Family & Community Students & Families Student and Secondary Support
21st Century Community Learning Centers (CCLC) Grant Program
(Federally funded through NCLB Title IVB - Fund Code 647)

Charter Schools - Approval of Loan Beyond Charter Term and Approval of Charter Amendment for SABIS International Charter School

Under the charter school statute, G.L. c. 71, § 89(j)(6), a charter school may incur temporary debt in anticipation of receipt of funds but requires approval of the Board of Elementary and Secondary Education (Board) if it wishes to agree to repayment terms that exceed the duration of the school's charter. In addition, pursuant to 603 CMR 1.11(1), the Board must approve major changes in the material terms of a school's charter, including changes to a school's contract with an "education management organization that is providing or planning to provide substantially all the school's educational services."

SABIS International Charter School (SICS) requests the Board's approval for two related requests:

1. to enter into financing agreements that extend beyond the term of the school's current charter; and
2. to make several changes to the management contract between SICS and Springfield Educational Management, LLC (SEM), the school's educational management organization.

SABIS International Charter School, located at 160 Joan Street in Springfield, is a Commonwealth charter school beginning its fourteenth year of operation. SICS currently leases a facility owned by Springfield Property Management, LLC (SPM). SICS currently contracts with SEM for substantially all of the school's educational services. Both SPM and SEM are affiliates of SABIS Educational Systems, Inc.

Loan Approval Request

The SICS Board of Trustees requests the Board's approval to enter into loan agreements for up to $35 million for a period of up to 30 years. With this financing, the school intends to acquire its current facility from Springfield Property Management for $25.5 million and to construct an addition to the school for approximately $4.5 million.

The school expects to realize cost savings and increased financial stability by purchasing the building instead of leasing. The proposed building addition will contain approximately 12 classrooms to better accommodate the school's maximum enrollment of 1,574 students. This facility expansion will also allow SICS to provide educational services to additional students above the current enrollment of approximately 1,520, including students from the school's waitlist of over 2,000 names.

SICS intends to secure permanent, mortgage-backed financing from PNC Capital Markets LLC (PNC), which will involve the issuance of tax-exempt bonds by the Massachusetts Development Finance Agency (MDFA). PNC will underwrite the transaction and fixed rate, tax-exempt bonds will be marketed to institutional investors.

PNC has acknowledged in writing its understanding that the Commonwealth of Massachusetts, including but not limited to the Board and the Department of Elementary and Secondary Education, provides no representations or guarantees with respect to these loans and has no liability for any portion of the loans. They have also acknowledged in writing that specifically and without limitation, the Board's approval of the loan has no impact on any action that the Board may choose to take in the future with respect to probation, revocation, or renewal of the school's charter. The proposed motion approving this loan agreement request is explicitly conditioned upon the inclusion of this language in the loan agreements themselves. These written acknowledgements will be required of any new lenders should there be changes. In addition, MDFA includes standard language in its public offering statements informing investors that they must rely solely on the underlying borrower's ability to repay the debt.

Charter Amendment Request (Changes to Management Contract)

The SICS Board of Trustees requests approval to amend its current management contract agreement with Springfield Education Management, LLC (SEM), which is concurrent with the school's current charter term, June 20, 2010. All proposed changes to the management contract are related to the compensation paid to SEM and will not impact any elements of the school's educational program. Specifically, three changes are being requested.

• Under the current contract, SEM is entitled to 100% of any operating surpluses generated by SICS as an additional management fee and SEM is correspondingly required to bear sole financial responsibility for any operating deficits. Under the proposed amended contract, for the year ending June 30, 2008, SEM will be entitled to 50% of any operating surplus, with SICS keeping the remaining 50%. Thereafter, SICS shall keep 100% of any operating surpluses and will be responsible for any operating deficits.
• Under the current contract, SICS pays annual management and license fees to SEM, equal to a total of 12% of gross actual charter tuition receipts. Under the proposed, amended contract, this fee will increase from 12% to 13%. Additionally, this total fee is increased to 14% for any year in which SICS has an operating surplus that exceeds $500,000.

The SICS board requests approval of these changes in order to use projected operating surpluses to support debt service costs for the planned purchase and expansion of the school's current facilities. Even though the base management and license fees will increase under the proposed contract amendment, the school expects to realize significant savings because SEM will not longer receive operating surpluses. A pro-forma budget projection provided by the school indicates that, between FY08 and FY14, the school will save approximately $2.3 million in total management and license fees paid to SEM under the proposed amended contract. In addition, obtaining and building equity through the purchase of its facility will provide SICS with a tangible and valuable asset that will add financial stability to the school. Both SICS and SEM have indicated that they will execute the amendment to the management contract as presented, upon receiving Board approval.

Recommendation

The Department has reviewed both of these requests, and they appear reasonable and consistent with the charter school statute and regulations. With the safeguards explained above and agreed to by SICS, I recommend that the Board approve these requests as presented.

If you have any questions regarding this amendment or wish to see the school's full request, please contact Mary Street, Director of Charter Schools, at 781-338-3200; Jeff Wulfson, Associate Commissioner, at 781-338-6500; or me.