Should I Use a For-Profit or Nonprofit Charter School Developer?
By Anand Kesavan and Rich Billings
We are often asked, should I go with a for-profit developer like Turner-Agassi or a nonprofit developer like Pacific Charter School Development?
First off, most charter networks do not have a non-profit developer option. There are three major nonprofit developers, Pacific Charter School Development (“PCSD”) which operates primarily in California, Civic Builders which mainly works in the northeast, and Charter School Development Corp (“CSDC”) which works in the middle of the country.*
But assuming you are lucky enough to have a choice:
A for-profit developer like Turner-Agassi is a one-stop shop for both financing and real estate development. They bring their own capital to projects. They have in-house expertise, a lot of experience getting projects done, and strong relationships with third-party service providers. While no two for-profit developers are alike, they can offer a few potential advantages to schools:
- A major advantage of going with a for-profit developer is they typically bring their own financing, which will reduce workload and financing uncertainty as they are not dependent on the approval of external financing partners
- Charter networks often do not have to invest cash upfront for project equity or pre-development costs, which is helpful if the school does not have significant cash. However, the network may need to come up with a 3–6 month security deposit at closing (e.g., $500 — $1M on a $20M project; potentially more depending on lease terms)
- For-profit developers have the financial resources to be aggressive in pre-development and site acquisition, even before a school partner is lined up. Occasionally, a for-profit developer may already own a property that a charter network wants.
- For-profit developers may take on the workload and risk to work their way through logistical problems that might stall other developers (e.g., cost overruns, appraisal issues, permitting, etc.).
- For-profit developers will often structure payments based on the number of students so schools can “grow” into their new buildings (although schools pay for this flexibility).
- For-profit developers have more willingness to construct buildings for new or early-stage schools. Since for-profit developers bring their own capital, they are able to support schools in ‘riskier’ stages of their growth.
- For-profit developers are willing to be the long-term landlords unlike nonprofit developers which often require you to purchase the building from them.
The flip side to all of this is for-profit developers need to deliver returns to their investors so the main question is whether schools can strike a deal that works well financially without hamstringing the school over the long-term. Developer term sheets can be confusing so the school needs to clearly understand all the costs and risks involved in a deal.
The good news: nonprofit developers also provide very attractive options. They too have a lot of in-house expertise and can manage projects from start to finish.
One of the key differences between nonprofit and for-profit developers is nonprofit developers usually do not bring 100% of the capital needed for a project. They typically partner with national and regional philanthropists to raise project equity and essentially act as intermediaries to raise debt from banks or Community Development Finance Institutions (CDFIs) like Low Income Investment Fund (LIIF), Nonprofit Finance Fund (NFF), Low Income Support Corporation (LISC) and Self-Help Ventures Fund (Self-Help), among others. Charter networks are usually required to put in equity equal to 5–25% of the total project cost.
Some key differences when working with nonprofit developers:
- Schools typically invest some equity in the project (e.g., $2M- on a $20M project) but this contribution is small compared to the third-party equity coming from philanthropists. However, the school’s equity contribution is usually “first dollars in” and can be used for pre-development so these dollars are at risk.
- Nonprofit developers go out into the market and raise debt financing a la carte. This is incredibly valuable expertise that schools can draw on, however, relying on outside lenders also brings complexity. For example, if a $20M project needs $14.5M of debt, the developer may have to get multiple lenders involved because most CDFIs will not invest more than $5-$10M in a single project. Securing construction financing can be a long, laborious process that causes delays. And lenders can insist on financing terms that tie deals up. All these issues are part and parcel of raising debt for building projects.
- Nonprofit developers typically structure “lease” payments for 3–7 years after which point the operator refinances in the capital market.
The table below captures some of the differences between for-profit and nonprofit developers described above. The headline is both are worth pursuing as potential partners. For-profit developers 1) reduce financing risk by bringing more capital to projects, 2) may require less cash from the school, and 3) occasionally use their resources to “smooth out” challenges that can otherwise stall a project. However, schools often pay heavily for these benefits so it is critical to understand how expensive the deal is and what type of financial burden is being put on the school over the long-term. Non-profit developers provide similar project expertise, but there are key differences in the capital-raising process which creates some incremental, yet extremely common, financing uncertainty.
This is Part 2 of a 3-part series on for-profit and nonprofit charter school developers.
Part 1: Should I hire a developer to build my next charter school or do it myself?
Part 3: How KIPP Bay Area Schools evaluates new facilities opportunities
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