by Keith Donahue
The US Department of Education (USDOE) awarded Bluum, a statewide charter school support organization, a competitive $3.5 million Charter School Program (CSP) Credit Enhancement Grant. Bluum will use this grant to help outstanding school leaders design and build charter school facilities across Idaho. Specifically, Bluum will guarantee loans that schools secure for the predevelopment stage of their facility project. As shared below, financing the predevelopment phase of charter facility projects represents a real – and costly – challenge for new charters; this grant will allow Bluum to address this pinch point.
Why Is This Grant Needed – Charters Schools Fund Facilities Differently
Charter schools are an innovative part of Idaho’s public education system, not only from an educational perspective, but also with respect to how they finance their facilities. When traditional school districts need to construct a new facility, the district asks local voters to approve a ‘facility plant levy’. If the levy passes, the district takes on debt to fund the facility project and the new, voter-approved property tax revenues pay down the facility debt over time. In contrast, charter schools cannot seek local tax support for facilities projects. Like other start-up businesses, charter schools must secure financing out in the marketplace.
Typically, the first financing a proposed charter school secures is a ‘predevelopment loan’. During predevelopment, the school team works with architects to design the project, conducts due diligence on parcels of land, and, ultimately, completes all activities needed to secure a construction loan (usually in the $12 to $15 million range) to build the school. This predevelopment phase often takes one to two years and can cost $250,000 to $900,000 depending on the cost of the project. From the banking or lending community’s perspective, this is a high-risk stage of new school development.
The school entity is typically newly formed, does not yet have a building or students, has little if any collateral, and does not yet have a track record of fiscal performance. Given this, banks have been reluctant to enter this market. Schools have had to rely on philanthropy or, if able to secure a loan, very costly short-term debt. With this CSP grant support, Bluum aims to alter this landscape by attracting Idaho lenders to this market, and by securing favorable loan terms for participating schools.
How the Bluum Loan Guarantee Program Will Work
Bluum estimates the predevelopment loans, and therefore Bluum’s loan guarantees, will average $700,000 and 1.5 years. With these assumptions, Bluum has capacity to guarantee five predevelopment loans at any given time. At the end of the predevelopment phase, when the school secures its $12M to $15M in construction financing, the school uses a portion of the construction loan to pay off its predevelopment loan, thereby recycling the credit guarantee for another school.
Bluum hopes to receive USDOE approval to begin guarantee loans in early 2023. Bluum looks forward to building partnerships with Idaho lenders that will benefit our schools, and the families they serve, for many years to come.
Keith Donahue is Bluum’s Director of School Strategy and Operations.