During the 1990s and early 2000s, hedge fund manager Brian Olson supported New York City's charter schools because they appeared to have the potential to deliver a better education than traditional public schools. Indeed, many of those charter schools did deliver excellent educational results—but they also faced significant and persistent financial challenges.

Over time, however, Olson noticed a pattern: An academically successful charter school would lease a facility and begin to renovate it, but when those renovations wound up costing several times their original estimates, the school went bankrupt and had to close.

“A whole chain of things has to happen for kids to receive an excellent education, and one of those things is an appropriate, affordable facility,” said Olson. In 2002, Olson joined the board of Civic Builders, a nascent nonprofit that sought to develop real estate for charter school operators in New York.

Having invested in education for several years, Olson was able to identify what he calls a “choke point” that he could productively address. Civic Builders would take on the complexities of developing New York City real estate—including financing, property acquisition, design and construction—and free educators to focus on teaching. In exchange, educators had to promise one thing: high academic performance.

Limited resources, highest impact

Olson approaches philanthropy with the same kind of rigor he does any other investment. “My goal as an investor is to try to maximize my returns,” he said. “That’s also my goal as a philanthropist.”

Olson formulated this philosophy in the late 1990s, at his first hedge fund job with Tiger Management, where he became involved with a philanthropic initiative launched by Tiger’s founder. “The Tiger Foundation required the organizations to demonstrate that our funding was leading to results,” Olson explained. “It’s not just a feel-good kind of operation. It has a ‘limited resources, highest impact’ mindset.” That mindset resonated with Olson, who has used it to guide his own philanthropy ever since.

Getting clear on goals

Olson’s goals for Civic Builders are twofold: first, to create more "seats" for kids in high-quality schools, and second, to have a sustainable business model. Simple as they sound, to be realized, these goals require sophisticated strategies.

High academic performance

Olson wanted to make sure the schools he helped build provided students with an excellent education over the long haul. But how could Civic Builders ensure this, given their belief that schools have 100-year lifespans and last long after the visionary founders retire? Olson said "[Civic Builders leaders] wrestled with this for a long time.”

Their ultimate answer was to lease the facilities they build, and in those leases, include provisions that tenant schools must meet high academic performance standards on New York State’s standardized tests. “If the school fails over a rolling, three-year basis, then its lease can be terminated by us, and we can move that school out and move in a higher-performing school.”

Civic Builders offers a simple bargain to school leaders: We’ll make your job easier by removing the hassles involved in real estate, and leave you free to run your school in accordance with your own philosophy. In exchange, you are accountable for student results.

So far, no school has been evicted—although one came close. Here is Olson’s account of that process:

Within three years after Civic intervened, the number of students at that school testing at or above proficiency had increased by more than 50%.

A sustainable business model

Ideally, Civic Builders’ facilities would have rents that are affordable by their school tenants, yet still cover the full costs of the building and generate a little surplus for use on future projects. “We’d love to have a bunch of profitable leases, so that we create our own capital, which would allow us to build more buildings. That’s our overarching goal,” Olson explains.

But developing a sustainable business model has been a challenge—one that Olson and others are still tackling. “Real estate in New York City is a very expensive endeavor; we’ve spent hundreds of millions of dollars building school buildings,” says Olson. “So we need to develop a model that can sustain itself, because if we relied solely on philanthropy, we’d have a very limited amount of impact."

External factors have made the challenge even trickier. Civic Builders’ two aspirations—helping to grow high-quality charter schools and pursuing long-term financial sustainability—came into conflict when the New York City Department of Education made hundreds of millions of dollars available to charter schools for real estate in the city’s 2005-2009 capital plan. “It was basically free capital, which distorted our marketplace,” said Olson. “Anybody who might get funds from the New York City Department of Ed didn’t want to do a deal with us on a private basis. So that had the somewhat ironic and unintended consequence of freezing the charter school real estate market for a couple of years.”

Civic Builders was also eligible for this funding. Only two years into Civic Builders’ history, Olson and his colleagues faced a significant strategic choice:, Would they apply for this funding stream, which prohibited charging rent to schools? If yes, they could dramatically expand seats for kids—but at the expense of their original business model, which they believed had identified a more effective use of debt and equity financing.

Ultimately, they decided to apply. To date, they have received nearly $300 million in city funds. However, Olson noted, the organization still maintained its non-negotiable quality standards: “Even though most of the money came from the Department of Ed, we still negotiated that leases for the charter schools would have our academic performance requirements.”

The real return on investment

As chairman of the board of directors, Olson invests between two to 10 hours a week, depending on the stage of projects. “It’s highly episodic,“ he says. “I’m very active in deal-making, somewhat involved in actual acquisition of properties and financing, and not involved in construction.”

As for returns, to date, Civic Builders has developed or is in the process of building 12 facilities—either new buildings or gut renovations—comprising more than 760,000 square feet and costing some $445 million. Civic Builders was able to do this with $25 million of philanthropy, indicating that for every $1 in philanthropy, they built almost $20 of school buildings. Several buildings have won prestigious design awards. Most important, those buildings house schools that provide students an excellent education. In 2009, all 12 Civic Builders schools exceeded the academic achievement of district public schools by 13 percent in English arts and 15 percent in math. That’s what Olson considers his most important measure of return on investment.