Facility Financing for Charter
Schools 101
Steve Saltzman
The Charter School “Ecosystem”
A successful charter
school demands more
than just stellar
academics – it must
be a sound business
enterprise as well.
Operations
Facility
Academics
The Bicycle Analogy
Back Wheel:
FINANCIAL
ENGINE
Front Wheel:
MISSION
Who is Self-Help?
• Non-profit CDFI founded in 1980
• Mission: Creating and protecting
ownership and economic
opportunity for people of color,
women, rural residents and lowwealth families and
communities.
• Over $110 million lent to charter
schools nationwide since 1997
Two Factors
should drive your thinking about financial and facilities planning:
1. How many students you have
2. The amount of per pupil revenue
you will receive
•
•
Plan only with money you have either
in hand or committed by law
Too many schools get in trouble
because they assume their enrollment
will grow. If you play optimistically,
even a modest shortfall can challenge
your school’s ability to honor its
obligations.
How Much Can You Spend on Your
Facility?
• Every penny spent on facilities
is a penny not spent on
instruction or faculty
development.
• Overspending on real estate
can be an enormous distraction
from the most important
challenge at hand – providing a
quality education to young
people.
How Much $ Do You Have?
Get out your “Charter School Budgeting
Worksheet 1” and calculate along with me.
• How many students do you expect to enroll
in year 1?
• How much per pupil revenue will you have?
Calculate Problem #1:
[# of students] x [per pupil revenue]
= maximum gross revenue
Use a Realistic Revenue Projection
• Most new schools suffer 10% attrition
from opening day.
Calculate Problem #2:
[Maximum gross revenue] x [0.9]
= likely gross revenue
How Much Should I Spend on my
Building?
Key Rule: Occupancy costs should be no
more than 15% your revenue.
(This includes maintenance,
rent/mortgage payments, insurance and
all other building related expenses)
Calculate Problem #3:
[0.15] x [likely gross revenue]
= maximum facilities expense
Caution on Facility Spending #1
• Caution: Realtors may encourage you
to spend 20% of your maximum gross
revenue on your lease or mortgage
because this can increase their
commissions by as much as 30%.
• Spending such a high % of your
revenues on facilities provides no
margin for error should enrollment
lapse.
What Size Building Do I Need?
Key Rule: You should plan at least
75 square feet per student (100 square feet
per pupil is ideal)
Calculate Problem #4:
[# of students] x [75]
= minimum usable space for building
[Max facilities payment] / [Min square feet]
= max rent/mortgage per square foot
More Than Just Rent: Operating Costs
• Though rent or mortgage will be most of your facilities
expense, it won’t be all of it.
• Here are some other items you’ll need to consider. These
will not be included in a mortgage, and may or may not be
included in a lease.
Expense Item
Typical Cost/ft2/Year
Utilities
$1 -$2
Repair/Maintenance
$1.00
Roads and grounds
$0 - $.50
Cleaning
$.90
Security
$0 - $.75
Administrative
Total Operating Expenses
Fixed Expenses
Total Operating and Fixed Expenses
$.75 - $1.55
$4.5 – 6.5
$1 - $2
$6-7
How Much Can I Spend on a
Mortgage or Lease?
• Remember to account for those operating costs we’ve
discussed. Typically, they come to about $6/ft2.
Calculate Problem #5:
[Max cost per ft2] – [ $6 ]
= Max mortgage or non-inclusive
rent per ft2
[Max mortgage or noninclusive rent per ft2] x
[building size in ft2]
= Max mortgage or
non-inclusive rent
Mortgage or Lease
Utilities
CAM
Repair/Maintenance
Grounds
Security
Administration
+ Insurance
= Total Facility Cost
How Much Should I Spend on my
Teaching Staff?
Key Rule: Your spending on teachers should
equal at least 55% of your likely gross
revenue. (This includes salary and benefits.)
Calculate Problem #6:
#Classes x Avg # of teachers/class=
# of teachers
[0.55] x [likely gross revenue]
= teacher staffing budget
Caution on Facilities Spending #2:
• Caution: Schools that spend less than 55%
of their revenues on instruction and more
than 15% on facilities have limited budget
flexibility:
• You can always hire additional teachers or parttime instructors to fill gaps, but you cannot easily
eliminate 2,000 unused sq feet of a building.
Calculate Problem #6 (part 2):
[Minimum teacher staffing budget] / [# teachers]
= average teacher salary and budget
What’s Left?
• After 55%+ for teacher pay,
• 15% for occupancy costs, you have:
30% likely gross revenue for
student services, administration,
and any other costs.
Calculate Problem #7:
What do you have left?
How do I get the Building I Need if my
School Starts Small?
• Caution: New school leaders face the choice:
– Obtain a facility on day one that is big enough to
accommodate their final, maximum ideal enrollment
[OR]
– Lease a temporary facility for the first few years
• Either choice holds perils
• Many landlords will allow you to create a
“ladder-style” deal, where your rent increases
as enrollment grows. Again, the peril of
ladder-style deals is that schools seldom grow
as quickly or smoothly as they wish.
5 Key Take-Aways
1. Facility budget = Max 15% of
likely gross revenue
2. Teacher staffing budget = at least
55% of likely gross revenue
3. Minimum facility size = 75 ft2 per
student. 100 ft2 per student is
ideal.
4. Be aware of your realtor’s
personal interests.
5. Do not sign any single-source
agreements.
Leases
• Leases can be very long and technical but
you still are responsible for understanding
it completely before signing it
• Have your own attorney examine the
lease with you
• Some leases contain “hidden” clauses that
will force schools to pay more for their
facilities
• Learning to understand and negotiate a
lease could save your school thousands of
dollars!
Types of Leases
Flat or Fixed Leases
• A single rent is set for a definite period of time.
Gross Leases
• The tenant pays a flat monthly amount.
• The landlord pays for all operating costs for the building.
• In some cases, the tenant pays for its electricity, heat, and air
conditioning.
• This type of lease often contains an escalation clause that
allows the landlord to increase the rent annually to offset
increased expenses.
Step Leases (Ladder-Style)
• The rent is increased at a set amount on an annual basis
during the life of the agreement.
• The increase is to cover the landlord's expected increases in
expenses.
• The increase is based on estimated rather than actual costs.
Cost-of-Living Leases
• The rent is tied to rises in the cost of living.
• The rent goes up with general inflation.
From FindLaw.com
Types of Leases (con’t)
Net Leases
• The tenant pays a base monthly rent plus some of the expenses.
• The increases are based on actual costs rather than on estimates.
• The rent increases at the time that the landlord incurs an increase in
costs.
• In some cases, the tenant pays rent plus all of the real estate taxes.
• If leasing only a portion of the building, the tenant will pay a
proportionate share of the taxes.
Net-Net Leases
• The tenant pays the base rental amount, real estate taxes, and
insurance premiums.
• The insurance and real estate taxes are allocated among the tenants
based on the proportion of space occupied.
Net-Net-Net Leases (the most common lease)
• The tenant pays the base rental amount plus the landlord's operating
costs.
• Included in this amount are real estate taxes, insurance,
maintenance, and repairs.
Percentage Leases
• The tenant pays either a base amount and a percentage of gross
income or, depending on which is higher, pays a base amount or a
percentage of the business's gross income.
From FindLaw.com
Best Leases for Schools
• Depends on age of school and the
local real estate market
-More negotiating room in depressed
markets
• Start-up schools will benefit from
stable occupancy costs
• More mature schools should
consider buying their facility, if
possible
Terms
• Escalation clauses
– If the landlord’s expenses go up, s/he has
the right to increase your rent
– Typical for gross leases
• CAM (Common Area Maintenance)
– If your school is in a multi-tenant building,
understand what you’re doing
• Leasehold Improvements
– Alterations to a leased property
What’s in a Lease?
It depends! Before you sign anything, understand:
• Who pays for: Utilities, CAM, Maintenance, Improvements, Taxes
(remember, you are tax exempt.)
• If lease-to-purchase, how is the purchase price calculated?
• What happens to improvements you make? Can you deduct them from
the cost of purchase?
• What constitutes “maintenance”? Usually not roof, HVAC, etc.
• How can you exit the lease if need be?
• Under what circumstances can the landlord kick you
out?
[Advice: Have an attorney—on your side—
look at the lease. You may have to pay to
hire someone, but it’s worth it.]
Parts of a Lease
• Name of parties involved (usually
referred to as “Tenant” and “Landlord”)
– Only the parties outlined as “tenant” and
“landlord” are legally bound by the
contract. Make sure board members and
other supporters are not personally
mentioned in the lease
• Term
– Length of lease
– Start-up schools should look for relatively
short leases with an option to renew at the
end of the lease
Parts of a Lease (cont’d)
• Base Rent and Payment Details
– Outlines the minimum amount of rent you
will pay
– Reveals any possible fees or elevations
– Usually the type of lease (NNN, gross, etc)
is not explicitly mentioned, but this section
will outline which party is responsible for
paying which expenses
– Make sure the lease clearly explains how
expenses and rent elevations will be
calculated
• Fees
– Outlines when bills are due, what penalties
will be assessed for late payments, etc
Parts of a Lease (cont’d)
• Utilities and
Service/Conditions/Responsibilities
– Should give exact information about paying
for utilities, CAM, parking, janitorial, etc…
• Repair and Maintenance
– Who fixes what (and who pays for it) when
something breaks
• Alterations and Improvements
– Outlines what type (if any) of leasehold
improvement you can make
• Landlord Liability and Rights
– In what ways can the landlord waive
responsibility and when are they allowed to
terminate a lease
How to read a lease
• Skim first to identify the exact dimensions of
the building (the premise) and the land
(property)
• Identify the exact date the lease will begin
and end and look for any possible lease
extensions
– Paying rent months in advance of receiving
revenues could put your school in a difficult
position
• Look for clauses about parking, equipment,
restricted uses of property, ability to alter the
premise, subletting, etc
• After you understand the above, have your
lawyer thoroughly review the lease
Red Flags
• Verbal agreements from landlord
are not in written lease
• Landlord takes no responsibility
for repairs
• Single-source contracts with
realtors
Thanks!
And good luck!
Questions?
Steve Saltzman
919.956.4620 800.476.7428
steve.saltzman@self-help.org