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0 Sure Stost ramoe014 PEM eas ere al a The PEM Group November 9, 2010 Memorandum Tor Board of Directors ‘Vermont Educational & Health Buildings Financing Agency From: Public Financial Management, Ine Re: Burlington College, 2010 Series A “Approval is being sought from the Vermont Educational & Health Buildings Financing Agency (the “Agency”) to authorize a financing for Buslington College (“Burlington” of the “College”) in an amount not to exceed $7,000,000. The proceeds from the transaction will be used to putchase a property that will serve 4s the new main campus and to fund various renovations to the site Proj f Funds Tiree Phase Plan At the time of the College’s 2009 financing, the College had established a two-phase plan for the development and growth of the College. Phase I comprised various infrastructure upgrades and served as the foundation for Phase II, which was the construction of 2n approximately 16,000 square foot multi-purpose building overlooking Lake Champlain that would serve as an academic building with classrooms, offices, a student lounge and a café. But late in 2009, an existing 77,000 square foot building on a 32 acre property ‘owned by the Roman Catholic Diocese of Vermont became available 1/3 of a mile from the College’s existing main campus. This opportunity prompted the College to revisit and modify its development plan. 1 / Sources & Phase I of the College's revised three-phase plan consists of the purchase of three contiguous properties: © 351North Avenue ~ 14 acre property and @ 77,000 square foot Victorian building. ‘This property will serve as the new Main Campus and will contain offices, classtooms, labs, ‘Kitchens, library, gym, café and lounges © 320. North Avenue ~ 10 acre undeveloped parcel facing Lake Champlain. © 311 North Avenue ~9 acres and a 4,500 square foot building which will serve as a residence for 16 students Phase 11 will consist of several infrastructure upgrades to the main facility consisting primarily of safety and code renovations. Phase IIT will fund other renovations to the new main building including energy-efficient and water conservation changes, HVAC, among others. Phase III will be funded with money raised by a planned capital campaign. Benga he New Cupar ‘The College’s management indicates that the new campus will allow the College to grow its enrollment and educational programs in accordance with its strategic plan. “The College’s current building, located at 95 North Avenue is at maximum capacity, and demand for the College's programs is increasing. In addition, the new campus will allow the College to offer a better “campus experience” to its students ‘Management indicates that a eusrent lack of a “campus” (outdoor space, food services and gathering spaces) thas been the reason that most students cite for not enrolling atthe College. 3 & Oe: Sate of Eiciting Main Campus ‘An important component to the proposed finance plan is the sale of the Colleg’s main academic building. ‘The College plans to sell the main building for approximately $1 million and to convey a permanent, packing easement on a portion of the related parking lot for approximately $200,000. ‘The College has 2 Parchase & Sales Agreement for the existing main academic building and a portion of the related parking lot ‘The Purchase & Sales Agreement has been approved by the College's Board and the transaction will close just prior to the closing on the purchase of the new campus; atthe same time the College will pay off the VEHBFA loan with Union Bank (~$1.7 milion), clearing th lens on all of the Colleg’s existing and unsold properties. The sale proceeds, slong with a $500,000 fund that che College has already established, will fund the repayment ofthe $1.7 million Union Bank loan, $35 milion Diocese Loan [As putt of the sale of the three properties, the Diocese will enter into a $3,500,000 note with the College at no interest forthe first two years and at an interest rate of 3% on the outstanding balance for years three and four. The loan wil be paid back over a period of 4 years in principal installments of $1,000,000 in fiscal years 2012, 2013 and 2014 and $500,000 in fiseal yar 2015, with interest payable beginning in fiscal year 2014, Interest does not accrue until 2014. The Diocese loan wil be subordinate tothe People’s loan. Pre-payment of the Diocese loan requires People's United Bank consent. It is the expectation of the College that it will repay the Diocesan loun primarily through philanthropy and traditional enrollment growth, Sournes & Uses of Funds ‘The estimated sources and uses of funds are detailed in the table below. Estimated Sources & Uses of Funds™ Estimated Sources of Funds: Eatulth | EHIBFA Portion "Diocese Loan Total 2010 Series A Bond Proceeds $ 6,700,000 3 6,700,000 ‘thee Contributions 3 300,000 ‘00,000 Diocese Loan $ 3,500,000 3,500,000 Total Sources of Funds = 300,000 $ 6700000 3.500,000 $10,500,000 Estimated Uses of Funds: “Acquire 3 Properties s 6500000 § 3,500,000 $10,000,000 Prosty Building Renovations $ 300,000 120,000 420,000 Cost of Issuance 80,000 20,000 Total Uses of Funds $ SOO $6,700,000 $3,500,000 70-500, 000 * Fig fom Sptembr 21,2010 appa Primi, abi a Structure Burlington College has signed a commitment letter with People’s United Bank. ‘The Bonds will be structured as a tax-exempt private placement with People’s United Bank ‘The Bonds will have a term of 10 years and a 30 year mortgage-style amortization. At year 10 there will be a balloon payment representing the remaining 20 years of unamortized principal with the option of refinancing at then-current rates. ‘The loan will be interest only for the first 9 months, after which the College will begin making monthly principal and interest payments. The loan rate on the Bonds will be a fixed rate, set by the Bank immediately prior to closing. The loan rate will be equal to the tax exempt equivalent of the Boston Federal Home Loan Bank 10/30 rate + 25%. As of October 25, the loan rate would equal 3.61%. ‘The loan is pre-payable at anytime, but itis subject to the Banks standard net loss payment penalty, which is similar to a “make whole” provision. Page -2 Prapared by Public Financial Management, In € ‘The People’s United Bank loan will be in addition to the loan from the Diocese. ‘The Diocesan loan willbe in the amount of $3,500,000 and wil be repaid in fixed installments over a period of 5 years. ‘The Bank’s willingness to fund the loan is contingent upon the following: 1) the sale of the existing main academic building; 2) the retirement of the existing $1.7 million debt obligation; 3) the satisfactory appraisal of the new property with a loan to value not to exceed 65%; and 4) the minimum commitment of $2.27 million of grants and donations prior to closing. In anticipation of this transaction, the College has increased its focus on philanthropy and to date, received almost $2 million in commitments Capital Campaign & Other Available Funds ‘The College expects to publically announce its capital campaign in the next few months. ‘The funds from the campaign will be used primarily for renovation projects and acquisition of the new campus buildings. As of the date of this memo, the College had already received commitments of $1.9 milion in signed capital campaign gifts, all of which are unrestricted, including $390,000 in grants for energy projects. ‘The College expects to receive $2 million in gifts in FY11, which it is on track to achieve, $1.5 million in FY12, $1.25 million in FY13 and $1 million in FY14. ‘The College can access other funds if necessary to supplement the capital campaign funds. ‘The College owns several single-family and apartment houses and an additional acre of land, all of which will be ‘unencumbered afiet the repayment ofthe existing Union Bank loan. ‘The College estimates the value of these properties to be approximately $2.6 million. In addition, the College’s endowment contains a building fund ‘with approximately $500,000 in unrestricted cash. ‘This money is different from the money that will be used to repay the Union Bank loan. Security ‘The security for the People’s loan is expected to be a 1+ lien on all business assets of the College and a 1* mortgage on the following properties: 351 North Avenue, Burlington; 329 North Avenue, Burlington; 311 North Avenue, Burlington’. ‘The Bank is requiring a loan to value ratio of 65%. If after the appraisal the value of the collateral is less than 65% of the financing amount, the Bank may consider taking a 1" mortgage position on additional unencumbered properties owned by the College. Additionally, the Bank is requiring the College to fund a reserve fund equal to $375,000, an amount equal to approximately 1 year of debt Financial Covenants Under the existing Union Bank loan agreement, the College is required to achieve a debt service coverage ratio of 1.25x. Under the new transaction, People’s United Bank is requiring the College to comply with a 1.20x debt service coverage ratio. "The Diocese will have a second mortgage on the properties. Page -3 Prepared by Public Financial Management, Ine es 88 Summer Soest ‘or7 soot PEM ‘Sue fon0 7 51-28 fox foe Sompincen| The PFM Group sono) Estimated Debt Service “The table below illustrates the estimated debt service requirements on the People’s and Diocesan loans. Based on the assumptions outlined in the table below, the annual debt service requirements on the People’s loan is approximately $384,000; which compares to the annual debt service requirements on the existing debt of $77,000, an increase of over $300,000. The Diocesan loan will add approximately $1 million in debt service between FY12 and FY 14, and $500,000 in FY15. ‘The College generated $454,078? in revenue available for debt service in FY10, which compates to an estimated annual debt service on the People’s loan of $383,842. ‘The College’s projections show that the revenue available for debt service increases to $624,995 in FY11 and $24 million in FY15, not including capital campaign gifts. Such growth would provide additional eash flow support for the People’s loan. When. the debt service requirements on the Diocesan loan are added to those of the People’s loan, the annual debt service requirements increase significantly through FY15. Historical pro-forma debt service coverage on the Diocese and People’s loans over the next 4 years, based on the People’s United Bank definition of net revenue available for debt service, ranges from 03x 0.5x. Over the same 4 year time horizon, debt service coverage based on the College’s projections without any capital campaign contributions ranges from 0.5x to 2.6x, When capital campaign contributions are factored in, the College’s coverage of debt service for both loans over the next 4 years ranges from 1.6x to 2.9x. Without the support from the eapital eampaign, the College’s operations alone would not be able to pay for the debt service requirements on both the loans. It is important to note that People’s United Bank is requiing that the College receive commitments of a minimum of $2.27 million of grants and donations prior to closing, This amount represents 65% of the Diocesan loan. SE ate Pa = ing Pepi’s Dine Chageia Anan Deh DeiSericest Genk ForDS slant Serce GorDSn/.Cop. Serve aye nace Oeaer_ Deane he Gam Gres Ga. Gonnge Courage CangignGacoge_ eases — a 2 Yate ee tose tise AS 3 mae) ae te ole San Uses tare ame a9 aosso Bus fore saat ‘aus “ome ae a ams bas fle Sane siasoe See) SO Bars Zea a coin Date ae soesas nui Sshne 1 Bam a o chia Mate See Soci Sate tne 12 Bam oe chine hate ae jase sate ASR 12 Bare oe Gnome Pals Sa ics pn eta Beare Gente Sinisa Hats ta saa Samne Bain 04 Same Sirs M316 wt Saar Baar hare cmos Tate m9 ‘ane Dake Zaz cripont Tate fae ‘Shoe Bar srs Tite 7316 aan Sain cir N36 fra, sim Baan crane Tite pir are aoe fioname Tite or, ‘si Saran sia Tite Siar Bazan Sono Te ‘See Balan finns Te 6 Barn Sienna te Siete Bacon ‘ioanem Tate sa Balas sian finns! Me fran ‘sao Baie Seana or 73 on ssa Bare is et nt oe bg ai fe ye 24 thd or Pe td nt et Nt are Sao NM Seve Calculated based on People’s United Bank definition of Revenue Available for Debt Secvice The PEM Group Founded in 1972, Buslington College is a private independent college located in Burlington Vermont. ‘The College offers both two-year Associate and four-year Bachelor of Arts degrees as well as several professional certificates. The College is fully accredited by the New England Association of Schools and Solleges (NEASC) and is a non-profit instinution. "The College is awaiting NEASC approval to offer Masters Degrees which will open ensollment to new populations ‘The College is not rated by Moody's, S&P of F ts, Student Demand & Market Position ‘Burlington College grew its total enrollment by 13% since the 2006 academic year to 160 full-time equivalent (PTE) students in 2010, Over the same five-year period, applications increased in every year esulting in a total increase of 165%. In 2006, the College received 78 applications and by 2010 applications hhad grown to 207. ‘The College’s Selectivity rate (acceptances applications) has consistently been above 80%, except for in 2007 and 2008 when there was a temporary improvement in the ratio. In 2010, the College’s selectivity ratio was 85%. Over the past five years, the College's matziculation rate (enzolled/accepted) has decteased. In 2010 the ratio reached a five year low of 40%. ‘This trend of high selectivity rates with decreasing yields could pressure the College’s ability to grow and maintain student quality. One reason for the inconsistent selectivity and matriculation ratios is that the base numbers are relatively smal, and therefore relatively small changes to the base numbers can have a noticeable impact on the ratios. Another reason is that the College hhas increased the scope of its student outreach. Management reports that the number of inguires in the College has quadrupled from the same time last year. Enrolment Statist 20062007 2008 20097 Eyeh oul FTES Taz 153 146 749 3% “Applications 8 104 137 188 165% Total Acceptances 68 65 0 135 157% ‘Newly Enrolled Matriculants 9 St 48 65 en Primary Selectivity 8% 6% 51% = 8% 85% Matriculation Rate 72% T% 9% _———«4%_—_—40% ‘The table below illustrates the wuition and board rates of the College and its top five peers/compettors, a provided by the College. At $21,340, the College’ tuition is lowes than that of all of its peezs/eompettors. At $27,690, its total annual cost, which includes tuition and board, is aso the lowest of its peers/competitors. Management expects that tuition will gow at a modest tate of 5% in each of the next 5 years. Price Stati Tuition Board Annual Cost Badington College $2140 $6350. $27,690 Marlboro $33.90 $5,190 $39,000 Green Mountain College $2920 $12,714" $39,034 Champlain College $27,130 $7330 $34,400 Emerson College $30752 $1281" $43,633 Savannah College of Artand Des $30,510 $7,785 $38,295, “Price includes meals PEM Liquidity and Capital siti ‘The College is in the silent phase of a new capital campaign. ‘The majority of the funds from the new campaign wil be used towards the new property acquisition and building renovations, including the payments to the Diocesan loan. As of early November, the College has received $1,900,000 in commitments, most of which ate unrestricted, ‘The College's Expendable Financial Resource base has shown strong improvement over the past 5 ‘years, but remains low relative to the College's operating budget and existing debt level. While unrestricted ‘cash has increased from $161,905 in FY06 to $710,424 in FY10, expendable financial resources increased from ($217,300) to $298,735. "The low expendable financial resource figure indicates that a significant portion of the College's net assets ate represented by its PP&E, which is not liquid and critical to the functioning of the College and therefore not practically available for debt service. The College's expendable financial resources to operations ratio has ranged from -.1x to -1x since FY06 and was 1x in FY10. The College’s ‘expendable financial resources-to-debt ratio has ranged from ~3x to 2x since FY06 and was .2x in FY10. — = we eae fe | St] oe tt om ed “| me) wy ‘The College's Debt-to-Capitalization ratio improved over the past 5 years. This improvement has been primarily driven by growth in assets and modest increases in debt. As of FY10, the College’s debt to capitalization ratio was 58%, which compares to Moody’s median for small colleges rated Baa of 30%. Debit Capitalization = SR ls, 000 wed a —SS = 4 Sanh hwo Operations "The College has demonstrated healthy operations over the past five years. The College generated an increase in unrestricted net assets in every year since 2006. The College’s operating margin (using Moody’s calculation) has ranged between -0.2% and 8.3% and its operating cash flow margin has ranged between 7.0% and 15.3%, Operating cash flow in FY10 was equal to 11.2%. Additionally, the College has shown strong debt service coverage ratios over the same time frame ranging between 2.0 and 4.8x (using Moody's Page -6 Prepared by Pubic Financial Management, Ine PEM, definition). As of FY10, the People’s Bank debt service coverage covenant rato (whichis different than Moody's calculation of the same ratio) was 3.6x, which ie well above the 1.20x requizement. Zam Ym | fe a | 3 pom oS aed it ba sola iupaliiies Sete ranean el ) Nr Art eee ee) See sateen) — tates ny ‘The College had approximately §1.7 million of long-term debt outstanding as of FY10, all of which vill be paid off in connection with the sale of their main building. The College’s pro-forma debt profile will consist of the People’s loan of $6.7 million and the Diocese loan of $3.5 million. ‘The total pro-forma debt will equal approximately $10.2 million, Financial Project ‘The College included as past of ts Agency application a detailed set of financial projections. The projections show that enrollment growth and the capital campaign will generate sufficient revenue to pay the annual debt service astociated with the People’s Bank and Diocese loans. These growth projections are critical due to the large increase in debt. Select assumptions of the projections are highlighted below. Enrolment ‘The projections show enrollment growing approximately 20% per year and reaching 400 FTEs in 2015, a five year growth rate of over 100%. This projected growth compates to a historical annual FTE growth rate since 2006 of between -5Y% and 8% and an annual growth rate in applications of between 10% and 37%. ‘The current facilities do not have the capacity for such growth, but the new building is expected to provide capacity for 1,000 FTEs once it is completely renovated. The College expects to have capacity for 300-400 FTEs by the fall of 2011 (FY2012) though their projections are much more modest at 229 FTEs, ‘The College currently has 190 FTEs, up 19% from last year’s 160, so the move to 229 would continue that tend. The growth in FTEs assumes the establishment of Master’s degree programs in FY12 and a five year traditional campus enrollment growth rate of 148%. “The College’s management expects to grow its student body while maintaining student quality. The College's 2010-11 selectivity ratio was 85% and its matriculation sate was 35%. Management expects (0 ‘maintain stident quality during this petiod of growth in part by increasing its financial aid, which is currently at 6% of total tition revenue, and enhancing student demand through a variety of approaches including. broadening student outreach, new educational programs and campus improvements, among others ‘The growth projections assume a tition sate increase of 5% per yeas. Currently, the College's tution sate of $21,340 is below that of most ofits peers. This 5% annual increase results i a tuition rate of just under $26,000 by FY15, a level that is stl below the eurrent tuition rates ofthe peers that the College detailed in its application. Page 7 Prepared by Public Financial Managemens, Inc. PEM Tnpact on Operations The projected enrollment growth translates into significant growth in revenues and expenses, Total revenues are expected to grow from $3.6 million in FY10 to $10.2 million in FY15, an increase of 187%. Expenses are expected (o grow from $3.2 million in FY10 to $8.1 million in FY15, an increase of 148%. One key assumption in the revenue growth is that it assumes one to two milion dollars per year in capital campaign gifts between FY11 and FY14, The overall growth and campaign funds result in income from operations ranging between $1.7 million to $2.3 million as illustrated in the chart below. ‘The income from ‘operations plus depreciation and interest expenses results in net revenue available for debt service ranging etween $2.1 million and $2.7 million and a projected debt service coverage ratio of between 1.6x and 14.1. Tf the capital campaign funds are subtracted from the revenue, the College's projected debe service coverage ratio ranges between 0.5x and 3.5x. Therefore, the ability of the College to pay both its People’s United and Diocese loans depends om its ability to raise sufficient capital through its capital campaign. ro Forma Impact of Operations a Tar a a ar a ar Cap. Campign Donations N/A 200000 stem _t23n00 tana RD Renee NetoCop Campin Deneionn SLATES OTG TART EIT Operating Income. SITBT 2325216 1504 I87 —1BOI OZR 1,929,830 2.481.982 Deri eet tame 809 ae sao aaa NatRey Avil or DSe/ Cs. Capagn Ane 24st. 2104S SamGaM ASSN zeta Netter Aa for DSw/on Cap. Campaign 84016 als 2400s T6ATR SSID aa0a7— Peoph's Beak Deserve in int) 240 than sian wa ag NAD Dice Der See i tt) O0 goannas sis Date Srvc avrg W Cop Cain eo ete as Deb sericeCovomge owt Cap Campuge 363508 "PReteces interest only period OF new debt and acerned interat Cingh 127 AO of ext deh Page -8 Pripared by Public Financial Management, In: = Current Issues in the Higher Ed ‘Moody's Anaual Sector Outlook for U.S. Higher Education for 2010 ‘Negative Outlook Remains Negative; Pressure Continues to be Greater for Peivate Universities than Public Institutions "Note: Moody’s ako notes that K-12 schools may be more vulnerable than higher education institutions as their services ‘may be viewed as more “discretionary. ‘© Tuition Pacing and Ensollment Uncertainty Now Fundamental Risk Pressure on Other Key Revenue Sources Likely to Continue for All Institutions (Gift Revenue; Grants and Contents) Can Public Colleges and Universities Adjust Quickly Enough to Declines in State Appropriations? Tnvestment Losses Lower Financial Resources, But Widespread Credit Detesiaation Unlikely Heightened Regulatory Risk Anticipated, With Uncertain Outcome Management Responses May Need to be Accelerated ‘Liquidity Challenges Remain Despite Some Recovery from Eacly 2009 Sure: Moody's January 2010 U.S. Education Srcor Onto report, Recommendation PEM recommends that the Agency grant approval for the College's proposed financing based on 1) the transformational nature of the project which should position the College for future growth; 2) the collateral value of the property being purchased; 3) the nature of the transaction as a direct placement with an institutional investor, Risks Mitigating Factors * Debt coverage requires meeting growth * New campus expected to improve student demand projections, especially entollmene growth * History of healthy operating performance * Debt coverage requires successful capital campaign * Minimal fixed costs associated with growth allows without an established institutional history of College to grow quickly with limited costs philanthropy * Significant increase in debt relative to operating budget and financial resource base Page -9 Prepared by Publi Financial Managemen, In.

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