Bond trustee grumbles over faltering University of Oklahoma housing P3
The University of Oklahoma violated its moral obligation on $200 million of debt by reducing its lease commitment to a public-private student housing project, bondholders claim.
On Aug. 2, bond trustee UMB notified investors that project revenues were insufficient to meet debt service, requiring use of the debt service reserve fund.
OU’s announcement on July 26 that it would not renew its parking lease and would scale back its leasing of commercial space in the complex was the latest blow to a project that had failed to hit its occupancy target because of high rental rates.
In a statement last week, the university said it could not continue the commercial and parking lease because it “would have cost the university nearly $7 million and led to subsidizing a private entity, which the university cannot do with student tuition and fees.”
The university, which began constructing Cross during the tenure of former OU President David Boren, now has a new administration.
The university received a $20 million upfront payment for the project when taxable and tax-exempt bonds were issued in 2017 through the Oklahoma Development Finance Authority.
In response to a question from bondholders on March 1, the project manager, Provident Oklahoma Educational Resources, said there were sufficient funds to pay interest without using reserves.
The university’s degree of commitment to the project is the subject of dispute from bondholders represented by UMB.
“It is the Trustee’s view that the University’s conduct is tantamount to a failure to appropriate for an annual lease that is subject to appropriation,” UMB said in a July 31 disclosure notice on the Municipal Securities Rulemaking Board’s EMMA website.
The official statement stated that “[t]he University intends to rent all of the Commercial Spaces on an annual basis,” according to the disclosure notice.
“This conduct will likely result in Revenue from the Project not being sufficient to pay operating expenses and Debt Service on the Bonds. It is also the Trustee’s view that, putting aside any legal obligations the University may have, this intentional act is a failure by the University to perform a ‘moral obligation.’”
The cutback in commercial leasing and the cancellation of the parking facility lease reduces revenue for the project by $6.4 million per year, according to a disclosure notice from UMB based on contracts with the private partner Provident Oklahoma Educational Resources.
In downgrading the debt last year, S&P said, “We do not view there to be meaningful financial support of the project from the university. Though the university has committed to leasing 100% of the retail and parking space for about $6 million, which helps mitigate some of the pressure on coverage, this is insufficient to sustain the project.”
Bondholders claim the university handicapped the project from the outset by not allowing freshmen to live in the residence, whose rents were considerably higher than those of nearby apartments. Rents were reduced to try to attract more students.
Bonds for the 1,219-bed Cross Village complex were downgraded to a junk rating of BB from BBB-minus by S&P Global Ratings on May 31, 2018 with a negative outlook.
At the time, S&P said “the reduced rates are not sustainable as they are not sufficient to cover operations and debt service beyond fiscal 2019 even at full occupancy.”
By allowing debt service coverage to fall below 100%, the issuer violated a covenant providing 120% coverage, S&P noted.
“Though not considered an event of default, failure to achieve the covenanted 1.2x could also result in negative rating pressure,” S&P said in 2018. “In addition, as current rates are not sustainable, failure to raise rates to sufficient levels or adjust expenses could render the project unable to support debt service and result in a multi-notch downgrade.”
Cross Village’s full dining options and other amenities were not in service when the residence opened in August 2018. Thus, the complex was less than a third occupied. The apartments lack stoves or refrigerators, forcing residents to rely on group dining facilities. Provident officials said they were looking for vendors to replace OU's commercial leases.
Cross’s housing options, which include one-, two- and four-bedroom luxury suites, are among the highest priced on campus. One-bedroom apartments were listed at $1,444 per month.
OU’s termination notice “does not assert that the university was unaware at the time it entered into agreements as of Aug. 1, 2018 that the rents were above market,” UMB says in its notice.
Provident has a 50-year ground lease on the site of a traditional OU dorm that was demolished to make room for the new luxury complex.
While the OU project is similar to one at Texas A&M University that fell short of occupancy goals in recent years, the A&M facility did not carry any moral obligation or subsidies from the university, an attorney for the trustee noted.