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Capital projects planned by schools can be developed over many months or even years with the objective usually centred around increasing pupil numbers or improving facilities to stay ahead of any immediate competition (or in some cases both). Such projects can be part of a wider estate-planning exercise and regarded as a key tool by the governing body of the school to help provide a view into the future.  A thorough plan will also help determine whether there will ultimately be an external funding requirement and in the event the amount and term over which any external financing can be serviced.

Whilst we have seen plans in place by schools for periods ranging from 5 to 10 years, we recognise that each school is unique and a plan will not always be in place or the level of detail will vary. In these scenarios the required level of information is gathered through a detailed discussion with the school’s senior management team.

 

Planning Capital projects

As soon as the governing body authorises a feasibility study to commence, the starting point is normally to appoint a team of professionals who will help develop initial designs, provide an indication of the project length as well as costs and also provide any required legal support at this early stage.  With the additional information in place, the governing body (or nominated sub-committee) will review the various reports and look to provide agreement to proceed with the project.

It then becomes the role of the professional team to help commence the planning consultation through to a full planning application. In our experience schools will benefit from the following advice at this early stage:

  • Carefully plan the timing of the project in order to minimise any disruption to the school as well as fully mitigate any health and safety concerns.
  • Consider the benefit of enabling works and site set up to commence in the Easter Break with the build able to commence as soon as the summer term ends. This can help maximise the benefit of having access to the site and operate at full speed as the term draws to an end.
  • Building projects are prone to risks relating to unexpected additional costs, risk of design failure and risk of delays. Procurement processes should allow for mitigation of this risk and through well-prepared building contracts with the aid of your professional advisors.
  • Engage your bank as early as possible as this can help you shape any potential funding requirement and provide the governing body with the comfort of a funding commitment at an early stage in the process.


Funding requirement

In looking at a funding proposal the bank will seek to understand the project from the school’s perspective to enable a thorough assessment of both historic and forecast financial information in order to evidence track record and sensitise any future assumptions. Non-financial information will also be assessed including a due diligence exercise around the senior management team and governance of the school.

The bank will be seeking to understand:

  • The rationale behind the proposed project or development and timing of any future projects.
  • The expected benefits and any future opportunities or implications for the school.
  • Approximate costs including contingencies in order to determine the likely borrowing requirements to ensure the project or school operations are not underfunded throughout the duration of the project.
  • Details of the school’s own resources including any actual or pledged donations.
  • A timing plan for the project along with details of professional advisers and an understanding of the procurement exercise in order to appoint the main contractor.
  • The expected life span of the asset in order to inform the length of the loan term – Lloyds Bank can provide a commitment for the whole term of the loan (up to 25 years).
  • Whether the development will cause any disruption to the day to day running of the school.

 

Financial and non-financial information

We usually ask for the following information to enable us to understand the project further as well as to illustrate the school’s ability to service any proposed debt:

  • Financials for the last three years (from this information we will ascertain the level of surplus cash being generated by the school).
  • The serviceability assessment will account for the school’s ability to service the debt at the proposed margin as well as incorporating a potential increase in Base rate.
  • An overview of pupil numbers for the last five years and future projections – a break down incorporating each school year is especially useful as cohorts can vary from year to year. This will enable the bank to understand the background assumptions behind pupil forecasts.
  • Projections including profit and loss, balance sheet as well as cash flow forecast – to include planned as well as regular capital expenditure carried out by the school.
  • An understanding of the following three key school KPIs:
    - Pupil break-even point
    - Bursary / scholarship levels (as a percentage of total income)
    - Staffing costs (as a percentage of income)
  • An assessment of the potential implications of the development upon the day to day cash flow / working capital of the school taking account of the fee cycle (which provides a significant boost 3 times a year).

Management and governance

The bank will regard the quality of any management team as the single biggest contributor to the sustained success of any organisation. With this in mind the bank will seek to:

  • Understand the expertise as well as experience of the Governors, Senior Leadership Team, as well as how the Head and Bursar work together.
  • Get a feel for the strength and depth of the team in relation to financial, technical and marketing skills.
  • Question the management team’s experience of similar or previous development projects in order to understand whether these were completed on time and budget.
  • Understand the level of engagement with professional advisers to date e.g. Quantity Surveyor, surveyors, accountant etc.
  • Identify whether the chosen contractor has sufficient experience of similar development projects and a suitably sized balance sheet to mitigate against the risk of developer failure.

 

Additional information to bear in mind

  • During the term of any borrowing, schools will be expected to share termly management information with the bank to enable the monitoring of actual performance against forecasts, account operation and cash flow as well as any pre-agreed covenants. 
  • Covenants will typically seek to provide a performance management benchmark and are geared to provide a trigger to both parties of any deterioration in surplus cash flow which forms the basis of the ability to service the proposed debt. 
  • Covenants would be set at a level that would enable school management to consider tactical operational changes in the event of a breach. This then becomes a useful performance management benchmark for both the borrower and lender.
  • Any security charged to the bank is a fall-back position with the funding assessment centred on the school’s ability to service the proposed ongoing debt from existing sustained pupil numbers. Pledging security enables the bank to reduce the interest margin for the proposed loan as secured lending carries lower costs of capital for the bank.
  • Where a property is taken as security for any proposed lending a professional valuation will be undertaken by a specialist bank panel valuer.
  • The bank would also look to obtain copies of inspection and regulatory reports (ISI/ISC/Ofsted) as well as obtaining evidence that appropriate child protection and health and safety policies and procedures are in place and ensure insurance cover is held at an appropriate level by the school to meet any liability arising.

We recognise that a substantial amount of time as well as effort is spent by the school management team throughout any projects that are undertaken and particularly that this time is spent whilst also carrying out the day to day responsibilities of operating the school itself. We hope this article supports your school along this exciting journey.

 

Anil Ahluwalia is a Relationship Director in the Lloyds Bank London Education Team  and specialises in the Independent Education Sector. 

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