By Corey Carlisle and Caitlin Kovalkoski, Low Income Investment Fund

The growth and influence of high-quality public charter schools has profoundly reformed the American education system since Minnesota enacted the first charter school law in 1991. This has been particularly true for low-income families and minorities, who are disproportionately served by public charter schools and often lack educational options available to other groups. According to an Oct. 24 article in the San Francisco Chronicle, in California alone, nearly one in 10 students is enrolled in a charter school.

One of the biggest challenges for public charter schools is obtaining quality school facilities. Though they are public schools, public charter schools often do not have access to school district buildings, nor do they generally have the ability to participate in school facility bond programs operated by local authorities. The lack of a property tax base with which to guarantee the public charter school’s repayment of debt is often exacerbated by lower per-pupil funding compared to traditional public schools. Moreover, the reauthorization risk of a typical five-year term of a public charter school makes long-term financing very difficult. Given the expected growth of the sector, it should come as no surprise that community development financial institutions (CDFIs) have played a huge role in delivering a scalable solution for public charter schools and the New Markets Tax Credit (NMTC) program has increasingly been used to finance their facilities.

Why NMTCs Make Sense for Public Charter Schools
CDFIs first underwrote charter school facilities in New Jersey and New York with the NMTC, and their experience led the way for other lenders to build expertise in this sector. The seven-year structure of the NMTC is an ideal fit for charter school facilities financing, as it allows a school to significantly reduce its debt service in the critical years of early operation as it builds its academic record and grows student enrollment. At the end of the seven-year term, the charter school should have at least one successful renewal of its charter based primarily on its academic performance. This renewal mitigates the risk perceived by traditional private sector lenders, allowing the charter school to refinance any remaining debt at more favorable rates, often using the equity in the NMTC deal to pay down the original loan amount.

Public Charter School Growth Fuels NMTC Demand
According to a 2012 survey conducted by the National Alliance for Public Charter Schools, there are more than 5,600 charter schools serving over two million students across the country. The annual growth in the public charter school movement is strong, with 400 to 500 new schools opening each year and 150,000 to 200,000 new students enrolling in charters each year. However, the demand for a seat in a public charter school is outpacing the growth, with over 610,000 students on charter school waiting lists, an increase of nearly 200,000 students since 2010.

The survey also confirmed that inadequate facilities remain a major obstacle for public charter school growth. “More than half (56 percent) of public charter schools responding to the survey reported that their current facility will not have adequate space for enrollment in five years,” the survey said. This growing demand for public charter schools and the facilities to house their academic programs has been reflected in the use of the NMTC.

According to NMTC data through fiscal year 2010 and an additional survey conducted by the Charter School Lenders’ Coalition, community development entities (CDEs) provided more than $1.15 billion of NMTC allocation to public charter schools through 260 transactions. These investments supported more than $2.5 billion in total financing of academic space for 125 public charter schools in 23 states and the District of Columbia. It is interesting to note that nearly half of this activity has occurred since 2009. Moreover, of the 36 CDEs that have financed at least one public charter school through their NMTC allocations, two entities have a singular focus on charter school facilities – Charter School Development Corporation and ExED. While this sector only represents approximately 5 percent of the total NMTC investment since the program’s inception, it is safe to say that charter schools will continue to seek capital through NMTCs to expand their operations.

Accelerating Academic Success with NMTC Financing
California-based Rocketship Education is an award-winning nonprofit elementary charter school network dedicated to eliminating the achievement gap for low-income students in and around San Jose, Calif. Rocketship students spend part of the day learning basic skills at their own pace on computer programs, which constantly assess their progress and adjust instruction.

The Low Income Investment Fund (LIIF) provided Launchpad Development Company with $10.5 million in NMTC financing for the development of Rocketship Discovery Prep Charter School in San Jose, Calif. The new school serves more than 600 kindergarten through 5th grade students in the Five Wounds/Brookwood Terrace neighborhood. Ninety percent of the local elementary school students qualify for free or reduced-price lunch programs. The NMTC transaction enabled Launchpad to purchase an industrial storage yard, which it has developed into a two-story 21,000-square-foot building with 17 classrooms, a multipurpose room and office space. The outdoor space includes play areas and a covered eating area. The developers incorporated green building elements during construction.

In 2012, Rocketship announced its first expansion outside of California and plans to open a school in Milwaukee in 2013. The organization’s long-term goal is to expand from its seven existing schools to 2,000 schools in 50 cities, serving 1 million students. No doubt, like the investment LIIF and others made for Rocketship Discovery Prep Charter School (see example) as well as three of their other schools, the NMTC will be a useful resource to fuel expansion and continue Rocketship’s transformational impact on the lives of disadvantaged youth.

Combining NMTCs with Other Capital Sources
Just as other sectors require multiple layers of financing, it should be noted that some public charter schools will require additional public subsidy, such as state capital funds or the U.S. Department of Education’s Credit Enhancement for Charter School Facilities (CE) program. In fact, of the 125 charter schools identified as qualified active low-income community businesses (QALICBs) under the NMTC program, 40 also benefited from CE funding, including Rocketship Discovery Prep. The $7.2 million leveraged loan in the Rocketship Discovery Prep deal included up to $675,000 of CE funding to attract $3.75 million from two other CDFIs to add to LIIF’s $3.41 million loan.

No Surprise: Better Results Linked to Better Performance
CDFIs and other public charter school lenders assess other important factors such as academic performance and board governance when determining whether or not to lend to charter schools. Ernst & Young’s 2011 analysis of $1.2 billion in loans to charter schools, “A Decade of Results: Charter School Loan & Operating Performance,” found that only 1 percent of the total loan amount in the study ended in foreclosure. Among the outstanding loans, a little more than 3 percent were reported as delinquent for 60 days or more at any point in their history. Not surprisingly, stronger academic performance was associated with better loan performance. Among the delinquent or extended loans, 53 percent of underlying schools met the adequate yearly progress (AYP) requirements of the federal No Child Left Behind Act, compared to 74 percent of underlying schools for all other loans.

Outlook for the NMTC Program
The NMTC is not, as of yet, a permanent part of the tax code, and as such requires (usually yearly) action by Congress and the president to reauthorize the program. To that end, Congress decides the fate of this and other expiring tax provisions as part of massive “tax extenders” legislation. Last year, Congress failed to act on many of those provisions and as a result the NMTC expired on Dec. 31, 2011.

In September 2011, the Senate Finance Committee passed legislation extending the life of various tax provisions, including a two-year extension of the NMTC at $3.5 billion for both 2012 and 2013. The House of Representatives has not moved any legislation dealing with expiring tax credits this year. As advocates continue to build a case for the importance of the credit with lawmakers, such as its vital importance to public charter schools, we anticipate momentum in the House will continue to build for movement of the tax extenders and the NMTC.