Small Town School Loans

How One School Utilized the Rural Development Fund

 By Mark Anderson

 The Brixham Montessori Friends School of York City, Maine, is a small school (40 preschool and elementary students) in a small city (York is home to just over 13,000 residents).

But the 9-year-old program has been steadily establishing its reputation in this coastal community, and the Brixham staff, board and parents agreed a year-and-a-half ago that the school’s next important step should be to grow.

Their strategic planning process outlined a handful of steps leading toward that goal. They agreed to open a toddler program, to meet a community need and start building parent relationships at an earlier stage. They called for a third 3-6 year-old classroom that was already in demand. Most importantly, they said it was time to acquire a new building to accommodate those expanded activities, as well as provide more space for art and music programs, schoolwide events and staff offices.

There was a roadblock in front of those goals, however, remembers Alica Johnson-Grafe, founder, teacher and administrator at the school.

“We went to our local bank and they looked at us and went, ‘Hmmmmh... . There’s not a lot here, is there’ in terms of securing a loan,” a financial refrain that has disappointed countless small schools with no real estate and little cash to back up their loan needs. 

But the bankers were sympathetic, too. They provided Johnson-Grafe with the first in a series of referrals that eventually led her to the Rural Development Fund, a 30-year-old U.S. Department of Agriculture program that provides capital loans to schools and other “essential” facilities in small communities.

Loans Match Small Markets

The RDF program fit Brixham’s needs to a T, as it has at many rural and small-city schools and preschools with capital needs all over the nation.

A key to RDF’s value is its understanding that small communities often work at a smaller scale than other markets. Program founders recognized that investments in its target communities rarely translate into big expansions and cash flow increases. To accommodate those modest returns on investment RDF offers fixed-rate, very long-term loans of up to 40 years, which drive annual debt service costs well below those on conventional 20- or 30-year loans.

The program also forgoes equity requirements from the borrower — another valuable benefit to young businesses — and it offers interest rates that are “always significantly below market rates,” said Ron Lambert, head of the Community Facilities loan program in Maine. Rates are set each quarter; new borrowers obtain a fixed 4.625 percent rate during the third quarter of 2006. 

With financing terms like that Brixham and Johnson-Grafe were able to buy a former office/industrial building in downtown York for $1 million, with another $280,000 earmarked for renovation.

The RDF loaned $1.18 million of that, at a fixed rate of 4.375 percent for 40 years. A Brixham school community fundraising campaign brought in the remaining $120,000.

Those are very favorable terms for a borrower, but the lenders say they’re confident in RDF’s ability to successfully underwrite loans in which a borrower’s business acumen must offset the lack of collateral.

RDF’s underwriting focuses on the last five years of financial reports (schools with less than five years in operation face longer odds for approval), and those should come from an independent accountant, or from thorough reports kept by a skilled staff member or volunteer.

RDF also requires a comprehensive pro forma for the expansion, demonstrating the expanded school’s ability to add enough income to repay the loan and any other new costs.

“A school like this may have been leasing discounted space at a church up to this point,” Lambert pointed out. “We’ve got to see budget projections that show they’re anticipating, and that they’ll be able to pay, new costs that, historically, they haven’t faced.” 

Johnson-Grafe hired an independent accountant to help Brixham polish its reports and its forecasts. “That was very helpful,” especially in helping to forecast the school’s opportunities to add revenue and income in the years ahead, she said.

Demonstrating a Community Role

But RDF isn’t interested only in creditworthiness. The program lenders also must see that their borrowers are working to meet genuine local needs.

One of their tests is to look for community representation on the board of directors, especially independent members from outside the school. Community board membership isn’t required, however, if the school can demonstrate its participation and benefit to the larger community in other ways.

Brixham provided a textbook example in how to demonstrate community backing.

“We’ve always had investment from everybody in our school,” Johnson-Grafe said. Families served on the board, volunteered on school activities, and took part in the strategic planning process. They solicited local businesses and organizations for fundraisers and events, spreading the Brixham story in the process.

Brixham kept families in touch with the school after their children graduated by distributing an alumni yearbook with a short write-up on former students and families.

Johnson-Grafe joined the local Chamber of Commerce, and she nurtured a relationship with the local public school, collaborating with the district on professional development programming and sharing information with curriculum specialists.

So when the Maine RDF office asked for 30 local letters of support for Brixham’s expansion, many community friends were ready to help, confirming Johnson-Grafe’s convictions about the value of tending your networks.

“It takes a lot of time but it’s important to be out in the community, making sure people see the good work that’s going on in your school.”

The loan process took time, too. Johnson-Grafe said she worked through an enormous amount of paperwork during the yearlong process, but she added that the RDF staff’s encouragement and advice made the difference. “They were very supportive and collaborative. They wanted us to succeed.” 

Nationwide, lending on schools has declined slightly during the last three years as the program emphasis shifted to small-community security needs outlined in new Department of Homeland Security requirements.

But the spigot is still open for schools. In 2005, the Community Facilities program granted 65 direct loans worth $145 million to preschools and schools around the country, and it guaranteed another 15 loans worth $12 million.

That public investment will pay off for the small city of York, as Brixham converts its facilities loan into at least four new permanent jobs, and the renovation and reuse of a vacant building. And it pays off for Brixhman school and its families, who get earlier access to a high-quality Montessori program and a better environment for students and teachers to carry out their school lives.

All thanks to Brixham’s partnership with a friendly arm of the U.S. Department of Agriculture. “I’m not a financial person,” Johnson-Grafe admits. “I’m a teacher, and it was a great thing to have people [at RDF] with strong business skills eager to collaborate with us, helping us to finish this.”

Steps to Get Ready

 Organize your school’s financial and organizational documents: annual financial reports, charter, bylaws, board records and 501(c)3 documents. Polish your business plan and its analysis of how your expanded business will perform. RDF staff will advise you on how to refine those plans — and when to bring in expert advice. 

 Think about the network: How many people in your community are aware of the valuable resource your school provides? Can you expand the network? 

 Raise some cash: No equity is required to obtain Community Facilities loans, but you’ll have to pay various fees — for attorneys, for appraisals, for down payment on real estate — out of your pocket. 

 Visit the USDA Rural Development Web site: www.rurdev.usda.gov for details on the Community Facilities loan program, available in any communities with populations under 20,000. You can find the phone number for your state office at the site. Call them for details and advice on how to apply in your state.