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4. CDFIs “Make the Market” for Charter School Facilities Financing

Annie Donovan

This chapter examines the role community development financial institutions (CDFIs)[1] play in supporting the growth of public charter schools, one of the most significant education reforms in decades. CDFIs are financial institutions whose primary mission is to provide capital and development services to meet the needs of low-income people and communities. CDFIs fill market niches underserved by traditional banks and investors. Charter schools are publicly funded but operate independently of school districts. They receive funding for operations but usually are not provided a facility and must find and finance one on their own.

The rapid growth of the charter school movement has created a financing demand estimated to exceed several billion dollars.[2] Banks and other financial institutions have been reluctant to lend to charter schools for a variety of reasons. Chief among them is the experimental nature of the charter movement and the attendant risks that come with start-up ventures. With expertise in high-risk lending and innovative problem solving, CDFIs have stepped in to provide much-needed capital and technical assistance. In the process of responding to the considerable demand for facilities financing, CDFIs have propelled their own growth and are finding a path to reach investors in the capital markets. Their work is a case study of how CDFIs can “make the market" – that is, how their investment activity can establish the viability of an emerging market and nurture its development to the point of market acceptance.

Central to the success of CDFIs in the charter space has been the participation of the federal government through the Credit Enhancement for Charter School Facilities Program (CECSF). Enacted first as a demonstration in 2001 and later authorized under the No Child Left Behind Act, the program makes funding available to induce investment in charter school facilities. As of2007, the U.S. Department of Education (DoE) has awarded $160 million under the program, 83 percent of which has gone to CDFIs. While the program was not intended specifically for CDFIs, they have proven to be the most effective vehicles for organizing and delivering capital to this emerging market. Data compiled by The Charter Coalition shows that for every $1 of federal funding, program grantees have raised $8 of private capital, or nearly $1.3 billion (thechartercoalition.org). The availability of credit enhancement has not only helped charter schools gain access to capital, it has created an opportunity for CDFls to grow, innovate, and move the development finance field to the doorstep of the capital markets.

  • [1] CDFIs are organizations whose primary mission is to use financial and development services to create access to capital for underserved markets and communities. The CDFI Fund certifies CDFIs. Not all CDFIs are certified by the CDFI Fund.
  • [2] Because no formal estimates exist, the author estimated demand on the basis of the percentage of schools seeking financing each year, average school size, average enrollment, and the cost of development per square foot. The range is $1.3 to $3 billion per annum.
 
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