The American Indian Academy of Denver (AIAD) offers students in grades 6-12 a STEAM curriculum designed to meet the educational needs of American Indian and Latino students. Prior to its launch in 2020, AIAD sought an early-stage investment for tenant improvements to its facility. Founder and head of school Terri Bissonette knew securing low-cost capital was difficult for established charter schools and knew it would be even more challenging for her new school. She didn’t have a track record, and therefore, the bank terms were discouraging. Dr. Bissonette learned about the Colorado Charter Facility Solutions led by Jane Ellis and wondered if they could help.

Single Projects or Solutions that Scale

There are many ways for donors and investors to create high quality education seats, promote economic development, and support job creation. Many organizations support an individual school. They can provide their support via a grant that has an immediate and direct financial impact. The resources go directly to the grantee to meet the specific need - and then it is over.

Similarly, a donor or investor can provide a loan or a loan guarantee. The donor or investor either makes a loan or puts up some collateral to guarantee a loan. The donor/investor often takes on all the risk often with no recourse or security interest. A guaranty is like a grant in that it only benefits one project.

There is a third financial tool that allows for multiple beneficiaries: pooled loan funds supported by program related investments (PRIs). This financial tool allows for multiple investments both now and in the future, and therefore impacts more lives.

Benefits of Revolving Loan Funds (RLFs)

RLFs are very efficient structures to create. They provide benefits to charter school leaders in several ways. First of all, similar to a grant, the capital can immediately be put to use. Second, the loan is distributed at a zero or nominal interest rate, saving the charter school critical resources that can be directed to the classroom. Third, the funds paid back to the loan fund can be recycled and lent to another charter school, saving the next school critical resources, and so on.

Another critical aspect of a RLF is it can leverage investment from other lenders, especially if it’s used as subordinate debt. What does this mean? Often a charter school needs to finance the entire cost of a project. They may approach a commercial bank for a senior loan but that senior loan won’t pay for the entire cost of the project. The bank often requires the school to come up with some portion of the project costs, much like a home mortgage requires a 20% down payment.  A charter school in its early years doesn’t have a down payment and will need to take out a secondary loan from another source. The RLFs can fill this need and be used to pay for the gap in funding. This leverages the bank financing and makes the investment into the RLF go further. In addition to leveraging bank financing, a revolving loan fund can leverage other donors. Revolving loan funds can be of significant size and often rely on multiple investors. These are ideal for collaborative approaches to social investing, especially place-based investing in a certain state or region. As more impact investors are seeking to collaborate and join efforts to make bigger and more impactful investments, loan funds are an ideal solution.

Finally, the revolving nature of this loan fund can help a generous donor leverage her impact. Instead of giving one grant to help off-set the costs of one school facility, she can contribute to, or invest in, a fund that provides low-cost subordinate debt that is repaid and lent out to other schools saving schools critical funding and impacting more children’s lives. The donor achieves two goals: the first is social and the second is scale. For the former, the donor is advancing her mission to create high quality school options for children. The latter ensures her capital is continuing to benefit more and more children.

These investments can be in perpetuity or they can sunset and the original capital can be returned to the investor for future investments and grantmaking. Investments in funds that live on forever are typically made through grants. Investments that have a fixed duration of 5, 10, or 15 years are often made through loans or program related investments.

Investing through Program Related Investments (PRIs)

Partnering for Success in Colorado

In 2016, five donors – including the Gates Family Foundation of Colorado – joined together to launch a loan fund backed for charter schools in Colorado. They had the option of creating a stand-alone entity or partnering with a non-profit loan fund that was already established. In this case, they chose to start a new organization to administer the fund which includes sourcing schools, disbursing loans and managing repayments. The group of donors identified a leader with a strong background in community development investments. This created Colorado Charter Facility Solutions (CCFS) led by Jane Ellis.

Together the donors agreed to capitalize the fund with a mix of direct grants and program related investments – socially-motivated loans that are structured to achieve below-market rate returns – totaling $10 million. The goal is to support the creation of 10,000 high quality charter school seats throughout the state over a 10-year period. Working with the Colorado League of Charter Schools, Colorado Department of Education, the Colorado Charter School Institute, and Moonshot edVentures, CCFS has identified schools needing low-cost capital to open new schools or access new facilities. Since the first loan transaction in 2018, CCSF has lent $10 million to 14 schools which has leveraged almost $60 million in financing and created a total of 5,168 seats, while more schools are in the pipeline. As the loans are repaid, the funds can be recycled to award low-cost subordinate debt to new schools. To date, five out of the 14 schools have repaid their loans in full.

CCFS’ average cost of capital from the investors is about 1.50%. CCFS charges the charter schools a 3.5% interest rate, which helps to cover the organization’s operating expenses and the technical support they offer to the charter school leaders, as well as the interest owed to the PRI investors. The investors set a term of 10 years at which point they can decide to reinvest in the fund or direct their capital to other priorities. This is the power of a PRI – the investor can pursue different challenges as time goes by.

When Dr. Bissonette heard Colorado Charter Facility Solutions could be a partner in securing start-up facility funds she wondered if it was too good to be true. Working with executive director Jane Ellis and her team, AIAD was able to receive valuable technical assistance, two start-up lines of credit, and an unsecured tenant improvement loan totaling $750,000 at 3.5% interest. Without the Colorado Charter Facility Solutions loan, AIAD wouldn’t have been able to find a loan at any price that made sense. This initial loan capital allowed for AIAD to open its doors to students wanting better education options, and it allowed them to direct more money into the classroom rather than paying interest.

Partnering for Success in Idaho

A few hundred miles to the northwest of Colorado, the J.A. and Kathryn Albertson Family Foundation (JKAF) faced a similar challenge in 2013. Charter schools in Idaho struggled to find affordable, flexible financing for their facilities. This had hampered the growth of charters across the state. JKAF wanted to provide high-performing charter schools access to low-cost facilities financing. Rather than create their own fund as was done in Colorado, they partnered with Building Hope, a mission-driven nonprofit Community Development Finance Institution (CDFI) and provided a PRI that has grown to $32M as of 2021. Working with BLUUM, a nonprofit in Boise, ID that incubates and supports new charters schools, Building Hope provides subordinate loans up to 35% of the total facility project at a 3% interest rate. Using JKAF’s $32M program related investment, Building Hope has leveraged $72 million from traditional investors resulting in $104 million for new charter schools creating 13 new school facilities providing 7,200 new seats.

What has this meant for the school leaders and students they serve? In the case of Keith Donahue, who served as the leader of Sage International School of Boise and the founder of Forge International School, the partnership between JKAF and Building Hope ensured more of the per pupil allocation could be used to hire teachers and support students rather than service the debt on the buildings. For example, when Sage – a K-12 International Baccalaureate school – began to grow out of its space, Mr. Donahue realized they would have to pay nearly $1M in annual lease payments if they stayed the course. With the help of Building Hope and JKAF, they were able to secure a $4.5M subordinate loan at 3% interest, which helped Sage secure a $10 million bond through a local bank. Annual debt payments ended up being $750,000. When Sage refinanced in 2020, they were able to reduce their annual payments to $640,000 per year.

Mr. Donahue shared when the second campus at Forge was ready to launch, BLUUM provided critical technical assistance as they applied for their charter and coached them as they sought to buy a facility in year zero before students were enrolled in the school. Like the Sage campus, Building Hope provided the Forge campus subordinate debt so they could buy their facility, thereby decreasing costs for the school, reducing inefficiencies, and directing critical resources to meet the academic needs of students. 

What’s Next

For those who want to continue to impact the lives of students, consider the option of launching a revolving loan fund with a program related investment. The investment will have a multiplier effect by impacting the lives of thousands of kids by providing low-cost capital to multiple schools.

Dr. Bissonette recently wrote, “Facility affordability and finding low-cost start-up financing is the biggest impediment to growing charter schools in Colorado. Colorado Charter Facility Solutions has been a critical ally to many schools like AIAD.”

There are other examples of foundations that have considered using program related investments to reduce facility costs for charter schools. According to those who have succeeded in providing low-cost capital to charter school operators, it is important to have a local partner that can offer charter leaders technical assistance as they develop their school model and navigate the facility landscape, as well as identify investors who are willing to invest with a double bottom line: earn a modest rate of return on their investment and create high quality seats for students.

For those interested in launching a revolving loan fund, there are free resources at the Charter School Facility Center at the National Alliance for Public Charter Schools and at Impact4Ed.

See 10 Building Blocks for State and Local Charter School Revolving Loan Funds