PAGE  

**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. 

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**Contents**

**LIST OF EXHIBITSv**

**ix****Acknowledgments******

**xi****Executive Summary******

xiKey Findings

xiiProgram Description

xiiData Sources and Analysis Strategy

xivFindings

**1****Chapter 1: Introduction******

**3****Chapter 2: Program Description******

**5****Chapter 3: The Grantees******

9Models of service used by Grantees to implement the Program

**Chapter 4: Methodology13**

13Data sources

13Grantee applications and annual performance reports

14Interviews

15Secondary data

15Limitations of the study

**17****Chapter 5: Findings******

17Does the Program, as implemented, provide for improved access of charter schools to capital markets for facilities?

19Overall charter school lending market

20Are grantees supporting higher volumes of lending compared with their lending volumes prior to the Program?

21Are unsuccessful Program applicants able to support lending without the support of the Program?

23Assisted schools’ ability to qualify for loans before the Program

24Does the Program bring new lenders and intermediaries into the charter school lending market?

25Do Grantees offer products or support new types of transactions?

25Do schools assisted under the Program exhibit higher levels of credit loss risk to lenders?

27Does technical assistance provided by Grantees improve charter schools’ abilities to secure financing?

27Does the Program, as implemented, provide for better rates and terms on financing than would otherwise be available?

28Are 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.)**

29How do the rates and terms of the loans supported by the Program compare with benchmarks?

31How do rates and terms of Directly Enhanced loans compare with those without Program-funded loans?

31What is the relative efficiency of different models of service used by Grantees?

32What are the differences in lending volume and risk of schools assisted between different types of models of service?

38Is the Program serving communities with the greatest need for public school choice?

39Proposed Grantee selection criteria for choosing schools to assist

45Demographic characteristics of assisted schools

47Social and economic characteristics of counties containing assisted schools

53Use of loan funds by assisted schools

62What is the evidence of innovative methods?

62Direct borrowing on the private market

63Cost-saving solutions such as space sharing

63New forms of organizational arrangements such as real estate trusts and intermediaries

64What are the major issues with Program implementation?

64How Grantees view the Program

65How assisted schools view the Program

**67****References******

**69****Appendix A: Glossary of Terms Used in This Report******

**73****Appendix B: Interviews Conducted******

**77****Appendix C: Discussion Guides******

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

**101****Appendix E: Program Grant Recipients: FY 2002–FY 2007******

****

**Exhibits**

xviiiExhibit 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

xixExhibit 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

5Exhibit 3‐1 Program awards: FY 2002 to FY 2004 ($ in Millions)

6Exhibit 3‐2 Organizational summary of Grantees

10Exhibit 3‐3 Description of Vertically Integrated and Fully Distributed models of service

16Exhibit 4‐1 Crosswalk of research questions and data sources

20Exhibit 5‐1 Grantees’ Directly Enhanced loan volume by type of loan between FY 2003 and FY 2005

21Exhibit 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

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

30Exhibit 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

33Exhibit 5‐5 Efficiency measures for Directly Enhanced loans supported by Grantees by model of service between FY 2003 and FY 2005

34Exhibit 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

36Exhibit 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

37Exhibit 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

40Exhibit 5‐9 Summary of Grantee selection criteria for Directly Enhanced loans

45Exhibit 5‐10 Number of assisted schools, enrollment, and percent of students eligible for free and reduced-price lunches by state

46Exhibit 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

48Exhibit 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

49Exhibit 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

50Exhibit 5‐14The 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

51Exhibit 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

52Exhibit 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

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

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

94Exhibit 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

95Exhibit 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

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

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

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

99Exhibit 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

100Exhibit D-9 Percentage of Hispanic residents, as of 2000, in tracts and counties with schools assisted by Grantees between FY 2003 and FY 2005

# 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.

# 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;**

· **Many of the assisted schools, according to Grantee****, 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, 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). 

**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**

**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).

**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**

**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: 

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. 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). 

**Exhibit 3‐1: Program awards: FY 2002 to FY 2004 ($ in Millions)**

**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.

**Exhibit 3‐2: Organizational summary of Grantees**

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

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

*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. 

**Exhibit 3‐3: Description of Vertically Integrated and Fully Distributed models of service**

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

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. 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.

# 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, 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. 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. 

**Exhibit 4 ‐1: Crosswalk of research questions and data sources**

# 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. 

· *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. 

· *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**

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). 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. 

Exhibit 5‐1: Grantees’ Directly Enhanced loan volume by type of loan between FY 2003 and FY 2005 

**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?**

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. 

**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**

**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?**

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. 

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. 

**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**

**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 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?**

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?**

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?**

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. 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?**

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?**

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.

**How do the rates and terms of the loans supported by the Program compare with benchmarks?**

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.

**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**

**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. 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?**

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?

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.

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?**

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.

**Exhibit 5‐5: Efficiency measures for Directly Enhanced loans supported by Grantees by model of service between FY 2003 and FY 2005**

**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. 

**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**

**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. 

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

**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). 

**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**

**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. 

**Exhibit 5‐9: Summary of Grantee selection criteria for Directly Enhanced loans**

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

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

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

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

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**

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. 

**Exhibit 5‐10: Number of assisted schools, enrollment, and percent of students eligible for free and reduced-price lunches by state**

**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.

**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**

**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***

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. 

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 

**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.

**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**

**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.

**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**

**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.

**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**

**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). 

**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**

**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**

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. 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.

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**

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***

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**

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?

· 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**

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**

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.

# 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

Exhibit D-1: Median household income, as of 2000, in tracts and counties with schools assisted by Grantees between FY 2003 and FY 2005 

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.

**Exhibit D-2: Poverty rates, as of 2000, in tracts and counties with schools assisted by Grantees between FY 2003 and FY 2005**

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.

**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**

 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.

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 

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.

Exhibit D-5: Percentage white residents, as of 2000, in tracts and counties with schools assisted by Grantees between FY 2003 and FY 2005

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.

**Exhibit D-6: Percentage black residents, as of 2000, in tracts and counties with schools assisted by Grantees between FY 2003 and FY 2005**

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.

**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**

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.

**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**

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.

**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**

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

� 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. 

� Schools that received Directly Enhanced loans are defined herein as assisted schools, or as schools assisted by Grantees.

� The nine organizations are referred to herein as the Grantees and, individually as a Grantee.

� One Grantee did not make any Directly Enhanced loans between FY 2003 and FY 2005.

� 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. 

� These nine organizations are referred to in this report as the Grantees and individually as a Grantee.

� 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.

� Schools that received Directly Enhanced loans are defined as assisted schools or as schools assisted under the Program.

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

� 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. 

� 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.

� 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. 

� Leasehold improvement loans do not have collateral, and so there is no loan-to-value calculation.

� 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. 

� 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.

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