Volume 10; No. 4; Fall 1998
Financing Childcare: Challenges and Opportunities
By September Jarrett, Loan Officer; Low Income Housing Fund and
Roderick Marshall, Director of Financial Services; Rural Community Assistance
The passage of a dramatic welfare reform bill in 1997 intensified the
nations focus on the lack of childcare options for low-income families.
As a partial solution to the childcare problem, federal daycare subsidies
are now available to help keep the cost of operations down so that the
price per child stays low. Thats great news for welfare parents who are
required to find income-generating work that will likely lead them outside
the home. But it also presents a predicament for many communities, largely
due to a shortage of available facilities.
This article will outline many of the benefits and challenges inherent
in childcare development and financing. Think about these points as you
consider the direction of your community development initiatives in the
coming years. September Jarrett from the Low Income Housing Fund offers
an urban perspective on childcare and discusses the newly inaugurated
Childcare Facilities Fund (CCFF) in San Francisco. Roderick Marshall from
Rural Community Assistance Corporation (RCAC) provides a rural perspective
on the issue, and shares information on financing options available through
RCAC. Armed with this information, childcare facilities finance may yet
find its way into your community development strategy.
Four Good Reasons to Support Childcare Development
1) Unprecedented Demand for Childcare
Between 1977 and 1993, the number of children under five in non-parental
care facilities more than doubled from approximately three to eight million.
By 1995, there were almost 10 million children in non-parental care programs.
Since the enactment of welfare reform, this figure has swelled even further.
Affordability issues are also a problem, particularly for low-income
families. Nationally, poor families with small children spend an average
of 18 percent of their income on childcare, compared to seven percent
spent by wealthier families.
The situation in San Francisco illustrates key points about both the
demand for care as well as affordability issues. Today, 4,000 San Francisco
families are on a waiting list for subsidized childcare. To make matters
worse, the Department of Human Services estimates there is a need for
2,736 new, licensed childcare slots to meet the demand for families transitioning
from welfare to work.
San Francisco has received $20 million in new subsidies, but a lack of
space (with a one to three percent vacancy rate citywide) is hampering
the ability of families to use these subsidies.
2) Childcare Development Supports Local Economic Development
Childcare development is also job development. New childcare facilities
result in the creation of jobs for program directors, teachers, teachers
aides, janitors and cooks. In addition, the National Economic Development
Law Center estimates that each $1,000,000 invested in new childcare facilities
development results in the creation of 23 indirect jobs (in construction,
business services and retail) for the period of one year. And, unlike
other business sectors, virtually all jobs supported by the total dollars
spent for childcare remain in the local community.
3) Childcare Investment Offers Great Social Returns
Well-publicized medical research has proven that important components
of brain development occur during a critical window between birth and
age three, and that human interactions and stimulation are essential to
this development. Thus, participation in high-quality childcare can positively
enhance a childs growth toward his or her full potential. This is especially
important for at risk children, many of whom grow up surrounded by poverty.
According to a recent report by the Rand Corporation, for every dollar
spent on early childhood programs, society later saves several more dollars
on social program and judicial system spending. One program cited a net
savings of $25,000 per child by calculating how later earnings and tax
contributions could offset welfare, education and criminal justice costs.
| Photo by Jon Klein of the Low Income Housing
4) CRA Benefits
The revised Community Reinvestment Act (CRA) considers loans, investments
and services that support childcare facilities to be qualified community
development activities. The most recently published Questions & Answers
(Federal Register October 6, 1997) provides some flexibility as to the
geographic location of facilities. That is, childcare centers do not necessarily
have to be located in a low- or moderate-income geography to receive CRA
consideration. A facility must, however, serve children from low- and
The Challenges of Financing Childcare Development
Despite these reasons to support childcare development , there are several
challenges to developing and financing early childhood facilities. Some
of these challenges include:
Development Resources and High Costs
While capital resources may be more abundant in urban centers, the high
cost of areas such as San Francisco make it especially difficult to develop
new facilities. In rural areas, development costs for new facilities may
be lower, but access to capital is much more limited.
In San Francisco, it takes an average of $16,000 per slot to create care
for low-income children in nonprofit childcare centers. Development of
home-based daycare centers costs an average of $3,000 per slot.
Experts in San Francisco estimate that at least $30 million is
needed to address the new demand presented by welfare reform. This doesnt
include the funds needed to address the existing back-log of kids currently
on waiting lists.
Low Reimbursements for Care
Subsidy rates are based on market rates for childcare in a given area.
In San Francisco, the average subsidy for childcare is $120 to $185 weekly
per child depending on his or her age.
In some areas, this subsidy would be adequate, but it certainly
leaves no room for facility improvements or the addition of programs,
which help ensure long-term quality of care. In high-cost urban areas
like San Francisco, this subsidy falls way short of the average $231 weekly
per child to provide quality care. Providers are thus forced to spend
their time fundraising to ensure the ongoing viability of the facility.
In addition, most typical operating contracts run year-to-year, posing
both development and financing challenges. Furthermore, subsidies have
become increasingly parent-based (as opposed to project-based) posing
greater financial risk to potential lenders.
| Joe Simmons, formerly of the Low Income Housing
Fund, at the Tenderloin Child Care Center
(photo by John Harding)
Lack of Financing Experience
The shortage of funding for childcare development often leaves providers
unable to save to meet equity requirements. In addition, childcare providers
may not have sufficient operating income to service debt, and may lack
experience in sophisticated debt-management techniques. To date, the vast
majority of early childhood facilities are fully grant funded from a mixture
of public and private (primarily foundation and corporate) resources.
Loan programs are emerging, but significant technical assistance and flexible
financing is needed now to better serve providers into the future.
The San Francisco Childcare Facilities Fund (CCFF)
The Low Income Housing Fund is a fourteen-year old community development
financial institution with a strong track record in affordable housing
lending. It recently launched a new public-private partnership, the San
Francisco Childcare Facilities Fund (CCFF), in order to increase the quantity
and improve the quality of childcare in San Francisco. Initial capital
for the CCFF was provided by the Miriam and Peter Haas Fund ($300,000),
The Mayors Office of Children, Youth and Their Families ($200,000), and
Providian Financial Corporation ($400,000). Additional support has been
received by public, foundation, and corporate resources. A linkage fee
(or special tax) tied to office space development in San Francisco is
another key source of funding for the initiative.
To date, the CCFF consists of three core programs:
1) The Family Childcare Assistance Program (FCCAP) provides
grants of $1,000 to $5,000 to meet one-time capital expenses of family
(in-home) childcare providers. Applications for the first round of funding,
in which $100,000 was available, were received in May 1998. Twenty-three
grants, serving 234 low-income children and supplementing the creation
of 66 new childcare slots were awarded. Among the projects supported are
facility renovations to provide improved access for disabled children,
the purchase of equipment to expand infant care, and improvements to outdoor
play space. Funds were entirely disbursed by the end of June. A second
round of funding is anticipated in early 1999.
2) The Childcare Center Assistance Program (CCCAP) provides
facilities finance for nonprofit childcare centers in San Francisco. Financial
tools available include a limited number of capital grants, zero interest,
mini-loans to support project planning, short-term direct loans, and access
to conventional loans on favorable terms through CCFF guarantees or interest-rate
write downs. Eleven preliminary applications for competitive capital grants
have been received and seven awards, supporting the creation of 329 new
childcare slots have been made. Five loan requests totaling more than
$2 million and representing 260 childcare slots are under consideration.
3) Technical Assistance is also provided in order to boost the
facilities expertise and business management skills of childcare providers.
Seminars on debt, facilities development, and business management are
provided to both nonprofit and family-based childcare providers.
The Rural Perspective: RCAC Offers Financing Options
From a rural development viewpoint, the economic realities of financing
rural childcare are often more brutal than financing urban facilities.
There are two reasons for this:
1) Large childcare programs have greater opportunity to service debt,
but the smaller population of rural communities doesnt support larger
2) Capital infrastructure is generally more developed in large cities
than in rural towns, enabling the city provider greater access to resources
such as grants, corporate donations, soft seconds, or dollar-per-year
The amount of equity a rural childcare provider will need to raise depends
on an often precarious balance between:
a) the number of children served and availability of government subsidies,
b) the price of real estate/new construction or the costs of remodeling
an existing building. Limited experience in this type of lending means
most providers currently have to raise as much as 50 percent of the cost
to remodel and existing building and up to 75 percent of the cost to develop
a new facility!
Rural Community Assistance Corporation (RCAC), designated by the U.S.
Treasury as a Community Development Financial Institution, makes affordable,
interim and long-term loans to create or enhance community facilities
in rural communities in 12 states. These facilities can include childcare,
adult day-health care, domestic violence protection and medical care.
An interim loan offers childcare or other providers up to three years
to meet long-term loan conditions typically required by traditional lenders.
RCAC Interim Loans span a crucial gap in time, between initial
concept to actual operation of a needed facility. The loan can be used
- Building a new facility;
- Buying and/or rehabilitating an existing building; or,
- Remodeling to improve the quality of an existing facility for increased
capacity or scope of service.
The interim loan allows a provider to complete predevelopment and construction
activity, move its program to a new location, stabilize its revenue and
expenses and become a more attractive borrower in the eyes of a long-term
RCACs Loan Guarantee Program provided through the United States
Department of Agriculture--Rural Development (USDA-RD), enhances long-term
facility financing. Having recently received eligible lender status to
participate in this program, RCAC now has the ability to make long-term
loans that are 80 percent guaranteed by USDA-RD. Borrower qualification
under this program is the same as RCACs program:
- The facility must be located in a rural area with a population of
less than 50,000 people;
- The borrowing entity must be a nonprofit organization or legally organized
for the benefit of the general public, e.g., a cooperative, municipality
or association; and
- Fifty-one percent of the families benefiting from the proposed facility
must earn at or below the area median income.
Given the amount of equity that childcare facilities require, ownership
may seem nearly impossible, but there have been a few exceptions. One
provider was able to obtain a $300,000 community development block grant
and raise $50,000 from fundraising activities, individual cash contributions
and in-kind donations from local merchants. This equity of $350,000 plus
a 25-year USDA-RD guaranteed loan for $100,000 enabled the provider to
build a facility for 60 children which employs 10 people. This is an increase
from its former capacity of 32 children and five employees.
There are numerous examples of creative financing for facility ownership,
but its never as simple as finding free money or a lender with a mission.
Facility ownership comes about as a result of finding the right technical
assistance to mold cash from all sources into a structure that is economically
viable for those dedicated to providing decent care in an enabling environment.
The childcare industry cannot expand its capacity to serve more families
and offer better quality of care unless it leverages its current capital
base and strategically uses loans as a tool to do so. Financial institutions
and community-based organizations must confront financing and development
challenges head-on, and must act as partners to provide the necessary
flexibility and support to create quality childcare facilities. After
all, if the adage is true that children hold the key to the future,
isnt the extra effort now worth the social benefit later? CI
Technical information may be available to childcare providers through
local Childcare Resource and Referral Centers. The National Economic Development
and Law Center can also provide technical assistance to providers in California
and referrals for other states. For more information, contact Julie Sinai
For more information about the San Francisco Childcare Facilities
Fund, please contact September Jarrett or Jonathan Klein at (415) 777-9804.
For information about loan programs offered by RCAC, you are encouraged
to call Rod Marshall at (916) 447-9832, (ext. 142) or Sondra Hartwell
1The Economics of Child
Care: A Report by the Council of Economic Advisors (December 1997).
3San Francisco Department
of Human Services, Capacity Projections (September 11, 1998).
4Los Angeles Times (April
5 Survey of Nonprofit Childcare
Centers completed by the Childcare Facilities Fund of the Low Income Housing
Fund (April 1997).
6Regional Market Rate Ceilings
for California Childcare Providers, California Childcare Resource and
Referral Network (July 1997).
About the Authors
September Jarrett is a loan officer
for the Low Income Housing Fund, where she has worked since 1994.
She has staffed the San Francisco Childcare Facilities Fund since
its inception. Ms. Jarrett has also worked with the Office of Housing
and Neighborhood Development of the City of Oakland, the Community
Development Research Center (New York), the Community Housing Partnership
(San Francisco), and the Coalition on Homelessness (San Francisco).
Ms. Jarrett has a B.A. in Urban Studies from San Francisco State
University and a M.S. in Urban Policy and Management from the New
School for Social Research.
Roderick Marshall is director of financial services
at the Rural Community Assistance Corporation (RCAC). In this role,
Mr. Marshall manages lending activities, staff development, loan program
and product development. The Financial Services Division provides
both short-term and long-term financing for a variety of projects,
including affordable housing, community facilities and small water
and waste-water systems. Before joining RCAC in 1995, Mr. Marshall
was a mortgage and commercial banker for 25 years specializing in
real estate loans. His education includes a B.S. Degree from Washington
State University and post-graduate work in mortgage banking at the
University of Chicago.