City First Bank opened in Washington two years ago with a mission to help rebuild the city’s most run-down neighborhoods, so it made perfect sense to Tom Nida, a senior vice president at $28 million-asset City First, to target charter schools — alternative learning institutions that are often the centerpieces of urban revitalization efforts.

The bank has made loans to four such schools in the past year and has a “comparable number” in the pipeline, Mr. Nida said. Its goal is to become the lender of choice for charter schools in and around the District of Columbia.

Others have similar goals in this suddenly vibrant lender niche. Though charter schools have been around for close to 10 years, in the last three years a growing number of banks, thrifts, and credit unions have been stepping in to finance their start-up costs.

They “now have a track record of success and have proved themselves to be good customers,” said John Schroeder, executive director at Charter Friends National Network, a St. Paul nonprofit that provides information and other resources for charter schools.

Lending opportunities in this segment are expected to increase with George W. Bush in the White House. The former governor of Texas, which has the third-most charter schools in the country, is an ardent supporter of them likely to back legislation encouraging them. Indeed, his education plan sets aside federal funding for charter school start-up costs, facilities, and other needs.

Because these schools operate free from many regulations that govern traditional public schools, they have more flexibility and creativity in their programs. In return the schools are held accountable by the school board or the state to produce positive academic results or face closure before the expiration of charter term.

The first charter school started in Minnesota in 1992, and since then 36 states and the District of Columbia have passed laws authorizing their creation. There are now about 2,000, and though they do receive public funding for such things as salaries and supplies, for building, buying, or leasing facilities they generally do not.

That’s where banks and other lenders come in. The typical facilities loan ranges from $1 million to $5 million, while less-popular working capital and leasehold improvement loans range from $200,000 to $500,000. The schools repay the loans primarily with annual funds from state and local governments, as well as funds from the federal government and private donors.

Since charter school financing is such a new area for most lenders, it is hard to quantify its earnings impact. But Mark Pinsky, president and chief executive officer of the National Community Capital Association in Philadelphia, said it’s a good idea for a bank or credit union to lend to these schools. Banks, for example, get Community Reinvestment Act credits for such loans. More important, Mr. Pinsky said, they are “an investment in the future” because they foster community stability and good will.

“Financial institutions have come to the conclusion that education is fundamental if you want to combat forces of economy,” he said. “And the return investment of a good education is enormous.”

In a 1999 survey by the Center for Education Reform, of Washington, 39% of the 305 schools that responded reported “early evidence of academic improvement” including test scores higher than the District and state averages, even though two-thirds were less than three years old. Moreover, only 4% of the charter schools organized have failed.

Bank of America got involved in charter-school financing a little over a year ago and has funded about eight of them, many in Washington.

“There has been an explosion of charter schools in recent years,” said Matt HoganBruen, vice president of community development lending at the Charlotte, N.C., banking company. “And we realized that Bank of America should be part of this national trend.”

However, Mr. HoganBruen pointed out that some states make it harder than others for banks to lend to charter schools. For example, some allow charters for only three years, meaning the school could be out of operation before a loan comes due.

“The big problem finding financing seems that all of us banks like to know that the charter will outlive the loan or at least the length of a reasonable amortization scale, and quite few states don’t make this possible,” Mr. HoganBruen said.

But the risk of lending to charter schools is diminishing as many states update their charters. In the past three years Florida, the District of Columbia, and Minnesota have instituted additional funding for charter schools to assist in covering facility lease or loan payments, and many other states are looking into developing similar revenue streams, according to Charter Friends.

Mr. HoganBruen and other bankers said the District of Columbia, with 37 charter schools, has one of the most bank-friendly charters. A charter lasts for 15 years — the typical length of a facilities loan — and includes per-pupil funding equivalent to public schools and a generous facilities and start-up allowance.

Mr. Nida said banks initially were wary — and to some extent still are — about lending to charter schools’ founders, generally educators and parents with little financial background. To ensure that the schools make good on their loans, banks are monitoring them, and some financial institutions, such as City First, Self-Help Venture Fund and Credit Union in Durham, N.C., and NCB Development Corp., give technical assistance and financial advice to the schools they fund. (Mr. Nida noted that he is on the board of one of the charter schools and is the treasurer for another.)

Kerinne Tollefsen, vice president of NCB Development Corp., a subsidiary of National Cooperative Bank, of Washington, said another barrier for would-be lenders in this niche is its newness.

“It’s pretty complicated at first to get your arms around” all the regulations, she said.

Since it started charter school funding six years ago, National Cooperative Bank has lent to 14 charter schools in many low-income communities. Its subsidiaries, NCB Development Corp and $157 million-asset NCB Saving Bank in Hillsboro, Ohio, split up the funding.

Ms. Tollefsen said National Cooperative and other financial institutions are getting more comfortable with charter schools, to the point that they regard them as a business line and set unique standards for them. Self-Help, for example, has established its own guidelines, and Bob Shaw, its director of commercial programs, said the company altered its nonprofit underwriting practices to permit lending to schools that have limited up-front funding and short charters.

Self-Help has lent to 14 charter schools in North Carolina since the state law passed in 1997. Self Help Credit Union supports some of the smaller loans and contributes to the larger ones, but its Self-Help Venture Funds affiliate has taken on the bulk of the lending with help from large banks. The venture fund is primarily backed by 15 of the state’s larger financial institutions, Mr. Shaw said.

He said that changing the guidelines was a risk worth taking, and he noted that all the schools Self-Help has funded are still up and running. “We operate with the belief that charter schools are important to the development of a community and crucial for low-income children to better themselves.”

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