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Stung Luxury Dorm Bondholders Say University Broke Promises

Bonds issued in 2017 to finance student housing at the University of Oklahoma lost a third of their value after the university terminated its lease agreement.

(Bloomberg)—The trustee representing bondholders who invested $250 million in a luxury dorm at the University of Oklahoma accused the college Monday of breaking a promise to lease retail and parking spaces over the 40-year term of the bonds.

The dorm at OU’s flagship campus in Norman has struggled to attract students and in late July suffered another blow when the university notified the complex’s non-profit owner that it wouldn’t renew the annual leases. Bonds issued in 2017 to finance the 1,230-bed complex known as Cross Village, which had a 27% occupancy rate at the end of March, lost a third of their value after the university terminated the agreement.

The rental payments, projected to make up a third of the dorm’s revenue, were a “moral obligation” of the university, lawyers for the trustee, UMB Bank, wrote in a letter to the university’s outside counsel Monday. Failure to renew the leases could result in a downgrade of the university’s bonds, driving up borrowing costs, the letter said.

“Major mutual funds, which aim to judiciously invest ordinary peoples’ valued savings and pension monies, lent $250 million based on the belief that the University would honor its obligations and not unnecessarily jeopardize Oklahoma’s standing in the municipal market,” Arent Fox, the law firm hired by UMB, said in the letter. “This belligerent act sends a loud and clear message to the marketplace and business community. YOU CANNOT TRUST AND SHOULD NOT DO BUSINESS OR BUY BONDS OF THE UNIVERSITY OR THE STATE OF OKLAHOMA.”

Colleges from Texas A&M to Kean University in New Jersey have tapped non-profits to finance student housing in an effort to hold down debt as they cope with declining state aid and pressure to limit tuition increases. The University of Oklahoma case highlights the risk of projects that rely on third-party support and recalls a decision by Michigan to terminate a lease in a bond-financed building after four years, leading to a default in 2017, according to Municipal Market Analytics.

UMB’s letter contained numerous inaccuracies and misstatements about the university’s obligations, Lauren Brookey, a university spokeswoman said in an email. The school is simply exercising its contractual rights by not renewing the leases, whose costs didn’t justify the benefits, she said.

“The university’s actions with respect to the Cross Village debt do not reflect at all on the university’s financial condition, its ability to repay its own debts, or its willingness and ability to satisfy its own contractual obligations. Statements that you cannot trust or do business with the university or the State of Oklahoma are defamatory,” Brookey said.

The offering statement for the Cross Village bonds makes clear numerous times that the bonds are not obligations of the university or the state and that the debt is backed solely by rents. While the document includes five-year financial projections that include the university rent payment, it cautions investors not to place undue reliance on forward-looking statements.

Invesco Ltd. was the largest public holder of the Cross Village bonds as of June 30, with $54 million, while MacKay Municipal Managers held $45 million.

The university should anticipate a lawsuit over its role in the issuance of the bonds and its actions in connection with the dorm project if it fail to change its “course of conduct,” lawyers for the trustee wrote. University officials should take steps to preserve documents regarding the university’s intent to renew the commercial space and parking leases, demand for student housing and competition to the complex.

The University of Oklahoma received $20 million from proceeds of the 2017 Cross Village bond issue for a 50-year ground lease of the site to the non-profit owner Provident Oklahoma Education Resources. The university should also preserve records related to the negotiation and use of the $20 million payment, lawyers for UMB wrote.

At the time of the bond offering and in follow-up calls with bondholders through 2018, university officials said they intended to renew the commercial lease and parking license, Provident Chairman and Chief Executive Officer Steve Hicks said in July interview.

However, a new university president, Jim Gallogly took over in July 2018, opposed the project, Hicks said. Gallogly resigned in May 2019 after clashing with former president David Boren, who was accused of sexual misconduct by a student. Gallogly also faced criticism over budget cuts and his response to a racial incident on campus.

“The University is responsible for its institutional decisions from one administration to another,” UMB’s attorneys wrote. “It cannot make promises to induce investments from the most respected names in the municipal market and receive $20 million only to then walk away from its obligations without serious consequences for Oklahoma.”

To contact the reporter on this story: Martin Z. Braun in New York at [email protected].

To contact the editors responsible for this story: Elizabeth Campbell at [email protected]

William Selway, Michael B. Marois

© 2019 Bloomberg L.P.

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