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Private school secures loan to protect their endowment and creates $3 million in value for the school

Finding alternative funding sources helped this private school conquer a costly construction bill

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About the School

A 20-year-old private school outside of Baltimore, Maryland, serving over 350 students in grades K to 12.

The Problem

The school needed more administration and classroom space, and faced a $10 million construction fee. While they had the means in their investment portfolio to finance the project, dipping into the fund created the risk of shortfalls for covering scholarships and operating expenses not covered by tuition or fundraising.

Discussing alternative funding sources

Our Solution

Our team suggested that the school consider tax-exempt financing through the Maryland Health and Higher Educational Facilities Authority instead of dipping into the endowment. This gave the school the ability to borrow money at extremely low rates, while allowing their investment portfolio to remain fully invested in the markets.

After analysis and discussion with the administration and board, we also recommended that they take advantage of a weekly floating rate interest option rather than a fixed rate loan. Additionally, we recommended against engaging in an interest rate “swap” transaction. The board agreed that the school could accept the trade-off of potential interest rate increase for the current benefit of borrowing in a very low interest rate market.

The Results

The school secured a $10 million loan through MHHEFA and did not need to touch its portfolio to fund growth. By keeping its investment portfolio untapped, additional wealth for the school was created through growth of its portfolio over time. In fact, this strategy created over $3 million in value for the school which was used, in turn, for operating expense shortfalls and tuition assistance.

Key Takeaways

  • Always explore alternative sources of funding before dipping into endowment or operational funds
  • Don’t shy away from variable rate loans as their lower interest rate may result in less cost over the long term for your school
  • It’s critical that an investigation of tax exempt financing through state authorities be considered as part of any private school financing strategy
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