Some community colleges in California are learning a hard lesson about free money.
The schools signed up to sell municipal securities whose debt service would be entirely covered by the loan and whose principal would be forgiven at maturity. They would never have to write a check.
Now at least two schools are facing the legal costs of terminating the transactions as well as pursuing alternative financing for almost $500 million in construction projects ranging from new classrooms to libraries to student housing, at a time when borrowing costs have climbed to the highest levels in decades.
The key adviser in the transactions was bond lawyer David G. Casnocha, managing shareholder of Stradling Yocca Carlson & Rauth's San Francisco office, who "has served as bond counsel to more than 500 school and community college districts in California," according to the firm's website. Stradling Yocca is the ninth-ranked bond counsel in the nation this year, working on 95 deals totaling about $7 billion, according to data compiled by Bloomberg.
"These deals are extraordinary and strange, and we've never seen anything like them before," said Robert Berry, executive director of the California Debt and Investment Advisory Commission, part of the California State Treasurer's Office. The commission provides "responsive and reliable information, education, and guidance to state and local public agencies and other public finance professionals," according to its website.
"It's hard to understand how the structure is feasible," said Berry, who is reviewing the deals.
The first transaction was approved at an Ohlone Community College board meeting on Nov. 9, 2022. Ohlone is east of San Francisco in the city of Fremont. Casnocha told the board that Alpina Investments Inc., a Canadian investment firm, had approached him with its new product "because I have relations with all the community colleges in California." He told the board that when the product was first described to him, he thought it "too good to be true," but as time passed and he discussed it with Alpina, he became convinced that it was a good deal for his clients.
This is how he explained the transaction in a video of the board meeting. A community college district sets up a leaseback deal to finance new construction with something called the Public Property Financing Corp. of California, used by municipalities across the state, creating a tax-exempt certificate of participation, in this case in the amount of $200 million.
The deal is structured to mature in three years, Casnocha explained. There are three annual $6 million debt-service payments with the principal coming due in the final year. Alpina sets up "grant funding" for the district and promises to dole out money according to the construction schedule. The certificate is privately placed with Alpina. Alpina also gives the district $18 million in three installments to cover the debt service, Casnocha said, and at the end of the term, "the principal of the grant is forgiven."
Asked to explain how Alpina could afford to do this, he told the board that they "use it to access their line of credit, which is in the billions of dollars," and that they can earn enough that way "to fully fund your grant." He added that this "is not charity" and that they "make a few bucks."
And if Alpina fails to pay? It is going to obtain a surety on the funding agreement, Casnocha said. "I don't think there's ever a risk that you're going to have to tap into the general fund to make the lease payment obligations."
Casnocha told the Ohlone trustees this would be the first of these new deals in the state, and that "Mt. Sac," the Mt. San Antonio College District in Los Angeles County, "is about two weeks behind you."
Mt. San Antonio's deal was for $254.5 million. A third district, San Bernardino Community College, approved a $560 million transaction on Aug. 10, 2023.
On Oct. 4, Mt. San Antonio filed a "Notice of Significant Event (Termination of Financial Obligation)" with the Municipal Securities Rulemaking Board, which said the certificates were terminated effective Aug. 1, 2023. "The Certificates are no longer outstanding and all obligations of the District applicable thereunder have ceased," the notice said.
Leah Szarek, the board's chief external relations officer, called the termination a "rare" event.
Casnocha said via email that Mt. San Antonio filed the notice terminating the deal because Alpina "failed to deliver the contractually agreed to funding."
An Ohlone "termination agreement and quitclaim" filed Sept. 1 with the California Debt and Investment Advisory Commission says Alpina defaulted "by failing to provide grant funding" in accordance with the terms of its agreement.
Alpina disputes the schools' claims.
"In fact, Alpina is the party that not only fulfilled its contractual obligations but went above and beyond," the firm said in an email. "Both colleges involved in the agreements had specific contractual requirements that they needed to meet before funding could be provided. Alpina issued multiple letters to both colleges, urging them to meet these agreed-upon requirements."
Alpina said it was working to make the project in San Bernardino "a successful example for other school districts and universities in California." It said it was "actively working" on the issuance of new participation notes for other schools.
"While the first two deals did not proceed as contractually agreed, we view them as valuable learning experiences for the upcoming projects," Alpina said in its email.
On Monday, Alpina added that the terminated transactions were victims of market volatility. "The parties' estimations of the viability of the rate and the financing turned out to be unrealistic," Alpina said in an email.
Carol Nelson, director of the office of the president and board of trustees at Mt. San Antonio, said in an email last week that she was unable to comment. None of the trustees or other officials at the three schools replied to emails. After answering the question of why Mt. San Antonio filed its termination notice, Casnocha didn't reply to subsequent calls and emails.
This isn't the first time Alpina has come under scrutiny. The firm, based in Vancouver, received funds from a Cypriot investment company as part of a series of transactions in 2019 probed by UK police. The case, which revolved around the trading of Guinean gold, prompted prosecutors to say there was "overwhelming evidence that the money was unlawfully obtained from international money laundering."
Alpina was sent €1 million ($1.2 million) before Lloyds Banking Group Plc blocked the transfer of an additional €10 million, according to a London court judgment from 2020. The payments made by the investment company Xiperias Ltd. were "curiously circuitous," the judge said.
Alpina said in an email to Bloomberg that it "promptly terminated the project upon learning of the investigation."
