A campus upgrade can be the key to furthering an independent school’s mission. Yet, by taking on too much debt, an institution can become overburdened and create unnecessary risk, which can linger for years to come. Finding the elusive middle ground — where highly anticipated improvements can be made without too much expansion of debt — is the challenge most school CFOs and Controllers often face.
Finding that balance can be complicated by the fact that no two schools are alike. Where one school may excel, another may struggle; where one has weakness, another displays strength. That’s why many independent school leaders find it helpful to conduct an in-depth evaluation of its finances and fund-raising capacity — similar to an internal report card — before approaching a lender with a large-scale improvement strategy. Surprisingly, it’s about more than just financial statement strength. Here’s what else you should know before you start planning your next large-scale improvement project.
The three-legged stool of capital finance
Whether planning a long, overdue upgrade to an academic building or the expansion of a gleaming, new athletic center, there’s no mistaking the long-term cost associated with a new campus facility. The ability to keep costs as low as possible can often hinge upon an administrator’s ability to simultaneously approach a project from several different angles. This three-pronged approach includes the following:
1. A solid cost estimate.
Construction costs have risen in recent years, which have inflated the costs associated with new classroom buildings, theaters and recreation centers. Being prepared with a solid architectural plan can help build a steady long-term strategy, whether a school completes a project in several phases or all at once. The more a school knows about its project requirements up front, the better prepared it will be to understand its viability and, eventually, meet necessary costs. Hiring a very experienced project manager early in the process is often the key to avoiding costly surprises.
2. Historical and potential fundraising efforts.
The more a school can fundraise before kicking off a project, the less it will ultimately have to finance. Still, this facet is often dependent upon a school’s long-term culture of giving, which isn’t always easy to change in the short term. Consider the health of your school’s annual fund, capital campaign history and diversity of gift revenue streams. These factors can provide guidance when evaluating future potential. Also evaluate the value of unrestricted versus restricted gifts, as unrestricted gifts offer higher financial flexibility.
3. A lender’s perspective.
It pays to be conservative and control costs but, for many schools, the acquisition of debt is a necessary component of a project’s completion. A lender will complete an in-depth evaluation of an organization’s overall financial position, including its understanding of the costs and timeline associated with the project in question. It will also review non-financial variables, like the composition of a project’s internal finance and strategy committees. Familiarity with a lender’s requirements, along with an understanding of where the school falls within its evaluation criteria, can help an administrator and Board of Directors work hand in hand when creating a long-term improvement plan.
Take stock of the unquantifiable
A high-quality lender knows that a school’s strengths may not always be present on their financial statements. A school with strong management, for example, will likely have the skills and know-how within its own administration and board room to complete a successful project. When the numbers don’t align, a lender will often want to know why, but will also consider the context.
Consider how strengths may compensate for weaknesses
Most lenders use a lengthy series of metrics to vet potential new clients. Still, a weakness in one or more areas can be overcome by strength in another. For example:
- A lack of cash flow may create a drawback for a financing proposal, but it doesn’t have to hinder it. Instead, a lender can carefully analyze a school’s long-term trends in enrollment, financial aid and annual giving. These three variables can help a lender determine how much long-term debt a school can prudently support.
- Low liquidity and inconsistent fundraising efforts may create challenges for the project. Still, if a school has strong management in place and a growing student body, a lender may recognize an organization’s potential for robust future growth. While it may not be apparent by reviewing financial statements alone, a capital improvement project could help boost enrollment efforts to a greater degree, which in turn helps cash flow and the building of liquidity.
In short, an in-depth understanding of a lender’s evaluation metrics can help prepare a senior leadership team before they tackle a new project. First Republic Bank uses a robust list of 10 metrics that evaluate a school’s readiness based on both quantifiable and non-quantifiable criteria. Knowledge of these metrics, as well an understanding of where a school falls within each, can create a framework for a broader discussion with a Board of Directors. The results of a school’s internal analysis can be used as an indicator of readiness. They can even act as a framework for a yearly report card when conducting an internal audit.
For more information about financing with First Republic Bank, or to find out more about the 10-metric list used when partnering with independent schools, contact firstname.lastname@example.org.