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Why Charters?

Most CDFIs do not identify themselves as education reformers. So what motivated them to enter the charter schools market? First is simply the demand for development capital. As described previously, charter schools receive funding for operations on a per-pupil basis, but most states do not offer either a school building or funding to support facilities. From the outset, charter schools have identified finding, developing, and paying for a facility as one of the top three obstacles to starting and expanding their schools (DoE 1998).

The reasons traditional financial institutions were reluctant to lend to charter schools are not surprising. Charter schools in need of financing, especially in the early years of the movement, were likely to be start-up or early-stage ventures with an unproven financial track record. The terms of their charters are usually three to five years, yet they may require a fifteen- or twenty-year amortization schedule to make debt service affordable. The very nature of the charter contract is to be subject to closure for failure to reach academic goals. The bar is raised even higher because charters tend to enroll low-performing students. Another risk factor is that charter school buildings are often single-purpose assets with limited reuse potential, located in low-income communities where real estate values may not support the cost of redevelopment. Finally, charters usually face opposition at the state level from stakeholders within the traditional public school system. Objections are most passionate around the autonomy and resources granted to charter schools. For all these reasons, traditional investors were reluctant to even spend time gaining an understanding of the market. If there is such a thing as a "classic" development finance market, charter schools qualify. CDFIs saw an opportunity to add value.

A second factor is (hat, although created to improve the quality of public education, charter schools are proving to be an effective tool for community development. Because they serve low-income, minority students, charter schools are disproportionately located in urban areas that are financially underserved, a prime market for CDFIs. Charter schools often redevelop underutilized or dilapidated properties and convert them into attractive spaces. The schools create jobs and attract ancillary businesses and services to neighborhoods.

The third factor, and perhaps the most compelling, is that charter schools are improving the quality of education for low-income students in many communities. Most charters are founded by parents, teachers, educational entrepreneurs, and other community leaders seeking better educational outcomes for poor and low-income children who have no other choice than to be subjected to an educational system that almost everyone agrees is failing them. Data from the Center for Education Reform show that 42 percent of charter schools serve populations where 60 percent or more of the students are consider “at-risk”. In communities where half the children fail to complete high school, charters are preparing and sending low-income children to college. This is a significant poverty alleviation strategy.

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