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Charter School Investment: An Interesting Triple Net Niche

Buildings leased to charter schools have gained popularity among investors in recent years due to the rapidly expanding acceptance of charter schools as a permanent and necessary component of the nation’s education system.  The stability and longevity offered by charter school tenants is particularly appealing to net lease investors.

A New Take on Net Lease Investing

Single-tenant, net lease investors seek long-term income stability.  High credit tenants like CVS and Walgreens tend to dominate the net lease conversation.  However, they typically offer anemic returns compared to alternate real estate investments.  Having only been around since 1991 (1996 in Florida), charter school investment is relatively new to many but is becoming increasingly popular among niche investors who understand the business, seek long-term investment stability and require higher returns than offered by conventional net lease opportunities.

How They Work

Charter schools are publicly funded, privately operated alternatives to traditional public schools.  They are overseen by their respective states and local school districts and are held to certain educational standards.

Charter schools provide a critically important alternative to parents of children in underperforming public school districts.  They also represent excellent opportunities for children to attend (charter) schools that focus on a specific educational mission (e.g. arts, technology, etc.).

A Rapidly Expanding Educational Sector

Charter school enrollment is growing at a rapid pace.  In fact, as summarized in the table below, Florida charter school enrollment in Florida nearly doubled in the past seven years.  This sustained trend of positive industry growth is particularly appealing to potential charter school landlords, giving them confidence in the sustainability of their tenants’ business.  This security is bolstered by the fact that charter schools are publicly funded, reducing the risk of competent school operators encountering economic hardship.

Source: Florida Department of Education Enrollment Surveys

Source: Florida Department of Education Enrollment Surveys

Highly Adaptable Tenants

In addition to “purpose built” campus facilities, it is very common for charter schools to operate out of properties originally designed for alternate uses such as retail, office or industrial buildings.  Such adaptive re-use scenarios are particularly common in infill areas.  Unlike custom-built campus facilities, alternate use buildings offer the added investment flexibility of being readily reverted to their original use if the school operation ever ceases.

A Broad Range of Players

The social mission of charter schools has drawn support and donations from high-profile sponsors such as:  The Walton Family Foundation (WalMart), The Bill and Melinda Gates Foundation (Microsoft) and Mark Zuckerberg (Facebook).

Properties occupied by charter school tenants have gained wide acceptance among both private and institutional investors.  For example,

  • EPR Properties, a publicly-traded REIT specializes in three market segments including educational properties which comprise approximately 21% of their portfolio value.
  • The Wall Street Journal reports that Northstar Commercial Partners, a Denver-based private equity firm, is raising a $100 million fund to acquire office, industrial and retail properties and converting them into charter schools.
  • Turner Impact Capital has teamed with former professional tennis star Andre Agassi to raise over $500 million for charter school development across the country.
  • Charter school investment has become popular among foreign investors, particularly those participating in the EB-5 visa program.

Impressive Returns

In a recent interview, charter school valuation expert Walter Duke, MAI of Walter Duke & Partners, advised, “Properties leased to charter schools can be very attractive investments.  They tend to be less risky than many multi-tenant alternatives yet generate higher returns than conventional, single-tenant, net lease assets.  We believe this is partially attributable to the relative newness of the charter school sector and the limited number of investors who truly understand the industry.”

With respect to cap rates, Duke reports, “Although capitalization rates are influenced by a variety of factors including: property characteristics, tenant strength and lease terms, it is not uncommon for Florida charter school landlords to enjoy returns in the 7% to 8% range.”

Broward County Charter School Investment Opportunity

CapasGroup Realty Advisors is pleased to offer a 31,677 square foot charter school investment opportunity (click here) in central Broward County.  Built in 1988 and originally designed for office-flex use, the building has been operated as an educational facility for more than a decade.  The building is subject to a triple-net lease.  The asking cap rate is 7.9%.

Published July 2016 by CapasGroup Realty Advisors

 

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