Highmark structures financing for charter and private school facilities as either a lease or a mortgage, whichever is most beneficial to the school. Schools are afforded considerable flexibility to purchase or refinance the property via the tax-exempt bond market, commercial lending, or other means.
Flexibility is important. In some states, lease-reimbursement aid that schools receive goes away when the board takes ownership of the property. But in some other states, onerous construction procurement processes apply when a school holds title to its building or real estate. These processes could drive up costs and unnecessarily extend construction schedules. On the other hand, real estate taxes might apply to the property if the school does not own it.
In some cases, a school board benefits by creating an affiliated entity, a foundation or a “friends of the school” non-profit company to hold the real estate and lease to the school. This structure could alleviate both the public procurement burden and property taxes. Each state and each school is unique.
Bottom line: We are flexible. What matters most to us is a financially sound, academically excellent school operating within the confines of the law.
Our lease transactions are structured as 20-year triple net (NNN) leases. “Triple net” means the tenant (the school) is responsible for (1) insurance, (2) maintenance and utilities, and (3) real estate taxes, if applicable. It’s a common structure in commercial real estate. 20 years is a long time, and we understand that most schools want to own their buildings eventually. So we offer buyout opportunities at certain points throughout the lease, beginning after year three of occupancy.
Our mortgage transactions function in basically the same way as our lease structure, except the school (or its affiliated foundation) will hold title to the property thus enjoying any benefits that might come with ownership. And as noted above, the school (or foundation) has refinance opportunities at designated points during the mortgage, starting after year three of moving in.
A school board is never obligated to buy or refinance the building at any specific time. We don’t force schools out. In fact, we frequently expand our clients’ facilities as enrollment increases and they become attractive to traditional lending options. Schools can stay in their lease or mortgage for years and years if they’d like.
Commercial lending, the tax-exempt bond market, and government-subsidized lenders have shown that charter schools will secure the most attractive, long-term mortgage after they’ve demonstrated stable governance, solid academic performance, several years of clean financial audits, and accumulation of a sizable fund balance. This can occur after three years of operations, but more often it occurs after five or seven years or more.
One bond analysis study showed that 63% of all tax-exempt bond transactions benefited only those charter schools in operation for five years or more. And a full 25% benefited only those charters that had been operational for 10 years or more.
Until schools can access the tax-exempt bond market, attract commercial lenders, or benefit from government-subsidized lenders, Highmark is the perfect solution. Perfect for new and young and growing charter schools. Perfect for growing EMOs and CMOs. Perfect.
Enjoy your permanent building now and purchase it when it makes economic sense. Give us a call. We’d love to hear your story.