Integrated     of service**  
                         model of      model of                     
                         service**     service**                    

  Mean number of months  39            34             24            37
  that existing assisted                                            
  schools were in                                                   
  operation when they                                               
  received their                                                    
  Directly Enhanced loan                                            

  Number of start-up     3             9              4             16
  assisted schools                                                  

  Number of students     354           309            510           346
  enrolled in existing                                              
  schools at time the                                               
  schools received its                                              
  Directly Enhanced loan                                            

  Total number of        38            43             6             87
  schools assisted                                                  
  ---------------------- ------------- -------------- ------------- -----------

**Exhibit Reads:** Fully Distributed Grantees supported Directly
Enhanced loans to schools that were in operation for an average of 39
months, compared to 34 months for schools that received their Directly
Enhanced loans from Vertically Integrated Grantees and 24 months for
schools that received their Directly Enhanced loans from Mixed Grantees.

Notes: 1. Fifteen start-up schools received Directly Enhanced loans
between FY 2003 and FY 2005. One start-up school received loans from two
Grantees that operate different models of service.

> 2\. Eighty-four schools received Directly Enhanced loans between FY
> 2003 and FY 2005. Three schools received loans from two Grantees
> operating different model of service.

Source: Grantee Annual Performance Reports.

A loan's risk is directly related to its loan-to-value ratio: the
greater the loan amount is relative to the value of the collateral, the
greater the likelihood that the borrower will default on his/her loan.
Vertically Integrated Grantees supported acquisition and construction
loans with an average loan-to-value ratio of 97 percent, as compared to
an average 73 percent loan-to-value ratio for acquisition and
construction loans enhanced by Fully Distributed Grantees. The higher
average loan-to-value ratio for loans supported by Vertically Integrated
Grantees suggests that they serve more risky charter schools than Fully
Distributed Grantees do.

Leasehold improvement loans, which are more risky than acquisition
loans, account for a larger share of the Vertically Integrated Grantees'
lending volume as compared to Fully Distributed Grantees. Of the 35
Directly Enhanced loans supported by Vertically Integrated Grantees, 13
(37 percent) were for leasehold improvements. This was slightly more
than leasehold improvement loans' share (30 percent) of Fully
Distributed Grantees. The average loan amount for Directly Enhanced
leasehold improvement loans was greater for Fully Distributed Grantees
(\$752,000) than for Vertically Integrated Grantees (\$571,000).

Lenders often charge higher interest rates to more risky borrowers.
Given that Vertically Integrated Grantees make loans to more risky
charter schools than Fully Distributed Grantees, one expects that the
interest rates charged by Vertically Integrated Grantees would be higher
than the interest rates charged by Fully Distributed Grantees. The
results presented next are consistent with this expectation.

The weighted average spread (WAS) for Directly Enhanced acquisition and
construction loans supported by Vertically Integrated Grantees was 2.83
percent (exhibit 5-7). The WAS for these loans ranged from a minimum of
1.57 percentage points and a maximum of 5.26. The WAS for acquisition
and construction loans supported by Fully Distributed Grantees was 1.91
percentage points (exhibit 5-7), and ranged from a minimum of -1.43
percentage points and a maximum of 6.54 percentage points. The WAS for
Directly Enhanced acquisition and construction loans supported by Fully
Distributed Grantees was 0.92 percentage points lower than the same
types of loans supported by Vertically Integrated Grantees. This is
consistent with the finding that Vertically Integrated Grantees make
loans to more risky charter schools, and so charge interest rates with a
higher spread.

[]{#__RefHeading___Toc188879033 .anchor}Exhibit 5‑11: Weighted average
spread and coupon for Directly Enhanced acquisition and construction
loans supported by Grantees between FY 2003 and FY 2005 by Grantee model
of service

![](media/image6.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** The weighted average coupon for Directly Enhanced
acquisition and construction loans supported between FY 2003 and FY 2005
by Fully Distributed Grantees was 5.59 percent, compared to 6.82 percent
and 5.65 percent for the same type of Directly Enhanced loans over the
same period supported by Vertically Integrated and Mixed Grantees,
respectively.

Source: Grantee Annual Performance Reports.

Fully Distributed Grantees, on average, charged a lower spread over
comparable term Treasury yields (2.87 percentage points, with a minimum
of 1.14 percentage points and a maximum of 5.37 percentage points) for
their leasehold improvement loans as compared to Vertically Integrated
Grantees (3.68 percentage points, with a minimum of 2.07 percentage
points and a maximum of 4.70 percentage points).

[]{#__RefHeading___Toc188879034 .anchor}Exhibit 5‑12: Weighted average
spread and coupon for Directly Enhanced leasehold improvement loans
supported by Grantees between FY 2003 and FY 2005 by Grantee model of
service

![](media/image7.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** The weighted average coupon for Directly Enhanced
leasehold improvement loans supported by Fully Distributed Grantees
between FY 2003 and FY 2005 was 6.59 percent, compared to 7.27 percent
and 5.84 percent for the same type of Directly Enhanced loans supported
over the same period by Vertically Integrated and Mixed Grantees,
respectively.

Source: Grantee Annual Performance Reports.

The Grantees using a Fully Distributed model of service charge a
guarantee fee to charter schools for the credit enhancement provided for
loans made by a third party. Furthermore, the third-party lender often
charges an origination fee to assisted schools. The Grantees using a
Vertically Integrated model of service do not charge assisted schools a
guarantee fee, but they typically charge origination fees. Therefore,
when charter schools work with either type of Grantee, they may incur
other costs associated with the financing (e.g., origination fees,
guarantees, and attorney fees).

It is also possible that assisted schools that receive loans with a
credit enhancement from a Fully Distributed Grantee may pay more fees,
in total, than those receiving loans directly from Vertically Integrated
Grantees. These higher fees, however, do not mean that the total
financing costs (which include fees associated with a loan and a loan's
interest rate) for schools that receive loans from Fully Distributed
Grantees are greater than the total financing costs for loans received
from Vertically Integrated Grantees. The credit enhancements provided by
Fully Distributed Grantees may result in lower interest rates than loans
made by Vertically Integrated Grantees, and so result in lower total
financing costs.

Because assisted schools report data regarding only fees incurred by
assisted schools that are paid to Grantees (and not fees paid to
third-party lenders), the data for these costs were not available for
analysis in this report. Therefore, this report does not include an
analysis of fees or total finance costs paid by assisted schools.

## Is the Program serving communities with the greatest need for public school choice? 

The research team evaluated whether Grantees used selection criteria to
choose assisted schools that include the following three factors ED uses
to evaluate Program applications:

-   The extent to which the applicant selects to serve geographic areas
    in which a large proportion or number of public schools have been
    identified for improvement, corrective action, or restructuring
    under Title I of the *Elementary and Secondary Education Act of
    1965*, as amended by the *No Child Left Behind Act*;

-   The extent to which the applicant selects to serve geographic areas
    in which a large proportion of students perform below proficient on
    state academic assessments; and

-   The extent to which the applicant selects to serve communities with
    large proportions of students from low-income families.

To determine whether Grantees selected service areas in need of school
choice, the research team examined the types of criteria Grantees used
to select charter schools, and compared these criteria with the same
factors that ED uses to evaluate Program applications. To determine
whether the Grantees made decisions to assist schools that were
consistent with their selection criteria, the research team examined the
demographic characteristics of students enrolled in the 84 assisted
schools and compared these characteristics to students enrolled in
charter schools and the overall U.S. K--12 student population. The
analysis also includes a comparison of the economic and demographic
characteristics of the Census tracts in which assisted charter schools
were located relative to the characteristics of the county in which the
assisted school was located.

As detailed below, all but one of the Grantees selects to serve areas
that require school choice. In addition, Directly Enhanced loans, on
average, were made to charter schools in which lower income and minority
students comprise a larger share of enrollment as compared to all
charter schools and all U.S. public schools. In addition, the assisted
charter schools were located in Census tracts with lower median
household incomes and a larger share of minority residents than the
counties in which the schools were located.

### Proposed Grantee selection criteria for choosing schools to assist 

Seven of the eight Grantees use selection criteria that include any of
the three following factors: (1) geographic areas in which public
schools need improvement, corrective action, or restructuring; (2)
geographic areas in which students perform below proficient on state
assessments; or (3) communities with a large proportion of students from
low-income families (exhibit 5-9).

Four Grantees are using selection criteria that include all three
factors. Five Grantees are using selection criteria that include
geographic areas in which schools need improvement, corrective action,
or restructuring. Six Grantees are using selection criteria that include
geographic areas in which students are performing below a proficient
level. Six Grantees are using selection criteria based on the income
level of an assisted school's surrounding area.

These findings suggest that Grantees were aware of the Program objective
to serve communities in need of school choice, and have incorporated
this objective into their assisted school selection criteria. As
detailed below, the characteristics of students enrolled in schools
assisted by Grantees between FY 2003 and FY 2005 and the income of
Census tracts in which these schools were located indicate that Grantees
were using these selection criteria when making Directly Enhanced loans.

[]{#__RefHeading___Toc188879035 .anchor}Exhibit 5‑13: Summary of Grantee
selection criteria for Directly Enhanced loans

+----------+-------------+--------------+------------+--------------+
| **G      | *           | **Geographic | **C        | **Other      |
| rantee** | *Geographic | areas in     | ommunities | criteria**   |
|          | areas in    | which        | with a     |              |
|          | which       | students     | large      |              |
|          | public      | perform      | proportion |              |
|          | schools     | below        | of         |              |
|          | need        | proficient   | students   |              |
|          | i           | level on     | from       |              |
|          | mprovement, | state        | low-income |              |
|          | corrective  | a            | families** |              |
|          | action, or  | ssessments** |            |              |
|          | rest        |              |            |              |
|          | ructuring** |              |            |              |
+==========+=============+==============+============+==============+
| A        |             |              |            | Match        |
| merica's |             |              |            | program      |
| Charter  |             |              |            | priorities   |
|          |             |              |            | with the     |
|          |             |              |            | overall      |
|          |             |              |            | national     |
|          |             |              |            | cha          |
|          |             |              |            | racteristics |
|          |             |              |            | of charter   |
|          |             |              |            | schools.     |
+----------+-------------+--------------+------------+--------------+
| CSDC^a^  | Target      | Target       | Target     |              |
|          | schools in  | schools in a | schools in |              |
|          | a district  | district     | a district |              |
|          | where more  | where more   | with 50    |              |
|          | than 25     | than 50      | percent or |              |
|          | percent of  | percent of   | more of    |              |
|          | public      | students do  | the        |              |
|          | schools     | not meet the | student    |              |
|          | have been   | standard of  | population |              |
|          | identified  | proficiency  | eligible   |              |
|          | for         | on the state | for free   |              |
|          | i           | assessment.  | or         |              |
|          | mprovement, |              | red        |              |
|          | based on    |              | uced-price |              |
|          | their       |              | lunch.     |              |
|          | inability   |              |            |              |
|          | to meet     |              | Target     |              |
|          | adequate    |              | schools    |              |
|          | yearly      |              | within     |              |
|          | progress.   |              | c          |              |
|          |             |              | ommunities |              |
|          |             |              | identified |              |
|          |             |              | as low     |              |
|          |             |              | income     |              |
|          |             |              | under the  |              |
|          |             |              | New Market |              |
|          |             |              | Tax Credit |              |
|          |             |              | program.   |              |
+----------+-------------+--------------+------------+--------------+
| LIIF     | Open to all | Open to all  | Emphasis   | Target       |
|          | charter     | charter      | on schools | schools in   |
|          | schools in  | schools in   | in         | one state.   |
|          | overcrowded | overcrowded  | low-income |              |
|          | and         | and          | co         |              |
|          | low         | lo           | mmunities. |              |
|          | -performing | w-performing |            |              |
|          | school      | school       |            |              |
|          | districts.  | districts.   |            |              |
+----------+-------------+--------------+------------+--------------+

**Exhibit 5‑9: Summary of Grantee selection criteria for Directly
Enhanced loans (cont.)**

+----------+-------------+--------------+------------+--------------+
| **G      | *           | **Geographic | **C        | **Other      |
| rantee** | *Geographic | areas in     | ommunities | criteria**   |
|          | areas in    | which        | with a     |              |
|          | which       | students     | large      |              |
|          | public      | perform      | proportion |              |
|          | schools     | below        | of         |              |
|          | need        | proficient   | students   |              |
|          | i           | level on     | from       |              |
|          | mprovement, | state        | low-income |              |
|          | corrective  | a            | families** |              |
|          | action, or  | ssessments** |            |              |
|          | rest        |              |            |              |
|          | ructuring** |              |            |              |
+==========+=============+==============+============+==============+
| LISC     |             | > Direct 90  | Direct 90  |              |
|          |             | > percent of | percent of |              |
|          |             | > the        | the        |              |
|          |             | > assistance | assistance |              |
|          |             | > supported  | supported  |              |
|          |             | > by the     | by the     |              |
|          |             | > grant to   | grant to   |              |
|          |             | > schools in | schools in |              |
|          |             | > geographic | geographic |              |
|          |             | > regions    | regions    |              |
|          |             | > with a     | with a     |              |
|          |             | > high       | high       |              |
|          |             | > proportion | proportion |              |
|          |             | > of         | of         |              |
|          |             | > students   | students   |              |
|          |             | > offered,   | offered,   |              |
|          |             | > or         | or         |              |
|          |             | > projected  | projected  |              |
|          |             | > to be      | to be      |              |
|          |             | > offered,   | offered,   |              |
|          |             | > choice     | choice     |              |
|          |             | > under the  | under the  |              |
|          |             | > *No Child  | *No Child  |              |
|          |             | > Left       | Left       |              |
|          |             | > Behind     | Behind     |              |
|          |             | > Act*       | Act*       |              |
|          |             | > (i.e.,     | (i.e.,     |              |
|          |             | > students   | students   |              |
|          |             | > residing   | residing   |              |
|          |             | > in areas   | in areas   |              |
|          |             | > in which a | in which a |              |
|          |             | > large      | large      |              |
|          |             | > proportion | proportion |              |
|          |             | > of         | of         |              |
|          |             | > students   | students   |              |
|          |             | > perform    | perform    |              |
|          |             | > poorly on  | poorly on  |              |
|          |             | > state      | state      |              |
|          |             | > academic   | academic   |              |
|          |             | >            | a          |              |
|          |             |  assessments | ssessments |              |
|          |             | > or in      | or in      |              |
|          |             | > which      | which      |              |
|          |             | > there are  | there are  |              |
|          |             | > large      | large      |              |
|          |             | >            | p          |              |
|          |             |  proportions | roportions |              |
|          |             | > of         | of         |              |
|          |             | > low-income | low-income |              |
|          |             | > students). | students). |              |
+----------+-------------+--------------+------------+--------------+

**Exhibit 5‑9: Summary of Grantee selection criteria for Directly
Enhanced loans (cont.)**

+----------+-------------+--------------+------------+--------------+
| **G      | *           | **Geographic | **C        | **Other      |
| rantee** | *Geographic | areas in     | ommunities | criteria**   |
|          | areas in    | which        | with a     |              |
|          | which       | students     | large      |              |
|          | public      | perform      | proportion |              |
|          | schools     | below        | of         |              |
|          | need        | proficient   | students   |              |
|          | i           | level on     | from       |              |
|          | mprovement, | state        | low-income |              |
|          | corrective  | a            | families** |              |
|          | action, or  | ssessments** |            |              |
|          | rest        |              |            |              |
|          | ructuring** |              |            |              |
+==========+=============+==============+============+==============+
| MassDev  | > Use a     | > Use a      | Use a      | Target       |
| elopment | > scoring   | > scoring    | scoring    | schools in   |
|          | > method    | > method     | method     | one state.   |
|          | > that      | > that gives | that gives |              |
|          | > gives     | > weights to | weights to | Use the      |
|          | > weights   | > the        | the        | majority of  |
|          | > to the    | > location   | following: | the funds to |
|          | > location  | > of schools |            | assist newly |
|          | > of school | > in areas   | -          | established  |
|          | > in        | > in which a |   Location | schools and  |
|          | > districts | > large      |     in     | schools that |
|          | > in which  | > proportion |     c      | have been in |
|          | > a public  | > of         | ommunities | existence    |
|          | > school    | > students   |     with   | for less     |
|          | > has been  | > perform    |     large  | than five    |
|          | >           | > poorly on  |     p      | years.       |
|          |  identified | > state      | roportions |              |
|          | > for       | > academic   |     of     | > Use a      |
|          | > i         | >            |            | > scoring    |
|          | mprovement, | assessments. | low-income | > method     |
|          | >           |              |            | > that gives |
|          |  corrective |              |  students; | > weights to |
|          | > action,   |              |     and    | > the        |
|          | > or        |              |            | > following: |
|          | > re        |              | -          |              |
|          | structuring |              |   Location | -   Smaller  |
|          | > under the |              |     of     |     size of  |
|          | > *No Child |              |            |     student  |
|          | > Left      |              |    charter |              |
|          | > Behind    |              |     school |  population; |
|          | > Act*.     |              |     in an  |              |
|          |             |              |     ec     | -   Total    |
|          |             |              | onomically |     school   |
|          |             |              |            |              |
|          |             |              | distressed |    revenues; |
|          |             |              |     area.  |     and      |
|          |             |              |            |              |
|          |             |              |            | -   The      |
|          |             |              |            |              |
|          |             |              |            |   commitment |
|          |             |              |            |     of other |
|          |             |              |            |     public   |
|          |             |              |            |              |
|          |             |              |            |    resources |
|          |             |              |            |     to the   |
|          |             |              |            |     project. |
+----------+-------------+--------------+------------+--------------+

**Exhibit 5‑9: Summary of Grantee selection criteria for Directly
Enhanced loans (cont.)**

+----------+-------------+-------------+-----------------+----------+
| **G      | *           | *           | **Communities   | **Other  |
| rantee** | *Geographic | *Geographic | with a large    | cr       |
|          | areas in    | areas in    | proportion of   | iteria** |
|          | which       | which       | students from   |          |
|          | public      | students    | low-income      |          |
|          | schools     | perform     | families**      |          |
|          | need        | below       |                 |          |
|          | i           | proficient  |                 |          |
|          | mprovement, | level on    |                 |          |
|          | corrective  | state       |                 |          |
|          | action, or  | as          |                 |          |
|          | rest        | sessments** |                 |          |
|          | ructuring** |             |                 |          |
+==========+=============+=============+=================+==========+
| NCBCI    | > Program   | > Program   | Program 1:      | Program  |
|          | > 2:        | > 2:        |                 | 1:       |
|          | >           | >           | At least 80     |          |
|          | > Target at | > Target at | percent of the  | Target   |
|          | > least 70  | > least 70  | schools that    | the      |
|          | > percent   | > percent   | the Grantee     | Mid-     |
|          | > of its    | > of its    | will finance    | Atlantic |
|          | > funds to  | > funds to  | have a majority | states.  |
|          | > poorly    | > poorly    | of students who |          |
|          | >           | >           | qualify for     | Program  |
|          |  performing |  performing | free or         | 2:       |
|          | > school    | > school    | reduced-price   |          |
|          | >           | >           | lunches.        | Serve    |
|          |  districts. |  districts. |                 | schools  |
|          |             |             | At least 75     | in       |
|          |             |             | percent of the  | Florida, |
|          |             |             | schools in the  | Georgia, |
|          |             |             | Grantee's       | Mi       |
|          |             |             | portfolio will  | nnesota, |
|          |             |             | be in           | and      |
|          |             |             | low-income      | Wi       |
|          |             |             | areas.          | sconsin. |
|          |             |             |                 |          |
|          |             |             | Program 2:      |          |
|          |             |             |                 |          |
|          |             |             | At least 80     |          |
|          |             |             | percent of the  |          |
|          |             |             | schools that    |          |
|          |             |             | the funds       |          |
|          |             |             | finance will    |          |
|          |             |             | have a majority |          |
|          |             |             | of students who |          |
|          |             |             | qualify for     |          |
|          |             |             | free or         |          |
|          |             |             | reduced-price   |          |
|          |             |             | lunches.        |          |
+----------+-------------+-------------+-----------------+----------+
| RDF      | > Target    |             | Target          |          |
|          | > ne        |             | communities     |          |
|          | ighborhoods |             | with low or     |          |
|          | > where the |             | low-to-median   |          |
|          | > closest   |             | incomes, and    |          |
|          | > regular   |             | students from   |          |
|          | > public    |             | minority        |          |
|          | > school is |             | groups.         |          |
|          | >           |             |                 |          |
|          |  identified |             |                 |          |
|          | > as being  |             |                 |          |
|          | > under     |             |                 |          |
|          | -performing |             |                 |          |
|          | > by the    |             |                 |          |
|          | > state or  |             |                 |          |
|          | > as being  |             |                 |          |
|          | > subject   |             |                 |          |
|          | > to        |             |                 |          |
|          | > i         |             |                 |          |
|          | mprovement, |             |                 |          |
|          | >           |             |                 |          |
|          |  corrective |             |                 |          |
|          | > action,   |             |                 |          |
|          | > or        |             |                 |          |
|          | > re        |             |                 |          |
|          | structuring |             |                 |          |
|          | > under the |             |                 |          |
|          | > *No Child |             |                 |          |
|          | > Left      |             |                 |          |
|          | > Behind    |             |                 |          |
|          | > Act*.     |             |                 |          |
+----------+-------------+-------------+-----------------+----------+

**Exhibit 5‑9: Summary of Grantee selection criteria for Directly
Enhanced loans (cont.)**

+----------+-----------+------------+------------+------------------+
| **G      | **G       | **         | **C        | **Other          |
| rantee** | eographic | Geographic | ommunities | criteria**       |
|          | areas in  | areas in   | with a     |                  |
|          | which     | which      | large      |                  |
|          | public    | students   | proportion |                  |
|          | schools   | perform    | of         |                  |
|          | need      | below      | students   |                  |
|          | imp       | proficient | from       |                  |
|          | rovement, | level on   | low-income |                  |
|          | c         | state      | families** |                  |
|          | orrective | ass        |            |                  |
|          | action,   | essments** |            |                  |
|          | or        |            |            |                  |
|          | restru    |            |            |                  |
|          | cturing** |            |            |                  |
+==========+===========+============+============+==================+
| Self     |           | > Schools  |            | Service          |
| Help^b^  |           | > serve    |            | high-need        |
|          |           | > u        |            | communities by   |
|          |           | nderserved |            | focusing lending |
|          |           | > const    |            | activity         |
|          |           | ituencies, |            | primarily, but   |
|          |           | > such as  |            | not exclusively, |
|          |           | > students |            | in six southern  |
|          |           | > with a   |            | states (North    |
|          |           | > history  |            | Carolina,        |
|          |           | > of low   |            | Florida,         |
|          |           | > academic |            | Georgia,         |
|          |           | > pe       |            | Tennessee,       |
|          |           | rformance. |            | Texas, and South |
|          |           |            |            | Carolina).       |
|          |           |            |            |                  |
|          |           |            |            | Schools serve    |
|          |           |            |            | underserved      |
|          |           |            |            | constituencies,  |
|          |           |            |            | such as          |
|          |           |            |            | communities of   |
|          |           |            |            | color, rural or  |
|          |           |            |            | inner city       |
|          |           |            |            | communities.     |
|          |           |            |            |                  |
|          |           |            |            | Schools cannot   |
|          |           |            |            | afford a         |
|          |           |            |            | conventional     |
|          |           |            |            | down payment or  |
|          |           |            |            | lack substantial |
|          |           |            |            | financial        |
|          |           |            |            | backing.         |
|          |           |            |            |                  |
|          |           |            |            | The pledged      |
|          |           |            |            | collateral is    |
|          |           |            |            | weak or the      |
|          |           |            |            | Charter School   |
|          |           |            |            | is leasing its   |
|          |           |            |            | facility.        |
|          |           |            |            |                  |
|          |           |            |            | School is a      |
|          |           |            |            | start-up or is   |
|          |           |            |            | too young to     |
|          |           |            |            | have been        |
|          |           |            |            | through a        |
|          |           |            |            | charter renewal. |
+----------+-----------+------------+------------+------------------+

Notes: a. 50 percent of assisted schools must meet one of the listed
criteria.

b\. Assisted schools must be in one of the six states and meet at least
one of the remaining criteria.

Sources: Grantee Annual Performance Reports and Grantee applications.

### **Demographic characteristics of assisted schools** {#demographic-characteristics-of-assisted-schools .Style-Heading-3-+-Not-Bold-Underline}

The assisted schools were in 20 states and Washington, D.C. (exhibit
5-10). Arizona had the most assisted schools, with 11, followed by
California and Washington, D.C., which both had 10 schools. North
Carolina had nine assisted schools and Massachusetts had eight assisted
schools.

[]{.mark}

[]{#__RefHeading___Toc188879036 .anchor}Exhibit 5‑14: Number of assisted
schools, enrollment, and percent of students\
eligible for free and reduced-price lunches by state

  --------------- ------------- ---------------- -----------------------------
                  **Number of   **Enrollment**   **Percent of students
                  assisted                       eligible for free and
                  schools**                      reduced-price lunch**

  Arizona         11            2,889            31.7%

  California      10            3,615            58.4%

  Washington,     10            2,952            77.3%
  D.C.                                           

  North Carolina  9             2,859            68.1%

  Massachusetts   8             1,737            35.2%

  Indiana         6             1,728            44.0%

  New York        6             1,107            82.9%

  Minnesota       4             471              62.4%

  Colorado        3             940              43.7%

  Pennsylvania    3             1,834            83.0%

  Florida         2             233              32.2%

  Texas           2             699              80.1%

  New Jersey      2             576              73.4%

  Arkansas        1             410              16.3%

  Idaho           1             Not reported     N/A

  Michigan        1             150              35.3%

  Missouri        1             336              36.6%

  New Mexico      1             92               0.0%^†^

  Nevada          1             189              91.0%

  Tennessee       1             270              76.7%

  Oregon          1             75               86.7%

  Total           84            23,162           58.9%
  --------------- ------------- ---------------- -----------------------------

**Exhibit Reads:** Arizona had the largest number of schools (11)
assisted by the Grantees between FY 2003 and FY 2005.

^†^There is only one assisted school in New Mexico. The Grantee of this
assisted school reported that no students in this school were eligible
for free and reduced-price lunches.

Note: States in this exhibit are presented in the order of the number of
assisted schools.

Source: Grantee Annual Performance Reports geocoded by the authors.

These five states had nearly 60 percent of all of the schools assisted
by the Program and over 60 percent of all students enrolled in assisted
schools. Over half of the students in assisted schools were eligible for
free and reduced-price lunch.

The 23,162 students enrolled in the 84 charter schools assisted between
FY 2003 and FY 2005 were more likely to be from lower income and
minority families than students enrolled in all charter schools and
students enrolled in all public schools. Fifty-nine percent of students
enrolled in assisted charter schools were eligible for free or
reduced-price lunches, compared to 39 percent of all U.S. students in
public school and 44 percent of all charter school students.

Students enrolled in assisted schools are more likely to be minorities
than those in all charter schools and all public schools (exhibit 5-11).
African-American students account for 45 percent of students in the
assisted charter schools compared to 17 percent in U.S. public schools
31 percent in all charter schools. Hispanic students comprise 29 percent
of students in assisted charter schools, compared to 22 percent in all
charter schools and 19 percent in all U.S. public schools.

[]{#__RefHeading___Toc188879037 .anchor}Exhibit 5‑15: Racial and ethnic
composition of students enrolled in schools assisted under the Program
between FY 2003 and FY 2005, all charter schools, and all U.S. public
schools

![](media/image8.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** The proportion of white students in schools assisted
by Grantees between FY 2003 and FY 2005 was 24 percent; the proportion
of such students in all charter schools was 42 percent and in all public
schools was 58 percent.

Sources: 1. Information related to assisted schools: Grantee Annual
Performance Reports.

> 2\. Information related to all charter and public schools in the
> United States: Common Core of Data (CCD), "Public Elementary/Secondary
> School Universe Survey," 2004--05 (Preliminary) at
> http://nces.ed.gov/ccd/bat.

### **Social and economic characteristics of counties containing assisted schools** {#social-and-economic-characteristics-of-counties-containing-assisted-schools .Style-Heading-3-+-Not-Bold-Underline}

Using address information, each assisted school was geocoded to a Census
tract and county. The Census tracts, in which assisted schools were
located, on average, had a lower socioeconomic status than the county in
which the schools were located. As of 2000, the average median household
income for tracts that contain assisted schools was \$36,000, or 83
percent of the average \$43,000 median household income of all assisted
schools' counties. The variation of the median household income of
Census tracts for assisted schools is illustrated in the maps presented
in exhibit 5-12 through exhibit 5-15. These exhibits map the location of
all schools assisted by Grantees in five counties---Los Angeles (which
contains the city of Los Angeles), Hennepin County (which contains
Minneapolis), Ramsey County (which contains St. Paul), Philadelphia
(which is a county equivalent and contains the city of Philadelphia) and
Washington, D.C. (the county equivalent that contains the city). These
counties had the largest number of assisted schools (24 of 84 schools)
among the 47 counties that contain a school assisted by a Grantee
between FY 2003 and FY 2005. The maps also show the location of all
charter schools and public schools in the county. In addition to the
locations of the three types of schools, the maps show the median
household income of all the Census tracts in a county as of the 2000
Census.

Assisted schools in Los Angeles County were mostly in the central
portion of the county, which contains the lowest income Census tracts
(exhibit 5-12). Charter schools in Hennepin County (which contains
Minneapolis) and Ramsey County (which contains St. Paul) were generally
in Census tracts with median household incomes within the lowest
quintile in the area (exhibit 5-13). Charter schools in Philadelphia
were largely in the southern portion of the city, which contains Census
tracts generally with a median household income within the middle
quintile (exhibit 5-14). The assisted charter schools were also located
in the northeastern and central portions of the city (where the median
household incomes were similar to southern Philadelphia), in which there
were no other charter schools. The assisted schools within Washington,
D.C., were in areas with a range of incomes, from the southeastern part
of the city, which has Census tracts in the lowest income quintile, to
areas in the northwestern portion, which has higher income levels.

[]{#__RefHeading___Toc188879038 .anchor}Exhibit 5‑16: The median
household income, as of 2000, for Los Angeles County Census tracts, the
location of schools assisted by Grantees between FY 2003 and FY 2005,
all charter schools, and all public schools

![](media/image9.jpeg){width="5.728472222222222in" height="7.425in"}

**Exhibit Reads:** Schools in Los Angeles County assisted by Grantees
between FY 2003 and FY 2005 were in Census tracts that had a median
household income, as of the 2000 Census, in the lowest quintile.

Sources: 1. Information related to assisted schools: Grantee Annual
Performance Reports.

> 2\. Information related to all charter and public schools in United
> States: Common Core of Data (CCD), "Public Elementary/Secondary School
> Universe Survey," 2004--05 (Preliminary) at
> <http://nces.ed.gov/ccd/bat>.

[]{#__RefHeading___Toc188879040 .anchor}Exhibit 5‑17: The median
household income, as of 2000, for Hennepin County and Ramsey County
Census tracts, the location of schools assisted by Grantees between FY
2003 and FY 2005, all charter schools, and all public schools

![](media/image10.jpeg){width="5.626388888888889in"
height="7.292361111111111in"}

**Exhibit Reads:** Schools in Hennepin (Minneapolis) and Ramsey (St.
Paul) counties assisted by Grantees between FY 2003 and FY 2005 were in
Census tracts that had a median household income, as of the 2000 Census,
in the lowest quintile.

Sources: 1. Information related to assisted schools: Grantee Annual
Performance Reports.

> 2\. Information related to all charter and public schools in the
> United States: Common Core of Data (CCD), "Public Elementary/Secondary
> School Universe Survey," 2004--05 (Preliminary) at
> <http://nces.ed.gov/ccd/bat>.

[]{#__RefHeading___Toc188879041 .anchor}Exhibit 5‑18: The median
household income, as of 2000, for Philadelphia County Census tracts, the
location of schools assisted by Grantees between FY 2003 and FY 2005,
all charter schools, and all public schools

![](media/image11.jpeg){width="5.7375in" height="7.425in"}

**Exhibit Reads:** Schools in Philadelphia County assisted by Grantees
between FY 2003 and FY 2005 were in Census tracts that had a median
household income, as of the 2000 Census, in the lowest quintile.

Sources: 1. Information related to assisted schools: Grantee Annual
Performance Reports.

> 2\. Information related to all charter and public schools in the
> United States: Common Core of Data (CCD), "Public Elementary/Secondary
> School Universe Survey," 2004--05 (Preliminary) at
> <http://nces.ed.gov/ccd/bat>.

[]{#__RefHeading___Toc188879042 .anchor}Exhibit 5‑19: The median
household income, as of 2000, for Washington, D.C., Census tracts, the
location of schools assisted by Grantees between FY 2003 and FY 2005,
all charter schools, and all public schools

![](media/image12.jpeg){width="6.489583333333333in"
height="5.014583333333333in"}

**Exhibit Reads:** Schools in Washington, D.C. assisted by Grantees
between FY 2003 and FY 2005 were in Census tracts that had a median
household income, as of the 2000 Census, in the lowest quintile.

Sources: 1. Information related to assisted schools: Grantee Annual
Performance Reports.

> 2\. Information related to all charter and public schools in the
> United States: Common Core of Data (CCD), "Public Elementary/Secondary
> School Universe Survey," 2004--05 (Preliminary) at
> <http://nces.ed.gov/ccd/bat>.

Consistent with lower household incomes, assisted schools were located
in Census tracts with, on average, higher poverty rates than the
counties in which they were located (exhibit 5-16). Overall, the average
poverty rate for tracts in which assisted schools were located was 20.6
percent as compared to 13.8 percent for the counties in which assisted
schools were located. Also consistent with lower incomes, the proportion
of residents on public assistance in tracts with assisted schools (6.7
percent) was greater than the overall proportion of counties in which
assisted schools were located (4.2 percent).

Assisted schools were located in tracts in which the proportion of
residents younger than 18 was about the same as the counties in which
they were located, but where the proportion of minority residents was
greater. White, non-Hispanic account for about one-half of residents in
tracts that contain assisted schools, compared with slightly more than
two-thirds of residents in counties that contain assisted schools
(exhibit 5-16).

[]{#__RefHeading___Toc188879043 .anchor}Exhibit 5‑20: **Selected
characteristics of Census tracts and counties, as of the 2000 U.S.
Census, with schools assisted by Grantees between FY 2003 and FY 2005**

![](media/image13.wmf){width="6.499305555555556in"
height="4.433333333333334in"}

**Exhibit Reads:** The average poverty rate for Census tracts in which
assisted schools were located was 20.6 percent. The average poverty rate
for counties in which assisted schools were located was 13.8 percent.

Note: The data used to prepare the information in this exhibit are
presented in Appendix D.

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

2\. Characteristics of Census tracts and counties in which assisted
schools were located: U.S. Census 2000

### **Use of loan funds by assisted schools** {#use-of-loan-funds-by-assisted-schools .Style-Heading-3-+-Not-Bold-Underline}

The following discussion provides profiles of the eight assisted schools
interviewed for this study. These profiles offer more details about the
schools assisted by the Program, and how these schools use loans made
possible by the Program to improve their facilities. The profiles
include information provided by school representatives during interviews
with the research team and so, to retain confidentiality, the school
names are not included.

Each profile includes information about the school's enrollment,
demographic characteristics of the school's county, and the level of
educational need in the school's county, as defined by the Educational
Needs Index.[^15] The Educational Needs Index, which uses county-level
Census data to classify that area's level of educational need, is a
county-level study of educational, economic, and population pressures
that influence educational policy and planning at local, regional, and
state levels.

The experiences of the eight charter schools illustrate how the Program
assists charter schools in overcoming common facilities-related
challenges. In nearly every case the assisted charter school did not
have space that could accommodate enrollment growth or allow the school
to deliver a complete range of educational services. Because the
assisted schools did not have a long operating history (none of the
eight schools were in operation for more than four years before
receiving its loan), or were start-ups, they could not qualify for a
loan from a commercial lender.

In some cases the assisted schools received their loan directly from a
Grantee. Other schools used Program-funded enhancements so that they
could be approved for a commercial loan or sell a bond. In all eight
cases the credit enhancement allowed the Grantee to make financing
possible for the assisted school.

+------------------------------------+---------------------------------+
| **Assisted School #1**             |                                 |
+------------------------------------+---------------------------------+
| ***Assisted by:***                 | NCBCI                           |
+------------------------------------+---------------------------------+
| ***School characteristics when the |                                 |
| loan was closed (FY 2003):***      |                                 |
+------------------------------------+---------------------------------+
| Years in operation:                | 5                               |
+------------------------------------+---------------------------------+
| Enrollment:                        | 192                             |
+------------------------------------+---------------------------------+
| Grades served:                     | Grades 5 to 8                   |
+------------------------------------+---------------------------------+
| Student racial composition:        | 0% White                        |
|                                    |                                 |
|                                    | 52% African-American            |
|                                    |                                 |
|                                    | 0% Asian                        |
|                                    |                                 |
|                                    | 0% American Indian              |
|                                    |                                 |
|                                    | 48% Hispanic                    |
+------------------------------------+---------------------------------+
| Percent of students eligible for   | 90%                             |
| free or reduced-price lunches:     |                                 |
+------------------------------------+---------------------------------+
| Percent of students in special     | 5%                              |
| education:                         |                                 |
+------------------------------------+---------------------------------+
| Percent of students with limited   | 0%                              |
| English proficiency:               |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| ***County characteristics (in      |                                 |
| 2000):***                          |                                 |
+------------------------------------+---------------------------------+
| County:                            | Bronx, N.Y.                     |
+------------------------------------+---------------------------------+
| Educational Needs Index:           | Most critical                   |
+------------------------------------+---------------------------------+
| Median household income:           | \$29,364                        |
+------------------------------------+---------------------------------+
| Percent of residents in poverty:   | 31%                             |
+------------------------------------+---------------------------------+
| Percent of households receiving    | 15%                             |
| public assistance:                 |                                 |
+------------------------------------+---------------------------------+
| Racial/ethnic composition:         | 30% White                       |
|                                    |                                 |
|                                    | 36% African-American            |
|                                    |                                 |
|                                    | 1% American Indian              |
|                                    |                                 |
|                                    | 34% other race                  |
+------------------------------------+---------------------------------+
| Percent of residents Hispanic:     | 48%                             |
+------------------------------------+---------------------------------+
| Percent of population 18 or        | 31%                             |
| younger:                           |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| Use of Directly Enhanced loan      |                                 |
| proceeds:                          |                                 |
|                                    |                                 |
| During the first four years, the   |                                 |
| school operated out of a space     |                                 |
| that it rented from a Catholic     |                                 |
| church. The church space was       |                                 |
| sufficient for the school's        |                                 |
| enrollment of 100 students at the  |                                 |
| time, but did not allow for any    |                                 |
| enrollment growth. The school      |                                 |
| leased a parcel of land from the   |                                 |
| City of New York and completed     |                                 |
| plans for a new campus to          |                                 |
| accommodate more students than     |                                 |
| could be served in its rented      |                                 |
| space. The school developed plans  |                                 |
| for an \$18 million,               |                                 |
| 40,000-square-foot facility.       |                                 |
| Because it was unable to raise all |                                 |
| of the funds required to build the |                                 |
| facility, the school developed the |                                 |
| property in two phases. The school |                                 |
| used its \$4 million Directly      |                                 |
| Enhanced loan to complete the      |                                 |
| first phase. The school, based on  |                                 |
| its successful track record, was   |                                 |
| able to raise \$12 million in      |                                 |
| contributions to support the       |                                 |
| second phase of construction. The  |                                 |
| campus is now complete and will    |                                 |
| eventually accommodate 700--800    |                                 |
| students in grades 5--12.          |                                 |
+------------------------------------+---------------------------------+

+------------------------------------+---------------------------------+
| **Assisted School #2**             |                                 |
+------------------------------------+---------------------------------+
| ***Assisted by:***                 | LISC                            |
+------------------------------------+---------------------------------+
| ***School characteristics when the |                                 |
| loan was closed (FY 2003):***      |                                 |
+------------------------------------+---------------------------------+
| Years in operation:                | Start-up                        |
+------------------------------------+---------------------------------+
| Enrollment:                        | Will serve 400 students at full |
|                                    | enrollment                      |
+------------------------------------+---------------------------------+
| Grades served:                     | Will serve grades 6--8 at full  |
|                                    | enrollment                      |
+------------------------------------+---------------------------------+
| Student racial/ethnic composition: | Not available                   |
+------------------------------------+---------------------------------+
| Percent of students eligible for   | Not available                   |
| free or reduced-price lunches:     |                                 |
+------------------------------------+---------------------------------+
| Percent of students in special     | Not available                   |
| education:                         |                                 |
+------------------------------------+---------------------------------+
| Percent of students with limited   | Not available                   |
| English proficiency:               |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| ***County characteristics (in      |                                 |
| 2000):***                          |                                 |
+------------------------------------+---------------------------------+
| County:                            | Los Angeles, Calif.             |
+------------------------------------+---------------------------------+
| Educational Needs Index:           | Most critical                   |
+------------------------------------+---------------------------------+
| Median household income:           | \$46,493                        |
+------------------------------------+---------------------------------+
| Percent of residents in poverty:   | 18%                             |
+------------------------------------+---------------------------------+
| Percent of households receiving    | 6%                              |
| public assistance:                 |                                 |
+------------------------------------+---------------------------------+
| Racial/ethnic composition:         | 49% White                       |
|                                    |                                 |
|                                    | 10% African-American            |
|                                    |                                 |
|                                    | 1% American Indian              |
|                                    |                                 |
|                                    | 41% other race                  |
+------------------------------------+---------------------------------+
| Percent of residents Hispanic:     | 45%                             |
+------------------------------------+---------------------------------+
| Percent of population 18 or        | 29%                             |
| younger:                           |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| Use of Directly Enhanced loan      |                                 |
| proceeds:                          |                                 |
|                                    |                                 |
| The school was founded in August   |                                 |
| 2000 by a local community          |                                 |
| development corporation that       |                                 |
| operates in one of the poorest and |                                 |
| most densely populated             |                                 |
| neighborhoods in Los Angeles. The  |                                 |
| school was operating an elementary |                                 |
| school for a year prior to seeking |                                 |
| a middle school charter. The \$1.5 |                                 |
| million Directly Enhanced loan     |                                 |
| financed a \$4 million middle      |                                 |
| school. The school, based on its   |                                 |
| track record and financial         |                                 |
| strength, is now able to refinance |                                 |
| the Directly Enhanced loan with a  |                                 |
| conventional commercial loan       |                                 |
| without any credit enhancement.    |                                 |
| The school, when it refinances the |                                 |
| Directly Enhanced loan, will take  |                                 |
| cash out to construct a preschool  |                                 |
| for 240 four-year-olds.            |                                 |
+------------------------------------+---------------------------------+

+------------------------------------+---------------------------------+
| **Assisted School #3**             |                                 |
+------------------------------------+---------------------------------+
| ***Assisted by:***                 | America's Charter               |
+------------------------------------+---------------------------------+
| ***School characteristics when the |                                 |
| loan was closed (FY 2003):***      |                                 |
+------------------------------------+---------------------------------+
| Years in operation:                | 3                               |
+------------------------------------+---------------------------------+
| Enrollment:                        | 180                             |
+------------------------------------+---------------------------------+
| Grades served:                     | Pre-K to 7                      |
+------------------------------------+---------------------------------+
| Student racial/ethnic composition: | 29% White                       |
|                                    |                                 |
|                                    | 46% African-American            |
|                                    |                                 |
|                                    | 22% Hispanic                    |
|                                    |                                 |
|                                    | 0% Asian                        |
|                                    |                                 |
|                                    | 0% American Indian              |
+------------------------------------+---------------------------------+
| Percent of students eligible for   | 49%                             |
| free or reduced-price lunches:     |                                 |
+------------------------------------+---------------------------------+
| Percent of students in special     | 15%                             |
| education:                         |                                 |
+------------------------------------+---------------------------------+
| Percent of students with limited   | 6%                              |
| English proficiency:               |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| ***County characteristics (in      |                                 |
| 2000):***                          |                                 |
+------------------------------------+---------------------------------+
| County:                            | Washington, D.C.                |
+------------------------------------+---------------------------------+
| Educational Needs Index:           | Not available                   |
+------------------------------------+---------------------------------+
| Median household income:           | \$41,625                        |
+------------------------------------+---------------------------------+
| Percent of residents in poverty:   | 20%                             |
+------------------------------------+---------------------------------+
| Percent of households receiving    | 6%                              |
| public assistance:                 |                                 |
+------------------------------------+---------------------------------+
| Racial/ethnic composition:         | 31% White                       |
|                                    |                                 |
|                                    | 60% African-American            |
|                                    |                                 |
|                                    | 0% American Indian              |
|                                    |                                 |
|                                    | 9% other race                   |
+------------------------------------+---------------------------------+
| Percent of residents Hispanic:     | 8%                              |
+------------------------------------+---------------------------------+
| Percent of population 18 or        | 22%                             |
| younger:                           |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| Use of Directly Enhanced loan      |                                 |
| proceeds:                          |                                 |
|                                    |                                 |
| The school was founded in 2000 by  |                                 |
| a group of parents working with    |                                 |
| teachers and other education       |                                 |
| professionals to create a school   |                                 |
| dedicated to the best practices in |                                 |
| education reform. The school       |                                 |
| opened in the fall of 2000 in a    |                                 |
| rented space over a drugstore.     |                                 |
| Because this space was not         |                                 |
| adequate, the school purchased a   |                                 |
| former church. This space needed   |                                 |
| to be remodeled from a 12,000      |                                 |
| square-foot church into a 32,000   |                                 |
| square-foot educational facility.  |                                 |
| The total costs associated with    |                                 |
| this project were \$6.25 million.  |                                 |
| The school financed \$4.85 million |                                 |
| from bonds issued by the           |                                 |
| Washington, D.C., government. The  |                                 |
| credit enhancement was necessary   |                                 |
| because the property was a         |                                 |
| single-purpose entity, and so the  |                                 |
| appraised value was not 85 percent |                                 |
| of the value of the bond, which    |                                 |
| investors required to purchase the |                                 |
| bond. The school raised the        |                                 |
| remaining \$1.4 million from       |                                 |
| donations. The facility, according |                                 |
| to a representative of the school, |                                 |
| is essential to provide            |                                 |
| educational services and is        |                                 |
| helpful in attracting students and |                                 |
| retaining faculty.                 |                                 |
+------------------------------------+---------------------------------+

+------------------------------------+---------------------------------+
| **Assisted School #4**             |                                 |
+------------------------------------+---------------------------------+
| ***Assisted by:***                 | Self-Help                       |
+------------------------------------+---------------------------------+
| ***School characteristics when the |                                 |
| loan was closed (FY 2003):***      |                                 |
+------------------------------------+---------------------------------+
| Years in operation:                | 2                               |
+------------------------------------+---------------------------------+
| Enrollment:                        | 154                             |
+------------------------------------+---------------------------------+
| Grades served:                     | K to 4                          |
+------------------------------------+---------------------------------+
| Student racial/ethnic composition: | 60% White                       |
|                                    |                                 |
|                                    | 27% African-American            |
|                                    |                                 |
|                                    | 3% Asian                        |
|                                    |                                 |
|                                    | 1% American Indian              |
|                                    |                                 |
|                                    | 10% Hispanic                    |
+------------------------------------+---------------------------------+
| Percent of students eligible for   | Not available                   |
| free or reduced-price lunches:     |                                 |
+------------------------------------+---------------------------------+
| Percent of students in special     | 0%                              |
| education:                         |                                 |
+------------------------------------+---------------------------------+
| Percent of students with limited   | 1%                              |
| English proficiency:               |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| ***County characteristics (in      |                                 |
| 2000):***                          |                                 |
+------------------------------------+---------------------------------+
| County:                            | Durham, N.C.                    |
+------------------------------------+---------------------------------+
| Educational Needs Index:           | Less critical                   |
+------------------------------------+---------------------------------+
| Median household income:           | \$41,333                        |
+------------------------------------+---------------------------------+
| Percent of residents in poverty:   | 13%                             |
+------------------------------------+---------------------------------+
| Percent of households receiving    | 3%                              |
| public assistance:                 |                                 |
+------------------------------------+---------------------------------+
| Racial/ethnic composition:         | 51% White                       |
|                                    |                                 |
|                                    | 39% African-American            |
|                                    |                                 |
|                                    | 0% American Indian              |
|                                    |                                 |
|                                    | 9% other race                   |
+------------------------------------+---------------------------------+
| Percent of residents Hispanic:     | 8%                              |
+------------------------------------+---------------------------------+
| Percent of population 18 or        | 24%                             |
| younger:                           |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| Use of Directly Enhanced loan      |                                 |
| proceeds:                          |                                 |
|                                    |                                 |
| The school received its charter in |                                 |
| February 2002 and started          |                                 |
| operations in July 2003. It        |                                 |
| operates in Durham, N.C., in a     |                                 |
| neighborhood that is experiencing  |                                 |
| reinvestment and economic          |                                 |
| development. The school's staff    |                                 |
| took a planning year between       |                                 |
| February 2002 and July 2003.       |                                 |
|                                    |                                 |
| The school received its Directly   |                                 |
| Enhanced loan in two phases. In    |                                 |
| the first phase the school used    |                                 |
| \$415,000 to renovate a space that |                                 |
| the school was leasing in an old   |                                 |
| Army Reserve building. The         |                                 |
| renovations included installation  |                                 |
| of bathrooms, a firewall, and      |                                 |
| other changes necessary to get the |                                 |
| building up to code. At the time,  |                                 |
| the school had a long-term lease   |                                 |
| and served 100 K--2 students on    |                                 |
| only the first floor of a 28,000   |                                 |
| square-foot building. Given        |                                 |
| projected enrollments, the school  |                                 |
| could operate on the first floor   |                                 |
| for two years. To accommodate more |                                 |
| enrollment growth, the school      |                                 |
| received the balance of the        |                                 |
| Directly Enhanced loan and with    |                                 |
| the proceeds bought the building   |                                 |
| and renovated the second floor to  |                                 |
| accommodate K--5 students.         |                                 |
+------------------------------------+---------------------------------+

+------------------------------------+---------------------------------+
| **Assisted School #5**             |                                 |
+------------------------------------+---------------------------------+
| ***Assisted by:***                 | CSDC                            |
+------------------------------------+---------------------------------+
| ***School characteristics when the |                                 |
| loan was closed (FY 2004):***      |                                 |
+------------------------------------+---------------------------------+
| Years in operation:                | 1                               |
+------------------------------------+---------------------------------+
| Enrollment:                        | 82                              |
+------------------------------------+---------------------------------+
| Grades served:                     | 9 to 10                         |
+------------------------------------+---------------------------------+
| Student racial/ethnic composition: | 48% White                       |
|                                    |                                 |
|                                    | 6% African-American             |
|                                    |                                 |
|                                    | 4% Asian                        |
|                                    |                                 |
|                                    | 6% American Indian              |
|                                    |                                 |
|                                    | 37% Hispanic                    |
+------------------------------------+---------------------------------+
| Percent of students eligible for   | 60%                             |
| free or reduced-price lunches:     |                                 |
+------------------------------------+---------------------------------+
| Percent of students in special     | 5%                              |
| education:                         |                                 |
+------------------------------------+---------------------------------+
| Percent of students with limited   | 0%                              |
| English proficiency:               |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| ***County characteristics (in      |                                 |
| 2000):***                          |                                 |
+------------------------------------+---------------------------------+
| County:                            | Pima, Ariz.                     |
+------------------------------------+---------------------------------+
| Educational Needs Index:           | Most critical                   |
+------------------------------------+---------------------------------+
| Median household income:           | \$40,831                        |
+------------------------------------+---------------------------------+
| Percent of residents in poverty:   | 15%                             |
+------------------------------------+---------------------------------+
| Percent of households receiving    | 3%                              |
| public assistance:                 |                                 |
+------------------------------------+---------------------------------+
| Racial/ethnic composition:         | 75% White                       |
|                                    |                                 |
|                                    | 3% African-American             |
|                                    |                                 |
|                                    | 3% American Indian              |
|                                    |                                 |
|                                    | 19% other race                  |
+------------------------------------+---------------------------------+
| Percent of residents Hispanic:     | 29%                             |
+------------------------------------+---------------------------------+
| Percent of population 18 or        | 26%                             |
| younger:                           |                                 |
+------------------------------------+---------------------------------+
| Use of Directly Enhanced loan      |                                 |
| proceeds:                          |                                 |
|                                    |                                 |
| The school was a start-up          |                                 |
| organization at the time it        |                                 |
| received its Directly Enhanced     |                                 |
| loan. The school identified        |                                 |
| commercial space in which to open  |                                 |
| for the 2004--05 school year. It   |                                 |
| secured a leasehold improvement    |                                 |
| loan from a bank to complete       |                                 |
| \$500,000 worth of renovations to  |                                 |
| a 23,000-square-foot property that |                                 |
| was a shop in the 1940s. The       |                                 |
| school leased two full stories and |                                 |
| a basement. The school funded      |                                 |
| these improvements with a          |                                 |
| \$400,000 Directly Enhanced loan   |                                 |
| and \$100,000 raised from donors.  |                                 |
| A credit enhancement was necessary |                                 |
| because the building's owner would |                                 |
| not permit the lender that made    |                                 |
| the leasehold improvement loan to  |                                 |
| have a lien on the property. A     |                                 |
| Grantee pledged a certificate of   |                                 |
| deposit as partial collateral for  |                                 |
| the loan, which allowed the lender |                                 |
| to make the initial \$400,000      |                                 |
| loan. With the \$500,000, the      |                                 |
| school was able to complete        |                                 |
| improvements to the property's     |                                 |
| upper floor and created, in a      |                                 |
| 9,000 square-foot area, eight      |                                 |
| classrooms and a cafeteria. In the |                                 |
| remaining parts of the building,   |                                 |
| the school has completed           |                                 |
| infrastructure improvements so     |                                 |
| that the property conforms to      |                                 |
| local building codes. The school   |                                 |
| is gearing up for a Phase II       |                                 |
| project in which it would renovate |                                 |
| the basement and first floor for   |                                 |
| the school's use. The cost of this |                                 |
| phase is expected to be about      |                                 |
| \$400,000.                         |                                 |
+------------------------------------+---------------------------------+

+--------------------------------------+-------------------------------+
| **Assisted School #6**               |                               |
+--------------------------------------+-------------------------------+
| ***Assisted by:***                   | RDF                           |
+--------------------------------------+-------------------------------+
| ***School characteristics when the   |                               |
| loan was closed (FY 2005):***        |                               |
+--------------------------------------+-------------------------------+
| Years in operation:                  | 1                             |
+--------------------------------------+-------------------------------+
| Enrollment:                          | 180                           |
+--------------------------------------+-------------------------------+
| Grades served:                       | 7 to 9                        |
+--------------------------------------+-------------------------------+
| Student racial/ethnic composition:   | 43% White                     |
|                                      |                               |
|                                      | 55% African-American          |
|                                      |                               |
|                                      | 3% Asian                      |
|                                      |                               |
|                                      | 0% American Indian            |
|                                      |                               |
|                                      | 8% Hispanic                   |
+--------------------------------------+-------------------------------+
| Percent of students eligible for     | 43%                           |
| free or reduced-price lunches:       |                               |
+--------------------------------------+-------------------------------+
| Percent of students in special       | 21%                           |
| education:                           |                               |
+--------------------------------------+-------------------------------+
| Percent of students with limited     | 3%                            |
| English proficiency:                 |                               |
+--------------------------------------+-------------------------------+
|                                      |                               |
+--------------------------------------+-------------------------------+
| ***County characteristics (in        |                               |
| 2000):***                            |                               |
+--------------------------------------+-------------------------------+
| County:                              | Middlesex, Mass.              |
+--------------------------------------+-------------------------------+
| Educational Needs Index:             | Less critical                 |
+--------------------------------------+-------------------------------+
| Median household income:             | \$64,854                      |
+--------------------------------------+-------------------------------+
| Percent of residents in poverty:     | 7%                            |
+--------------------------------------+-------------------------------+
| Percent of households receiving      | 2%                            |
| public assistance:                   |                               |
+--------------------------------------+-------------------------------+
| Racial/ethnic composition:           | 86% White                     |
|                                      |                               |
|                                      | 3% African-American           |
|                                      |                               |
|                                      | 0% American Indian            |
|                                      |                               |
|                                      | 11% other race                |
+--------------------------------------+-------------------------------+
| Percent of residents Hispanic:       | 5%                            |
+--------------------------------------+-------------------------------+
| Percent of population 18 or younger: | 24%                           |
+--------------------------------------+-------------------------------+
|                                      |                               |
+--------------------------------------+-------------------------------+
| Use of Directly Enhanced loan        |                               |
| proceeds:                            |                               |
|                                      |                               |
| The school started operations in     |                               |
| August 2005 in Cambridge, Mass.      |                               |
| Prior to starting operations, the    |                               |
| school's staff looked for space in   |                               |
| that city. Due to a low vacancy      |                               |
| rate, few properties were available  |                               |
| for rent. The school eventually      |                               |
| found 30,000 square feet of space to |                               |
| lease: 20,000 square feet in one     |                               |
| building and 10,000 square feet in a |                               |
| building across a parking lot from   |                               |
| the larger space.                    |                               |
|                                      |                               |
| The school received a \$750,000      |                               |
| Directly Enhanced loan even though   |                               |
| it was a start-up organization. The  |                               |
| Grantee provided the loan to be      |                               |
| disbursed in two phases. In the      |                               |
| first phase, the school received     |                               |
| \$445,000 from the Grantee as part   |                               |
| of a \$550,000 project to improve    |                               |
| the larger 20,000 square-foot space. |                               |
| The school operates in classrooms    |                               |
| and administrative offices on four   |                               |
| floors of the 20,000 square-foot     |                               |
| building. This layout, according to  |                               |
| a school representative, provides a  |                               |
| different spatial experience for     |                               |
| students. The school will use the    |                               |
| \$235,000 balance of the Directly    |                               |
| Enhanced loan to renovate the 10,000 |                               |
| square foot building.                |                               |
+--------------------------------------+-------------------------------+

[]{.mark}

[]{.mark}

+---------------------------------------------+------------------------+
| **Assisted School #7**                      |                        |
+---------------------------------------------+------------------------+
| ***Assisted by:***                          | CSDC                   |
+---------------------------------------------+------------------------+
| ***School characteristics when the loan was |                        |
| closed (FY 2003):***                        |                        |
+---------------------------------------------+------------------------+
| Years in operation:                         | 4                      |
+---------------------------------------------+------------------------+
| Enrollment:                                 | 340                    |
+---------------------------------------------+------------------------+
| Grades served:                              | K to 8                 |
+---------------------------------------------+------------------------+
| Student racial/ethnic composition:          | 84% White              |
|                                             |                        |
|                                             | 10% African-American   |
|                                             |                        |
|                                             | 1% Asian               |
|                                             |                        |
|                                             | 1% American Indian     |
|                                             |                        |
|                                             | 2% Hispanic            |
+---------------------------------------------+------------------------+
| Percent of students eligible for free or    | 22%                    |
| reduced-price lunches:                      |                        |
+---------------------------------------------+------------------------+
| Percent of students in special education:   | 16%                    |
+---------------------------------------------+------------------------+
| Percent of students with limited English    | 0%                     |
| proficiency:                                |                        |
+---------------------------------------------+------------------------+
|                                             |                        |
+---------------------------------------------+------------------------+
| ***County characteristics (in 2000):***     |                        |
+---------------------------------------------+------------------------+
| County:                                     | Buncombe, N.C.         |
+---------------------------------------------+------------------------+
| Educational Needs Index:                    | Less critical          |
+---------------------------------------------+------------------------+
| Median household income:                    | \$36,124               |
+---------------------------------------------+------------------------+
| Percent of residents in poverty:            | 11%                    |
+---------------------------------------------+------------------------+
| Percent of households receiving public      | 3%                     |
| assistance:                                 |                        |
+---------------------------------------------+------------------------+
| Racial/ethnic composition:                  | 89% White              |
|                                             |                        |
|                                             | 7% African-American    |
|                                             |                        |
|                                             | 0% American Indian     |
|                                             |                        |
|                                             | 3% other race          |
+---------------------------------------------+------------------------+
| Percent of residents Hispanic:              | 3%                     |
+---------------------------------------------+------------------------+
| Percent of population 18 or younger:        | 23%                    |
+---------------------------------------------+------------------------+
|                                             |                        |
+---------------------------------------------+------------------------+
| Use of Directly Enhanced loan proceeds:     |                        |
|                                             |                        |
| The school was founded in 1999 with the     |                        |
| assistance of a \$36,000 start-up grant     |                        |
| from the state of North Carolina. These     |                        |
| funds were used to place a deposit on a     |                        |
| space in a local strip mall. During the     |                        |
| time the school was in this space, it       |                        |
| continued to look for a permanent location. |                        |
| A local bank had a lien on a vacant school  |                        |
| property owned by a parochial school that   |                        |
| had relocated to another site. The bank     |                        |
| that had a lien on the property was willing |                        |
| to make a loan to the charter school for an |                        |
| amount equivalent to 80 percent of the      |                        |
| purchase price.                             |                        |
|                                             |                        |
| The school did not have sufficient          |                        |
| resources for the remaining 20 percent. As  |                        |
| a result, a Grantee provided a credit       |                        |
| enhancement for a loan from the lender with |                        |
| a lien on the property, and the school      |                        |
| received another loan, subordinate to the   |                        |
| Directly Enhanced loan, for the remaining   |                        |
| amount of the \$1.6 million purchase price. |                        |
| The school, once it relocated from the      |                        |
| strip mall, expanded from 270 to 364        |                        |
| students. In addition, the space allows the |                        |
| school to offer an on-site daycare for      |                        |
| staff. The new space allows for more        |                        |
| extensive sports facilities, including a    |                        |
| soccer field and playgrounds. In addition,  |                        |
| the school now has science labs and an      |                        |
| expanded computer lab. Moreover, the new    |                        |
| location is in a park-like campus setting,  |                        |
| which allows the school to provide hands-on |                        |
| classes related to its environmental        |                        |
| curriculum.                                 |                        |
+---------------------------------------------+------------------------+

+------------------------------------+---------------------------------+
| **Assisted School #8**             |                                 |
+------------------------------------+---------------------------------+
| ***Assisted by:***                 | NCBCI                           |
+------------------------------------+---------------------------------+
| ***School characteristics when the |                                 |
| loan was closed (FY 2003):***      |                                 |
+------------------------------------+---------------------------------+
| Years in operation:                | 4                               |
+------------------------------------+---------------------------------+
| Enrollment:                        | 916                             |
+------------------------------------+---------------------------------+
| Grades served:                     | 1 to 12                         |
+------------------------------------+---------------------------------+
| Student racial/ethnic composition: | 1% White                        |
|                                    |                                 |
|                                    | 98% African-American            |
|                                    |                                 |
|                                    | 0% Asian                        |
|                                    |                                 |
|                                    | 0% American Indian              |
|                                    |                                 |
|                                    | 1% Hispanic                     |
+------------------------------------+---------------------------------+
| Percent of students eligible for   | 75%                             |
| free or reduced-price lunches:     |                                 |
+------------------------------------+---------------------------------+
| Percent of students in special     | 4%                              |
| education:                         |                                 |
+------------------------------------+---------------------------------+
| Percent of students with limited   | 0%                              |
| English proficiency:               |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| ***County characteristics (in      |                                 |
| 2000):***                          |                                 |
+------------------------------------+---------------------------------+
| County                             | Philadelphia, Pa.               |
+------------------------------------+---------------------------------+
| Educational Needs Index:           | Most critical                   |
+------------------------------------+---------------------------------+
| Median household income:           | 23%                             |
+------------------------------------+---------------------------------+
| Percent of households receiving    | 8%                              |
| public assistance:                 |                                 |
+------------------------------------+---------------------------------+
| Racial/ethnic composition:         | 45% White                       |
|                                    |                                 |
|                                    | 43% African-American            |
|                                    |                                 |
|                                    | 0% American Indian              |
|                                    |                                 |
|                                    | 12% other race                  |
+------------------------------------+---------------------------------+
| Percent of residents Hispanic:     | 9%                              |
+------------------------------------+---------------------------------+
| Percent of population 18 or        | 27%                             |
| younger:                           |                                 |
+------------------------------------+---------------------------------+
|                                    |                                 |
+------------------------------------+---------------------------------+
| Use of Directly Enhanced loan      |                                 |
| proceeds:                          |                                 |
|                                    |                                 |
| Located in Philadelphia, the       |                                 |
| school, prior to receiving its     |                                 |
| Directly Enhanced loan from a      |                                 |
| Grantee, was renting space for     |                                 |
| five years. The school used the    |                                 |
| loan proceeds to purchase the      |                                 |
| building it was renting and a      |                                 |
| parcel next to the building, on    |                                 |
| which it constructed classrooms    |                                 |
| with modular building technology.  |                                 |
| The school financed the entire     |                                 |
| \$2.1 million cost from a Grantee  |                                 |
| loan.                              |                                 |
|                                    |                                 |
| The space created with the loan    |                                 |
| proceeds allowed the school to add |                                 |
| additional science labs and        |                                 |
| classrooms. Seniors use the labs   |                                 |
| for projects. In addition, the     |                                 |
| additional space allows the school |                                 |
| to have a mini-courtroom that      |                                 |
| students who are taking classes in |                                 |
| the school's law curriculum use    |                                 |
| under supervision of a lawyer who  |                                 |
| provides instruction.              |                                 |
+------------------------------------+---------------------------------+

Note: Level of educational needs of county provided by
www.educationalneedsindex.com.

Sources: Grantee Annual Performance Reports, assisted school Web sites,
and interviews.

## What is the evidence of innovative methods?

The Program emphasizes that organizations that receive grants will use
innovative methods to facilitate loans to charter schools. There is no
industry standard as to what constitutes an innovative method. However,
one study (Hassel and Esser 2004) identified five types of innovative
methods that provided a useful framework for describing the approaches
that assisted schools used to either acquire or construct their own
facility or to improve a leased facility:

1.  Direct borrowing on the private market;

2.  Sale or lease of existing facilities;

3.  Cost-saving solutions such as space sharing with community agencies
    and higher education institutions;

4.  New uses of community resources or use of distance education; and

5.  New forms of organizational arrangements such as establishing real
    estate trusts and intermediaries.

##### 

The information used in this analysis was drawn from the loan-level data
provided by Grantees in their Annual Performance Reports and the
observations of Grantee and representatives of assisted schools.

### **Direct borrowing on the private market** {#direct-borrowing-on-the-private-market .Style-Heading-3-+-Not-Bold-Underline}

As discussed, Grantees and assisted school representatives reported that
assisted schools typically did not have sufficient equity or a long
enough operating history to meet the underwriting standards of
commercial lenders and bond issuers. Grantees that operate a Fully
Distributed model provide credit enhancements to make loans more
attractive to third-party lenders, oftentimes commercial banks. As a
result, charter schools assisted by Program Grantees were able to borrow
directly from the private market.

Grantees, with their Program funds, were able to attract capital from
sources that have not been widely used to support charter school
lending. One Grantee makes Directly Enhanced loans on behalf of a third
party, which received a \$36 million New Market Tax Credit allocation.
This relationship allows charter schools to receive loans funded by the
New Market Tax Credit program, which was a new source of capital.
Another Grantee has been able to combine the credit enhancements
available under the Program with the U.S. Department of Agriculture's
Community Facilities program, which makes available credit enhancements
in the form of a guarantee of 90 percent of the loan amount for public
schools (among other uses) in communities with populations under 20,000
(U.S. Department of Agriculture).

### **Cost-saving solutions such as space sharing**  {#cost-saving-solutions-such-as-space-sharing .Style-Heading-3-+-Not-Bold-Underline}

In some cases Grantees used innovative real estate solutions that
created opportunities for charter schools to share space until they
could purchase a building. A Grantee negotiated an agreement to purchase
a 23,500 square-foot facility and obtained the necessary \$2.425 million
to renovate the building and turn it into classrooms, administrative
offices, and a multipurpose space for two charter schools that operated
in the building. One school moved into its own facility, and the other
school will purchase the property soon.

### **New forms of organizational arrangements such as real estate trusts and intermediaries** {#new-forms-of-organizational-arrangements-such-as-real-estate-trusts-and-intermediaries .Style-Heading-3-+-Not-Bold-Underline}

Grantees had not yet established new intermediaries or real estate
investment trusts, but the volume of Directly Enhanced lending made by
the Grantees has now reached sufficient size that some of them, along
with investment banks, are exploring the possibility of establishing a
cooperatively owned, nonprofit conduit. This entity would purchase
Directly Enhanced loans, aggregate them, and create asset-backed
securities that use the cash flows from assisted charter school loan
repayments to finance bonds issued by the conduit. In addition, Grantees
are exploring the possibility of creating a multistate bond issuer,
which could reduce fees paid by charter schools that issue bonds.

This model, in which an intermediary aggregates loans and creates
asset-backed securities, is well established for mortgage and commercial
loans. And some charter school bonds have been aggregated as part of a
larger issuance. Therefore, there is precedence for creating
asset-backed securities that use charter school loans as collateral.

In summary, charter schools assisted under the Program typically did not
have sufficient equity or a long enough operating history to meet the
underwriting standards of commercial lenders and bond issuers.
Therefore, Grantees used Program funds creatively to attract lenders and
investors to fund loans. These loans, according to commercial lenders,
Grantees, and assisted school representatives would likely not have been
made without the enhancement. Some Grantees were able to use funds made
available through the New Markets Tax Credit program to fund charter
school loans, which is a new source of liquidity for this type of
lending.

Moreover, as a result of the lending volume facilitated by Grantees,
investment bankers and other industry participants are now examining the
potential for creating a secondary market for the Directly Enhanced
loans. Such a market would allow Grantees and other lenders to
recapitalize and use the proceeds for even more charter school lending.
If successful, a secondary market for charter school loans could, as
with residential and commercial mortgages, provide a significant and
efficient source of liquidity in the future.

## What are the major issues with Program implementation? 

One of the purposes of this study is to collect information from
Grantees and assisted schools about their experiences with the Program
and invite suggestions about potential improvements. To collect such
observations, research team members, in their discussions with a Grantee
representative, asked the following questions regarding Grantees'
experiences with the program:

-   What were the greatest challenges that your organization faced when
    implementing the Program?

```{=html}
<!-- -->
```
-   What did your organization do to overcome these challenges?

-   What changes would your organization like to see to the Program?

-   How would your organization's ability to serve charter schools
    change if the suggested changes to the Program were implemented?

-   Knowing what you now know, would you submit another Program
    application?

All questions were open-ended to allow interviewees to raise the issues
that they believed were the most important, given their experiences with
the Program. As detailed below, assisted charters expressed satisfaction
with the Program. Grantees expressed concerns primarily about the
administrative costs of operating the program, but despite concerns,
only one will not apply again for Program funds.

### **How Grantees view the Program**  {#how-grantees-view-the-program .Style-Heading-3-+-Not-Bold-Underline}

Grantees were positive about the Program; eight of the nine Grantees
indicated that they would apply for Program funds in the future.

As discussed earlier, the Program requires Grantees to prepare Annual
Performance Reports that provide ED with information about the loans
supported by the Program and a narrative discussion of the Grantee's
activities. Grantees are required to submit annual performance reports
under ED's generic grant regulations and under this Program's statute.
Some of the components are mandated by the statute and some are required
by ED. In addition, Grantees respond to questions that ED asks from time
to time as part of its oversight responsibility to ensure that funds
were being used in ways that support the Program's objectives. A major
implementation challenge raised by every Grantee was that the Program's
statute caps administrative costs at one-quarter of one percent of the
grant amount. Grantees indicated that their costs to complete reports
required by statute are greater than allowed for by the Program's
statutory cap and so were financing some administrative costs from other
sources. To resolve this problem, Grantees indicated that they would
like the statutory cap increased, or that they be allowed to generate
more fees or other Program income, which could be used to fund
administrative activities.

The Program's one-quarter of 1 percent statutory cap is low when
compared to ED's State Charter School Facilities Incentive grants
program, which allows grant recipients to charge administrative costs up
to 5 percentage points of the grant amount (Title V, Part B, Subpart 1
of the *Elementary and Secondary Education Act of 1965*, as amended by
the *No Child Left Behind Act* § 5204(f)(4)).

In addition to the administrative cap, Grantees indicated that other
Program statutory restrictions could be changed to allow them to support
a greater number of charter schools. A Grantee indicated that it could
earn more income if it could use Program funds as a source of charter
school loans, rather than being restricted to placing these funds in a
reserve fund. Another Grantee indicated that the Program should be
changed so that Grantees could support predevelopment loans, which many
charter schools need to establish plans to acquire or rehabilitate
facilities. Predevelopment loans are loans that a school might obtain to
pay for the cost of determining whether a site is suitable for
development, such as a study to determine whether a site is contaminated
with environmental hazards.

Grantee concerns and recommendations concerning administrative costs
should be taken in the context of their expressed overall level of
satisfaction with the Program. Additional research, beyond the scope of
this study, would be required to (1) assess the extent of these
perceived problems; (2) identify potential changes, if any, to the
reporting requirements that would reduce costs to Program fund
recipients and still provide ED with information needed for effective
oversight; and (3) evaluate the potential benefits of increasing the
administrative fee provided by the Program's statute. In addition, ED
indicates that it has proposed making several changes to the reporting
requirements under the Program that would reduce the amount of time
Grantees spend completing reports.

### **How assisted schools view the Program**  {#how-assisted-schools-view-the-program .Style-Heading-3-+-Not-Bold-Underline}

Assisted charter schools were generally satisfied with the Program. Only
one assisted school expressed any criticism or concern at all during
interviews. This representative stated that a Grantee was slow to
provide disclosure information, and suggested that Grantees be required
to make disclosures well in advance of the date in which the loan is
made. All of the assisted schools, including the one with the concern,
indicated that they would recommend the Program to other schools, and
suggested no other changes to the Program.

In general, representatives of assisted schools indicated that the
Program allowed their schools to qualify for loans that were unavailable
without the Program-funded guarantee. With few exceptions, the assisted
school representatives indicated that their Directly Enhanced loan had a
reasonable interest rate and that they would recommend other charter
schools to take advantage of the Program.

#  {#section-8 .unnumbered}

# References

*CMBS 101: An Introduction to Commercial Mortgage Backed Securities
(CMBS*). Prepared by The Education/Research Committee of the Commercial
Mortgage Securities Association.

*Debunking the Real Estate Risk of Charter Schools: A Study by the Ewing
Marion Kauffman Foundation,* 2005. Kansas City, Mo.: The Ewing Marion
Kauffman Foundation.

Dolan, J. V., Murray, D. and Walsh, G. (1998). *Charter School Facility
Financing: Constraints and Options.* Boston, Mass.: Pioneer Institute
for Public Policy Research.

Hassel, B. and Esser, K. W. (2004). *Facilities Financing: New Models
for Districts That Are Creating Schools New*. St. Paul, Minn.: Education
Evolving.

Hassel, B. (1999). *Paying for the Charter Schoolhouse: Policy Options
for Charter School Facilities Financing*. St. Paul, Minn.: Charter
Friends National Network.

Hitchcock, D. and Breeding J. (2007). "Charter School Financing
Conference: Debt Rating Criteria, Measuring Debt Burdens and a Case
Study." Presentation at the National Charter School Facility Financing
Conference. Arlington, Va.

McDonnell Investment Management, LLC. \"Commercial Mortgage Backed
Securities.\"   *Fixed Income Insight, *Oct. 26, 2004. Author: Oak
Brook, Ill. Retrieved Dec. 13, 2006, from:
http://www.mcdonnellinvestments.com/MarketInsights.asp?page=1&order.

National Alliance for Public Charter Schools (2007). *Number of Charter
Schools and Students in the 2006--07 School Year*. Retrieved July 5,
2007, from
http://www.publiccharters.org/content/publication/detail/2182.

*The No Child Left Behind Act of 2001,* Public Law 107-110, 107th
Congress, 2nd Session, Jan. 8, 2002

U.S. Department of Agriculture. Office of Rural Development. Housing and
Community Facilities Programs. Retrieved Jan. 3, 2007, from
http://www.rurdev.usda.gov/RHS/cf/brief_cp_direct.htm.

U.S. Department of Education, Office of Innovation and Improvement.
"Final Regulations," Credit Enhancement for Charter School Facilities
Program, *Federal Register*, March 24, 2005 (Vol. 70, No. 56, p.
14,999).

# Appendix A: Glossary of Terms Used in This Report 

**Acquisition loan**---Money borrowed for the purpose of acquiring title
to a property.

**Assisted school**---A charter school that received a Directly Enhanced
loan from a grantee between FY 2003 and FY 2005.

**Collateral***---*Assets (usually real property for mortgages) pledged
by a borrower to secure a loan or other credit, and subject to seizure
in the event of a borrower's default.

**Construction loan***---*An interim loan designed to provide funds for
the actual construction of improvements on land.

**Credit enhancement**---The process of reducing credit risk by
requiring collateral, insurance, or other agreements to provide the
lender with reassurance that it will be compensated if the borrower
defaults.

**Debt service coverage ratio**---Calculated by dividing the annual net
operating income by the sum of the annual loan payments. For example, if
a charter school's annual net operating income is \$62,500 and the
annual debt service (principal plus interest) on a loan of \$50,000, its
debt service coverage ratio is 1.25.

**Directly Enhanced loan**---A loan received by a charter school between
FY 2003 and FY 2005 that received a credit enhancement from program
funds or was funded from a loan pool credit enhanced by a grantee with
program funds.

**Foreclosure**---The legal process by which an owner's right to a
property is terminated, usually due to default. This process typically
involves a forced sale of the property at public auction, with the
proceeds being applied to the mortgage debt.

**Fully amortizing mortgage**---A method of loan amortization in which
equal periodic payments completely repay the loan during the loan term.

**Leasehold improvement**---An improvement of a leased asset that
increases the asset's value. Charter schools oftentimes have to improve
leased facilities to make them suitable for classrooms and
administrative offices. In some cases, leasehold improvements are
required to bring a building up to a jurisdiction's building code.

**Loan pool**---A source of financing loans in which more than one
investor or bank agrees to provide the money that a borrower receives
when the loan is made.

**Loan term**---The length of time between when a loan is made and when
the borrower must repay it.

**Loan to value ratio**---The ratio of a loan to the value of the
collateral used for that loan. For example, an \$80,000 loan that is
used to purchase a \$100,000 property that is used as collateral has an
LTV of \$80,000/\$100,000 = 0.80.

**Loan underwriting**---The process lenders use to evaluate risks
associated with a loan applicant. Mortgage underwriters typically
evaluate the "three Cs:" a borrower's capacity to repay the loan,
his/her creditworthiness, and assets offered as collateral for the loan.

**New Market Tax Credits***---*A federal program that permits taxpayers
to receive a credit against federal income taxes for making qualified
equity investments in designated Community Development Entities (CDEs).
Substantially all of the qualified equity investment must in turn be
used by the CDE to provide investments in low- and moderate-income
communities. The credit provided to the investor totals 39 percent of
the cost of the investment and is claimed over a seven-year period.

**Net operating income**---Income after deducting for operating expenses
(such as salaries, utilities, and other day-to-day expenses) but before
deducting for income taxes and interest.

**Spread**---The difference between two financial measures.

**Subordinate debt**---Debt that is ranked below other loans (that are
referred to as more "senior") with regard to claims on assets that are
used as collateral. In the event of a foreclosure, a lender that makes a
subordinate loan is repaid only after the available proceeds from the
sale of the asset used as collateral are paid to more senior lenders.
Consequently, subordinate debt is more risky than senior debt, and so
usually has a higher interest rate.

**Weighted average coupon**---The weighted average of the gross interest
rates of loans aggregated into a pool of loans.

# Appendix B: Interviews Conducted 

*Grantees*

America's Charter, Washington, D.C. (Sheila Ryan)

CSDC, Hanover, Md. (Joel Sharfer)

LIIF, San Francisco, Calif. (Susan Harper)

LISC, New York, N.Y. (Elise Balboni)

MassDevelopment, Boston, Mass. (Rebecca Sullivan)

NCBCI, Arlington, Va. (Annie Donovan)

RDF, Phoenix, Ariz. (Mark Van Brunt)

Self-Help, Durham, N.C. (Laura Benedict, Meredith Lowe, Steve Farqair,
Jane Ellis)

*Assisted Schools*

Bronx Preparatory Charter School, New York, N.Y. (Alyssa Levy)

Camino Nuevo Charter School, Los Angeles, Calif. (Philip Lane)

Capital City Pubic Charter School, Washington, D.C. (Karl Jentoff)

Central Park School for Children, Durham, N.C. (Vickie Patten)

City High School, Pima, Ariz. (Carrie Brennan)

Community Charter School of Cambridge, Cambridge, Mass. (Joe Reilly)

Evergreen Charter School, Ashville, N.C. (Maureen Molloy)

Mathematics, Civics and Science Charter School, Philadelphia, Penn.
(Veronica Joyner)

*Commercial Lenders*

Bank of America, New York, N.Y. (Dave Leopold)

Citibank, New York, N.Y. (Kim Lattimer-Nelligan)

JP Morgan Chase, New York, N.Y. (Dudley Ben-Oit)

*Developers*

Bouma Development, Grand Rapids, Mich. (Doug Bouma)

Civic Builders, New York, N.Y. (David Umansky)

*Education Management Organizations*

National Heritage Academies, Grand Rapids, Mich. (JC Huizenga)

Imagine Schools, Arlington, Va. (Dennis Bakke)

Mosaica, New York, N.Y. (Mike Connolly)

*Unsuccessful Program Applicants*

Interviews were conducted by Kenneth Temkin and Bill Bavin with
representatives of five unsuccessful Program applicants. The names of
these representatives and their organizations are withheld to preserve
their confidentiality.

*Rating Agencies and Bond Insurers*

ACA Capital, New York, N.Y. (Rueben Sellers)

Moody's, New York, N.Y. (Erin Gore, currently with Banc of America
Securities)

Standard and Poor's, New York, N.Y. (David Hitchcock)

*Investment Banks*

Community Reinvestment Fund, Minneapolis, Minn. (Mary Tingerthal)

Goldman Sachs, New York, N.Y. (Rich Bellis)

RBC Dain Rauscher, Minneapolis, Minn. (Bill Wild and John Snyder)

Wilary Winn, St. Paul, Minn. (Doug Winn)

# 

# 

# Appendix C: Discussion Guides

**Grantee Discussion Guide**

Grantee: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Previous Charter School Lending (only applicable to grantees that had
such a program prior to participating in the Program) in the Year Prior
to the Program

a\. How long has your organization provided charter school facilities
loans?

> b\. What were the main strategies that your organization used to
> support lending for charter school facilities prior to the Program?
>
> c\. What was your organization's total charter school lending volume
> in the year prior to the Program?

d\. What was the source of funding for these loans?

> e\. How many charter schools received loans from your organization in
> the year prior to participating in the Program?
>
> f\. What types of loans (i.e., acquisition, repair, leasehold
> improvement) did your organization support in the year prior to the
> Program?
>
> g\. What underwriting standards did your organization use to evaluate
> charter school loan applications in the year prior to receiving the
> grant?
>
> h\. How did your organization establish rates and terms for these
> loans? What were typical spreads from comparable term Treasury and
> commercial real estate loans and fees?
>
> i\. How many start-up schools did your organization originate loans to
> in the year prior to receiving grant funds?

II\. Charter School Lending Under the Program

> a\. What types of activities (i.e., acquisition, repair, leasehold
> improvement) does your program support under the Program?
>
> b\. What underwriting standards does your organization use when
> underwriting loan applications under the Program (if different from
> underwriting standards before Program)?
>
> i\. Why are these underwriting standards different from those that
> your organization used before the Program?
>
> c\. How does your organization establish rates and terms for loans
> originated under the Program? \[Probe: Does the organization establish
> an interest rate spread from a benchmark?\]
>
> d\. How does your organization market the Program to potential charter
> school loan applicants?
>
> e\. How does your organization market credit enhancements available
> under the Program to lenders that have funds to originate loans to
> charter schools (not applicable for grantees with Mixed or Vertically
> Integrated models)?
>
> f\. How does your organization determine the level and types of
> technical assistance to provide to a charter school loan applicant?

III\. Effects of the Program

> a\. What new (if any) credit enhancements does your organization offer
> under the Program to increase facilities lending to charter schools?
>
> i\. How did the funding under the Program affect your ability to
> support such changes?
>
> ii\. Is your organization able to serve charter schools that exhibit
> higher rates of credit loss risk? If yes, how?
>
> b\. How does the Program affect the sources of financing that are
> available to support charter school facilities?
>
> c\. How does the Program affect the rates and terms of loans available
> for charter school facilities? Are you able to document this effect?
>
> d\. Has your organization established new relationships with lenders
> or other market participants under the Program? \[If yes:\]
>
> e\. How have those relationships changed your organization's ability
> to support charter school facilities lending?
>
> f\. How does the technical assistance provided by your organization
> affect the ability of charter school loan applicants to secure
> financing for facilities?
>
> g\. Since receiving the grant, have you done charter school lending or
> provided credit enhancements to support such lending beyond the
> grant-related activities you report? If yes, how much?
>
> h\. Have you been able to facilitate any innovative real estate
> arrangements under the Program? \[If yes:\]
>
> i\. What are those arrangements?
>
> ii\. How did the Program support them?
>
> i\. Overall, how has the Program affected your organization's ability
> to support charter schools facilities lending?

IV\. Implementation/Program Challenges

> a\. What were the greatest challenges that your organization faced
> when implementing the Program?

b\. What did your organization do to overcome these challenges?

c\. What changes would your organization like to see to the Program?
Why?

d.  How would your organization's ability to serve charter schools
    change if these suggested changes to the Program were implemented?

**Charter School Loan Recipient Discussion Guide**

Charter School: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Ability to Secure Financing Before the Program

> a\. Did your charter school, prior to receiving the loan from
> \[Grantee's name\], apply for financing from another source? \[If no,
> why not? If yes:\]
>
> i\. What was the purpose for the loan?
>
> ii\. Where did you apply for the loan?
>
> iii\. Was your loan application approved?
>
> \[If no:\]
>
> 1\. What reasons did the lenders provide for denying your charter
> school's loan application?
>
> \[If yes:\]
>
> 2\. What were the loan's rates and terms?

II\. Experience with the Grantee

a\. How did your charter school learn about loans offered by \[Grantee's
name\]?

b\. When did you initially contact \[Grantee's name\] about acquiring a
loan?

c\. Did you receive any type of technical assistance from \[Grantee's
name\]? \[If yes:\]

> i\. What types of technical assistance did you receive from
> \[Grantee's name\]?
>
> ii\. Did this technical assistance help your charter school secure
> financing? \[If yes, how so?\]
>
> d\. What types of information did you have to provide to \[Grantee's
> name and, if applicable, lender's name\]?
>
> e\. What were your expectations regarding rates and terms before
> applying for the loan?
>
> f\. How much did the actual rates and terms differ from your
> expectations? \[If different:\]
>
> i\. What factors do you think created these differences?
>
> g\. Did the loan from \[Grantee's name\] allow your school to
> implement any real estate solutions (i.e., sharing space with other
> charter schools) that you thought were not feasible before applying
> for a loan? \[If yes:\]
>
> i\. What were those solutions?
>
> ii\. How did the Program make those solutions feasible?
>
> h\. Would you recommend that other charter schools apply for loans
> from \[Grantee's name\]? Why or why not?

i\. What changes would you like to be implemented? Why?

> j\. Overall, how satisfied is your organization with the loan rates
> and terms that you received from \[Grantee's name\]?

III\. Students' Academic Performance

a.  Did your school meet AYP standards under the No Child Left Behind
    program?

**Unsuccessful Applicant Discussion Guide**

Organization: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Reasons for Submitting an Application

> a\. What were the primary factors that influenced your organization's
> decision to apply for a grant under the Program?
>
> b\. Did you seek financing to support charter school facilities
> lending from other sources? \[If yes:\]
>
> i\. What were those sources?

II\. Activities Subsequent to Submitting an Application

> a\. How (if at all) does your organization now support charter school
> facilities lending?

b\. What are your organization's sources of funding to support these
activities?

> c\. What types of credit enhancements did your organizations provide
> in the past year?
>
> d\. How many charter school facilities loans did your organization
> facilitate last year?
>
> e\. What activities (i.e., acquisition, repair, leasehold improvement)
> did those loans support?

f\. What were the rates and terms associated with those loans?

**Commercial Lenders That Originate Charter School Facility Loans
Discussion Guide**

Lender: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Charter School Lending

a\. How long have you originated charter school facilities loans?

> b\. What types of loans (i.e., acquisition, predevelopment, repair,
> leasehold improvement) do your bank originate to charter schools?
>
> c\. How many (number and dollar volume) charter school loans have you
> originated during the past three years?
>
> d\. What underwriting standards do you use when underwriting loan
> applications from charter schools?

e\. Are these standards different from other types of commercial
products? \[If yes:\]

> i\. Why are these underwriting standards different from those that you
> use for other types of commercial products?
>
> f\. How does your organization establish rates and terms for loans
> originated to charter schools? \[Probe: Does the organization
> establish an interest rate spread from a benchmark?\]

g\. Are the pricing policies different for other commercial loan
products? \[If yes:\]

> i\. Why are the pricing policies different?

II\. Credit Enhancements

> a\. Have you required credit enhancements for charter school
> facilities loans that you have originated? \[If yes:\]
>
> i\. For what proportion of loans did you require a credit enhancement?
>
> ii\. Why did you require the credit enhancement?
>
> iii\. What type of enhancement did you require?
>
> iv\. Does the credit enhancement affect the rates and term of the
> loans receiving them? \[If yes:\]
>
> v\. What was the effect of the enhancement on the rate and/or term?
>
> vi\. Would you have approved the loan without the enhancement? \[If
> no, why?\]

III\. Future Lending Plans

a\. What is your bank's projected charter school lending volume in the
next year?

> b\. Do you expect to change your underwriting/pricing standards for
> charter school loan in the next year? \[If yes:\]
>
> i\. How will they change?
>
> ii\. What are the reasons for this change?

**Real Estate Developers Who Construct Charter Schools Discussion
Guide**

Company: \_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Charter School Development Activities

> a\. How many charter schools have you developed? Has the volume
> changed over the past few years? \[If yes, why?\]

b\. What other commercial facilities (if any) does your company develop?

> c\. Charter school development activities account for what share of
> your overall development projects?

d\. How often are you approached by charter schools to develop
properties?

e\. How often do such charter schools have financing already lined up?

f\. What do you advise charter schools who do not have financing already
in place?

II\. Charter School Development Costs and Financing

> a\. What are the total development costs for a typical charter school
> development project? What are the per square foot development costs
> for a typical charter school development project?
>
> b\. Are these costs different for other commercial development
> projects? \[If yes, why?\]

c\. What sources do you use to finance charter school construction?

> d\. Are these sources different for sources that you use for other
> commercial projects? \[If yes, why?\]
>
> e\. How much equity do you require from the charter school to begin
> development? Is this amount different for other commercial projects?
> \[If yes, why?\]
>
> f\. What sources do charter schools use for permanent financing? Are
> these sources different than for other commercial projects?

III\. Credit Enhancements

> a\. For your developments, have you required that charter schools
> receive a credit enhancement for either the construction or permanent
> loan? \[If yes:\]
>
> i\. For what proportion of projects did you require a credit
> enhancement?
>
> ii\. Who provided the credit enhancement?
>
> iii\. What was the credit enhancement?
>
> iv\. Would you have gone forward with the project without the
> enhancement? \[If no, why?\]

IV\. Future Development Plans

a.  What is your projected charter school development activity in the
    next year?

**Investment Banks Discussion Guide**

Company: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Transactional Volume

> a\. How many charter school financing securitization transactions have
> you closed in the past year? How does this volume compare to previous
> years'?
>
> b\. What is the typical financing amount for these charter school loan
> securitization transactions? Has this changed over time? \[If yes,
> why?\]

II\. Transactional Structure

a\. What types of charter schools (start-ups?) were included in these
transactions?

b\. What types of charter school loans have been included in these
transactions?

> c\. What were the typical WLTV and debt service coverage ratio for the
> charter school loans included in the transaction?

d\. What types of credit enhancements have been included in these
transactions?

e\. Which companies have provided these credit enhancements?

f\. How did the credit enhancements affect the transaction's pricing?

g\. What fees did your company charge for the transaction?

h\. Is this fee different for other types of commercial bonds? \[If yes,
why?\]

**Rating Agencies and Bond Insurers Discussion Guide**

Company: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Transactional Volume

> a\. How many charter school financing transactions have you evaluated
> (insured) in the past year? How does this volume compare to previous
> years?
>
> b\. What is the typical financing amount for these transactions? Has
> this changed over time? \[If yes, why?\]

II\. Transactional Structure

a\. What types of charter schools (start-ups?) were included in these
transactions?

b\. What types of loans have been included in these transactions?

> c\. What were the typical WLTV and debt service coverage ratio for the
> loans included?

d\. What types of credit enhancements have been included in these
transactions?

e\. Which companies have provided these credit enhancements?

f\. How did the credit enhancements affect your ratings of the
transactions?

FOR BOND INSURERS

g\. What fees did your company charge for the insurance?

h\. Is this fee different for other types of commercial bonds? \[If yes,
why?\]

i\. How did this insurance affect the bond's rating?

> j\. Beyond affecting the bond's rating, how do you think the insurance
> affected the market's pricing of the issuance?
>
> k\. Do you believe that bond insurance is more likely to be
> cost-effective from the standpoint of charter schools in the future?
> \[If yes, why?\]

**Educational Management Organizations Discussion Guide**

Company: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I. Management Support Volume

> a\. How many charter schools did your company provide services to in
> the past year? How does this volume compare to previous years'?
>
> b\. What is the typical fee charged to these schools? Has this changed
> over time? \[If yes, why?\]

II\. Client Profile and Financing

a\. What types of charter schools (start-ups?) do you serve?

b\. In what types of facilities are these schools located?

c\. How many clients have sought financing for new facilities or
improvements?

d\. What types of lenders have these schools approached for financing?

e\. How successful have these schools been in receiving financing?

f\. What types of credit enhancements have been included in these
transactions?

g\. Which companies have provided these credit enhancements?

# 

# 

# 

# Appendix D: Characteristics of Census Tracts and Counties in Which Schools Assisted by Grantees Between FY 2003 and FY 2005 Were Located

[]{#__RefHeading___Toc188879044 .anchor}Exhibit D-: Median household
income, as of 2000, in tracts and counties with schools assisted by
Grantees between FY 2003 and FY 2005

![](media/image14.wmf){width="6.873611111111111in"
height="8.61111111111111in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#OLE_LINK1 .anchor}

Exhibit D-: Poverty rates, as of 2000, in tracts and counties with
schools assisted by Grantees between FY 2003 and FY 2005

![](media/image15.wmf){width="6.620833333333334in" height="8.46875in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879046 .anchor}Exhibit D-: Proportion of
population aged 18 and under, as of 2000, in tracts and counties with
schools assisted by Grantees between FY 2003 and FY 2005

![](media/image16.wmf){width="6.983333333333333in"
height="8.177083333333334in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879047 .anchor}Exhibit D-: Percent of
households receiving public assistance, as of 2000, in tracts and
counties with schools assisted by Grantees between FY 2003 and FY 2005

![](media/image17.wmf){width="6.990277777777778in"
height="8.61111111111111in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879048 .anchor}Exhibit D-: Percentage white
residents, as of 2000, in tracts and counties with schools assisted by
Grantees between FY 2003 and FY 2005

![](media/image18.wmf){width="6.942361111111111in" height="8.61875in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879049 .anchor}**Exhibit D-: Percentage black
residents, as of 2000, in tracts and counties with schools assisted by
Grantees between FY 2003 and FY 2005**

![](media/image19.wmf){width="6.942361111111111in" height="8.61875in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879050 .anchor}**Exhibit D-: Percentage
American Indian residents, as of 2000, in tracts and counties with
schools assisted by Grantees between FY 2003 and FY 2005**

![](media/image20.wmf){width="6.9840277777777775in" height="8.61875in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879051 .anchor}**Exhibit D-: Percentage of
other race residents, as of 2000, in tracts and counties with schools
assisted by Grantees between FY 2003 and FY 2005**

![](media/image21.wmf){width="6.947916666666667in" height="8.61875in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

[]{#__RefHeading___Toc188879052 .anchor}**Exhibit D-: Percentage of
Hispanic residents, as of 2000, in tracts and counties with schools
assisted by Grantees between FY 2003 and FY 2005**

![](media/image22.wmf){width="7.002083333333333in"
height="8.614583333333334in"}

Sources: 1. Location of schools: Grantee Annual Performance Reports
geocoded by the authors.

> 2\. Characteristics of Census tracts and counties in which assisted
> schools were located: U.S. Census 2000.

# 

# 

# Appendix E: Program Grant Recipients: FY 2002--FY 2007 

+-----------------------------------+----------------------------------+
| America\'s Charter School Finance | Local Initiatives Support        |
| Corporation/Building Hope         | Corporation                      |
|                                   |                                  |
| 910 17th Street, NW, Suite 1100,  | 501 Seventh Avenue, 7th Floor,   |
| Washington, DC 20001              | New York, NY 10017               |
|                                   |                                  |
| Project Director: Joe Bruno       | Project Director: Elise Balboni  |
|                                   |                                  |
| FY 2002: \$5 million              | FY 2003: \$10 million            |
|                                   |                                  |
|                                   | FY 2006: \$8.2 million           |
+-----------------------------------+----------------------------------+
| California Charter Schools        | Low Income Investment Fund       |
| Association                       |                                  |
|                                   | 100 Pine Street, Suite 1800, San |
| 250 E. 1st St., Suite 1000, Los   | Francisco, CA 94111              |
| Angeles, CA 90012                 |                                  |
|                                   | Project Director: Susan Harper   |
| Project Director: Adam Miller     |                                  |
|                                   | FY 2002: \$3 million             |
| FY 2005: \$10 million             |                                  |
|                                   | FY 2007: \$5 million             |
+-----------------------------------+----------------------------------+
| Charter Schools Development       | Massachusetts Development        |
| Corporation                       | Finance Agency                   |
|                                   |                                  |
| 7272 Park Circle Drive, Suite     | 160 Federal Street, Boston, MA   |
| 265, Hanover, MD 21076            | 02110                            |
|                                   |                                  |
| Contact person: Michelle Liberati | Project Director: Rebecca        |
|                                   | Sullivan                         |
| FY 2002: \$10 million             |                                  |
|                                   | FY 2003: \$10 million            |
| FY 2004: \$5 million              |                                  |
|                                   |                                  |
| FY 2006: \$6.6 million            |                                  |
+-----------------------------------+----------------------------------+
| Community Loan Fund of New        | Michigan Public Educational      |
| Jersey, Inc.                      | Facilities Authority             |
|                                   |                                  |
| 16-18 West Lafayette Street,      | 430 W. Allegan Street, Lansing,  |
| Trenton, NJ 08608                 | MI 48922                         |
|                                   |                                  |
| Project Director: David Scheck    | Project Director: Kathleen       |
|                                   | O'Keefe                          |
| FY 2006: \$8.15 million           |                                  |
|                                   | FY 2007: \$6.5 million           |
+-----------------------------------+----------------------------------+
| District of Columbia Office of    | NCB Capital Impact               |
| the State Superintendent of       |                                  |
| Education                         | 2011 Crystal Drive, Suite 800,   |
|                                   | Arlington, VA 22202              |
| 441 4th Street, NW, 350 North,    |                                  |
| Washington, DC 20001              | Project Director: Annie Donovan  |
|                                   |                                  |
| Contact person: Stefan Huh        | FY 2002: \$10 million            |
|                                   |                                  |
| FY 2004: \$5 million              | FY 2003: \$8 million             |
+-----------------------------------+----------------------------------+
| Housing Partnership Network, Inc. | Raza Development Fund            |
|                                   |                                  |
| 160 State Street, 5th Floor,      | 111 W. Monroe Street, Suite      |
| Boston, MA 02109                  | #1610, Phoenix, AZ 85003         |
|                                   |                                  |
| Project Director: Thomas Bledsoe  | Project Director: Mark Van Brunt |
|                                   |                                  |
| FY 2007: \$15 million             | FY 2002: \$5 million             |
|                                   |                                  |
|                                   | FY 2004: \$8 million             |
|                                   |                                  |
|                                   | FY 2006: \$1.6 million           |
+-----------------------------------+----------------------------------+
| IFF                               | The Reinvestment Fund            |
|                                   |                                  |
| One North LaSalle Street, Suite   | 718 Arch Street, Suite 300N,     |
| 700, Chicago, IL 60602            | Philadelphia, PA 19106-1591      |
|                                   |                                  |
| Project Director: Jill Levine     | Project Director: Donald R.      |
|                                   | Hinkle-Brown                     |
| FY 2005: \$8 million              |                                  |
|                                   | FY 2005: \$10 million            |
| FY 2007: \$ 10 million            |                                  |
+-----------------------------------+----------------------------------+
| Indianapolis Local Improvement    | Self-Help                        |
| Bond Bank                         |                                  |
|                                   | 301 West Main Street, Durham, NC |
| 200 East Washington Street, 2421, | 27702                            |
| Indianapolis, IN 46204            |                                  |
|                                   | Contact person: Jane Ellis       |
| Project Director: Barbara         |                                  |
| Lawrence                          | FY 2003: \$8 million             |
|                                   |                                  |
| FY 2005: \$2 million              | FY 2006: \$ 2.2 million          |
+-----------------------------------+----------------------------------+
| KIPP Foundation                   | Texas Public Finance Authority   |
|                                   |                                  |
| 345 Spear Street, Suite 510, San  | 300 W. 15th Street, Suite 411,   |
| Francisco, CA 94105               | Austin, TX 78711                 |
|                                   |                                  |
| Project Director: Carmen          | Project Director: Kim Edwards    |
| Maldonado                         |                                  |
|                                   | FY 2005: \$10 million            |
| FY 2006: \$6.8 million            |                                  |
+-----------------------------------+----------------------------------+

[^1]: Grantees support charter school lending by making loans directly
    to charter schools or by providing credit enhancements for loans
    made by third parties. Both types of loans are defined in this
    report as Directly Enhanced loans.

[^2]: Schools that received Directly Enhanced loans are defined herein
    as assisted schools, or as schools assisted by Grantees.

[^3]: The nine organizations are referred to herein as the Grantees and,
    individually as a Grantee.

[^4]: One Grantee did not make any Directly Enhanced loans between FY
    2003 and FY 2005.

[^5]: Nine organizations received grants in the first three years of the
    Program. One of these Grantees had not made any Directly Enhanced
    loans through FY 2005, and so the analyses do not include that
    organization.

[^6]: These nine organizations are referred to in this report as the
    Grantees and individually as a Grantee.

[^7]: One Grantee did not support any Directly Enhanced loans between FY
    2003 and FY 2005. As a result, this Grantee was not categorized into
    any model.

[^8]: Schools that received Directly Enhanced loans are defined as
    assisted schools or as schools assisted under the Program.

[^9]: Washington, D.C., and Philadelphia, both of which are cities, are
    also county equivalents. In this report they will be referred to as
    counties.

[^10]: ED reports that all organizations that have received Program
    funds have supported a total of \$407 million worth of loans through
    the end of FY 2006.

[^11]: The New Markets Tax Program is a federal program that permits
    taxpayers to receive a credit against federal income taxes for
    making qualified equity investments in designated Community
    Development Entities (CDEs). Substantially all of the qualified
    equity investment must in turn be used by the CDE to provide
    investments in low-income communities. The credit provided to the
    investor totals 39 percent of the cost of the investment and is
    claimed over a seven-year credit allowance period.

[^12]: Grantees that make loans do not use their grant funds to finance
    loans because this use of grant funds is prohibited by the Program's
    statute. The loans to charter schools are financed from a loan pool
    (not the grant) that is credit enhanced by the Grantee.

[^13]: Leasehold improvement loans do not have collateral, and so there
    is no loan-to-value calculation.

[^14]: Two Grantees are using a Mixed model of service. Because these
    two Grantees are using approaches that are not similar to each
    other, the analysis of outcomes between models of service is
    restricted to analyses of loans made by Grantees using either a
    Vertically Integrated or Fully Distributed model of service.

[^15]: The Educational Needs Index (ENI) includes 15 county-level
    variables that affect participation rates in postsecondary
    education, educational attainment levels, employment patterns, and
    socioeconomic status. Through an econometric model that uses these
    data, the ENI classifies counties as "most critical" when relatively
    poor conditions of under-education and economic challenges are
    compounded by population growth and shifting demographics toward
    youths or at-risk minority groups.
    http://www.educationalneedsindex.com/methodology.php.