How do you place a value on great schools? It’s a question that conventional lenders have struggled with for a long time. For many financial institutions, schools can be a hard investment to evaluate. Financing K-12 educational facilities often requires small, complex deals – and if something goes wrong, it’s hard to fix.
But at the nonprofit Equitable Facilities Fund, we know high-performing public charter schools are a worthy investment, because a great education will always be in high demand.
Since 2018, our social impact fund has committed $506 million in low-cost, long-term financing to support excellent schools serving more than 40,000 low-income students across 14 states. These loans have saved schools over $120 million – funds that can then go back into the classroom where they belong.
We’ve built a team of finance experts and charter school veterans driven by their steadfast determination to extend equitable capital access to schools and communities.
When the pandemic hit in March 2020, chaos hit the capital markets. For schools, particularly those that serve under-resourced communities, securing facilities funding became even more complicated than usual, thanks to soaring interest rates and hesitancy from banks to lend at all. A lack of funding would mean holding off on new construction and renovations meant to serve more students in their communities.
Being bold in our belief about what’s possible for these schools and students is a pillar of this effort.
EFF had to quickly make a choice – pause all work until the market stabilized, or stay true to our mission and continue lending to quality schools that were also sound financial investments.
EFF was founded as part of the Walton Family Foundation’s Building Equity Initiative, the first and largest philanthropic effort of its kind to tackle the biggest systemic barriers to growing high-quality public charter schools. Being bold in our belief about what’s possible for these schools and students is a pillar of this effort, and it allows us to make investment decisions that traditional financial institutions cannot.
During the early days of COVID-19, boldness took the form of an inventive new lending structure that we named “Cap and Rebate.” As interest rates rose during the market upheaval, we capped the rate hike for our schools and continued making a market for quality charter school loans. If and when the pandemic-stricken credit markets recovered, EFF would recalibrate the loans and refund any additional yield incurred by the schools at the temporary higher rate.
We knew our fund was in a better position than schools to take on this added risk, and our unique structure helped. Unlike many traditional banks, we also are deep in the details of school operations, working closely with each school to develop a sound financing plan based on their community’s needs, enrollment projections and what they can afford over the long term.
The Cap and Rebate strategy worked. By August 2020, the market had completely recovered. We had kept facilities projects moving amid uncertainty and were able to put $27 million back into the operating budgets of eight schools.
One school that participated in Cap and Rebate during the pandemic was Scuola Vita Nuova in Kansas City, Missouri. A K-8 school in the area’s urban core, 80% of students live within a two-mile radius, populated by a diverse mix of Hispanic, Somali, Vietnamese, African American and white families. Despite 90% of students receiving free and reduced lunch and 63% identifying as English Language Learners, the school has a track record of excellence, consistently outperforming schools throughout the district and state with similar demographics. In 2019, SVN was recognized as Charter School of the Year by the Missouri Charter Public School Association.
Despite a lack of state funding for public charter facilities, the school knew it had to expand to accommodate a growing community waitlist. To fund a major addition to the former Catholic grade school that housed them, Mary Pittala, SVN’s director of finance and operations, began researching lenders.
“Our options were very limited,” Mary said. “Banks were unwilling to lend funds necessary to complete a project of this size, and what they could lend was at a much higher interest rate and shorter pay-back terms. Historically, school buildings appraise for less than the cost of the renovations; if the school shuts down, the bank considers the building a single-purpose building, making it much less attractive for resale.”
SVN was deep in the planning process with EFF when the pandemic hit. Because of the Cap and Rebate program, the process was not delayed, and SVN received an $8.8 million loan to refinance $2.1 million of existing debt from a previous construction project and $6.7 million to fund the construction of a new building addition to serve more than 400 students. Construction began in August 2020, and ribbon-cutting for the new facility is expected in August 2021. Over the life of the loan, the school is expected to save $3.2 million, including dollars rebated after EFF reduced the interest rate on the loan in the fall of 2020.
Of the new facilities, says Mary, “It demonstrates to our kids that we value them, that their space is important, and that we want them to be successful in school. Giving them a beautiful space with room for hands-on projects and instruction is key to our program."
As SVN and other public charter schools have long understood in their search for equitable facilities, great education is possible anywhere when schools are provided with sufficient resources. It’s a flexible and efficient mentality that served students particularly well during the pandemic.
EFF is proud to support this ongoing work. With the backing of $200 million in philanthropic equity and an “A” rating from S&P, EFF has built a deep bench of 40 major investors, 25 of which are relatively new to charter investing.
COVID-19 wasn’t the first major market disruption, and it won’t be the last. But as 2020 proved, investing in mission-oriented social impact funds is a smart bet. The ability to help thriving schools through crisis is what drives EFF to double down on the work ahead – to keep funding and growing great schools and students.
