Charter Schools in Opportunity Zones

The Tax Cuts and Jobs Act of 2017 created Opportunity Zones (“OZ”), which provide tax incentives for investment in designated census tracts. Since then, there has been a lot of buzz about the potential for Opportunity Zone investments to accelerate the charter school movement across the country There are 8,700 Opportunity Zones –and while many have charter schools, approximately 70 percent of them are charter school deserts, according to Education Next. This year saw the very first OZ-funded project that included a charter school come to market. Zeta Charter School (Zeta) plans to open its South Bronx campus for the 2020-2021 school year in a multi-use development, conceived and led by New York developer AB Capstone and financed by Starwood Capital’s new OZ investment program. Zeta’s General Counsel, Jessie Ferguson, explains that educating the investor community about financial and operating risks of the charter school industry was key to getting the deal done. With the potential for charter school growth in OZs, educating additional OZ investors could spur more enthusiasm for investing in and including charter schools in OZ development.

Educating the OZ Investor Community

Even a quarter century into the movement, charter schools are still largely misunderstood. Capital providers such as commercial banks and bond market investors have taken to the industry relatively cautiously, often raising concerns about the associated risk of charter renewal periods that occur within a financing term. That said, the historical default rate of charter schools is worthy of envy. While nearly 50 percent of all start-up businesses do not make it to a fourth year of operation, the majority charter schools do. In fact, most charter schools in existence today have received at least one charter renewal, providing strong evidence that their operations have stabilized. Ferguson pointedly asked, “Which would you rather have as an anchor tenant – a start-up restaurant or a charter school?”

A social-minded developer looking for a strong anchor tenant and a motivated OZ investor were key to making the project work for Zeta. “There were no guidelines or regulations out on Opportunity Zones yet when we first identified that the site was located in an Opportunity Zone,” says Ferguson. Nevertheless, the team blazed a trail through early development and lease negotiations with the OZ funding top of mind. While the school was not privy to detailed terms of the OZ investment, Ferguson is convinced that an affordable lease would not have been possible without it.

The mixed-use approach to the South Bronx project also helped assuage underwriting risk concerns for the investor. The community and amenities within the project will be beneficial to the school too: potential tenants include restaurants and coffee shops that will cater to teachers, parents and families, as well as a nonprofit organization aligned with Zeta’s mission. Another multi-family housing development will go up across the street from the school’s campus as well. There is no doubt that the presence of a quality school will serve a critical role in the long-term economic and social health of the community.

Growing Enthusiasm for an OZ Impact on Charter School Growth

Ron Beit sees a lot of room for OZ fund investors to help solve the facilities challenge for charter schools. Beit, CEO of RBH Group, recently completed Teachers Village, a $150 million mixed-use development project in downtown Newark, NJ, that is home to three charter schools, 203 units of affordable housing for teachers, 18 retail stores and an early childhood center. His charter school development experience predates Teachers Village. His first school development was KIPP Academy in Newark, completed in 2009. Now RBH Group has another eight Teachers Village-type projects in major metro areas planned across the country over the next 12-24 months.

Mr. Beit’s original vision with these projects was to provide affordable workforce housing to teachers along with educational offerings to create a unique community and high quality of life. The premise was that with such a community, teachers would be the “first movers in the emerging markets of neglected urban areas.” His firm began assembling parcels of property in 2005 and had several projects in the pipeline in what ultimately became “Opportunity Zones” by the time the Tax Cuts and Jobs Act of 2017 was passed. As Beit says, “Teachers Village was born in what was the predecessor of Opportunity Zones.” Although this pipeline of projects would have been financeable prior to the Act, the serendipitous timing of the new legislation will create, by definition, long-term equity sources from a cohort of investors that prior to the Act would not have spent the time to understand the complexity of these projects. He calls the incentive for investors to take the time to understand projects in many areas that would otherwise have been ignored, “one of the greatest benefits of the Opportunity Zones”.

Thus far, OZ fund investors are focusing almost entirely on tier one projects in tier one markets – projects that would have otherwise been financed through conventional sources. But Beit expects that to change in time. The projects currently under finance were already underway within an OZ, but once they are exhausted he says that, “There will be many years of Opportunity Zone financing and charter schools are a natural fit for Opportunity Zone fund investors.” The fundamental economic nature of primary and secondary education and the 10+ year investment horizon of OZ fund investors are what make the pairing especially attractive. And, over time, more equity capital seeking a limited number of projects in these focused geographic areas should put downward pressure on the cost of this capital further facilitating the construction of schools.

What’s Next?

Of course, how and when OZ fund investors turn their attention to single-use charter school projects is a question that remains to be answered. Perhaps one of the more important factors will be informing investors of a charter school project. The first step may be the creation of a ‘marketplace’ for these investors to easily find viable charter school development projects. School leaders can reasonably determine whether a site is located in an OZ through an interactive map hosted by The Opportunity Exchange website (www.the opportunityexchange.com). The Exchange also provides investors and charter schools with opportunities to identify potential projects and provides a listing of projects in certain cities.

The second step will be for leaders in the charter school movement to educate the OZ investor community about the relative safety and soundness of investing in charter schools. The leadership team at Zeta learned first-hand that the school has a role in attracting and educating investors. Simultaneously, charter school leaders will need to learn more about potential OZs can have to positively impact school financing. Just because an investment qualifies for OZ tax incentives, does not mean it is the best option for the school. There are many details to understand in advance, including the refinancing of the OZ investments 10 years from now. There is a need to develop resources that accurately assess the pros and cons of OZ fund investor financed facilities in contrast to other facility alternatives.

New Charter School Facility Center Report Highlights Disparity in Charter School Facility Funding

WASHINGTON, D.C.—Today, the Charter School Facility Center at the National Alliance for Public Charter Schools (National Alliance) released State Policy Snapshot: Facilities Funding for Public Charter Schools, a new report that looks at how states are enacting policies to help offset the cost of leasing, purchasing, and maintaining charter school facilities.

The report provides a snapshot of the 31 jurisdictions that have enacted at least one of the following five charter school facilities funding policies:

  • Providing a per-pupil facilities allowance to charter schools (18 states)
  • Creating a charter school facility grant program (15 states)
  • Ensuring that charter schools have equal access to all existing state facilities programs and revenues for district-run public schools in a state (11 states)
  • Providing a charter school facility loan program (14 states)
  • Providing charter schools with access to local property tax dollars generated for facilities (five states)

“Access to adequate facilities is the number one hurdle for charter school growth, as well as to providing the best educational setting for students," said Charter School Facility Center managing director, Mark Medema. “This report provides a comprehensive overview of the charter school facilities environment across the country and shines a light on where states need to do more to help charter schools meet their facility needs.”

The report found that out of the 45 jurisdictions that have charter school laws, 31 have at least one charter school facilities funding policy in place. Colorado, New Mexico, and Ohio lead the states, with each adopting four of the policies. Even within the five categories analyzed, policies vary widely. The report provides a state-by-state overview of charter school facilities funding laws that illustrate the multitude of ways in which states have addressed charter school facility funding issues. 

“As thousands of charter school leaders and advocates grapple with securing facilities, this report can spark conversations about how states can better support charter school facility funding,” said National Alliance senior vice president of state advocacy and support, Todd Ziebarth. “Since all charter schools are public schools, we hope the report will spur states to more equitably support the facilities needs of charter school students.”

About the National Alliance for Public Charter Schools The National Alliance for Public Charter Schools is the leading national nonprofit organization committed to advancing the public charter school movement. Our mission is to lead public education to unprecedented levels of academic achievement by fostering a strong charter sector. For more information, please visit www.publiccharters.org.

About the Charter School Facility Center A project of the National Alliance for Public Charter Schools, the Charter School Facility Center is the first-ever entity solely dedicated to helping public charter schools access better and more affordable facilities and facility financing.

U.S. Dept. of Agriculture Charter School Meetings

The USDA’s Community Facilities Programs offers direct loans, loan guarantees, and grants to develop or improve essential public services and facilities in communities across rural America, including charter schools. Over the past 10 years, nearly 100 charter schools have accessed over $500 million in USDA funding and the Charter School Facility Center is working to grow that number by increasing information and access to the funding.

Following a successful April launch meeting in Lansing, MI, the Charter School Facility Center sponsored a meeting in Sacramento on Charter Schools and USDA Financing on May 9. Held in conjunction with the California Charter Schools Association and Momentum Strategy & Research, the event brought together key California stakeholders well-positioned to improve opportunities for California charter schools via USDA financing. The event opened with the latest findings from Momentum’s ongoing research into the past decade of USDA’s charter school financing (Did you know that 50% of all loans are made in just three states?). USDA officials from DC and CA presented current info about their programs and lending opportunities while CCSA presented an update on California charter schools and facilities challenges. The resulting discussion explored the challenges that have prevented more widespread use of USDA financing in California and developed ideas for moving forward and improving access.

A state meeting was held on June 4 in Austin, TX, and an information session will be held at the National Charter Schools Conference.

National Alliance Receives Charter Schools Program National Dissemination Grant to Establish the Charter School Facility Center

WASHINGTON, D.C. – On Friday, September 28, the U.S. Department of Education’s Office of Innovation and Improvement awarded the National Alliance for Public Charter Schools a $2.4 million grant over three years to establish the Charter School Facility Center (CSFC), the first-ever entity solely dedicated to helping public charter schools access better and more affordable facilities and facility financing.

There are an estimated 5 million additional students that would attend a charter school if they had access to one today, but current charter school supply can't keep pace with demand. One key reason is lack of access to facilities. While district schools have access to many options for financing, renovation, and construction of school buildings, charter schools cannot access those financing mechanisms to get the facilities they need to open, grow, and expand.

“At a time when demand for charter schools is increasing, lack of access to affordable, suitable facilities is our biggest challenge," said Nina Rees, president and CEO of the National Alliance for Public Charter Schools. "Studies show that nearly one-in-five schools were forced to delay their opening by a year or more due to facilities related issues. The Charter School Facility Center is a critical step to addressing this problem and ensuring all students have access to a high-quality public-school building.”

The CSFC will capture and share existing best practices for improving and funding facilities for charter schools, and will develop new, innovative solutions to address this challenge. Among other activities, the CSFC will create a national advisory board of industry leaders to improve the collection of existing best practice resources and identify new ideas that merit wide dissemination. In addition, the CSFC will support discrete projects to address specific needs, such as acquiring affordable funding for rural facilities.

The National Alliance looks forward to tackling this work with our partners and leaders in the field including the Tennessee Charter School Center (TCSC) and Local Initiatives Support Corporation (LISC), a nonprofit Community Development Financial Institution. TCSC will support local capacity building through technical assistance and LISC will build on their online research portal, SchoolBuild, which provides critical data on charter school facility transactions and guides schools through the facility development process from start to finish.