The University of Oklahoma breached a promise to lease custom-built space in a campus housing project financed with $250 million of bonds, according to a lawsuit the developer filed Monday.
OU’s cancellation of the leases on a parking garage and commercial space in the Cross Village student housing complex eliminated about a third of revenues pledged to annual debt service and raised prospects of default, the lawsuit said.
Provident Oklahoma Education Resources Inc., a non-profit that financed the $250 million project, said the university required the company to build a parking garage, apartments without kitchens and retail space that would include a dining hall for residents. OU then made leasing the apartments more difficult by not allowing freshmen to live in the complex.
“Through its high-ranking officials, including its associate vice president and chief financial officer, the university repeatedly promised to Provident and others that it would lease the entirety of the commercial space and parking facility throughout the life of the bonds,” the lawsuit says.
Instead, OU canceled its lease on the parking and commercial space after one year, following a dramatic turnover in top administration.
OU claims it was within its rights to cancel the leases and that there was no long-term pledge in the official statement for the bonds.
While the lawsuit acknowledged that OU was prevented by law from signing multi-year leases, “the university provided repeated assurances that it would in fact renew the leases on an annual basis.”
The lawsuit accuses OU of providing misleading studies about demand for the luxury apartments and said that a 1,000-space parking garage was not needed.
“Provident did not share the university’s flawed view that unbridled extravagance was the best approach,” the lawsuit said.
Cross Village opened in August 2018, and as of Oct. 1, 2019, had a 34% occupancy rate. The junk-rated, tax-exempt bonds traded recently at about 56 cents on the dollar. The bonds lost their investment grade rating of BBB-minus from S&P Global Ratings on May 31, 2018, three months before the project opened.
OU maintains that continuing "would have cost the University nearly $7 million annually and led to subsidizing a private entity, which the University cannot do with student tuition and fees," according to a spokeswoman.
With proceeds from the bonds, Provident paid OU $20 million for a 50-year ground lease, after which ownership of the complex would revert to the university. If the project fails, OU could get possession of the project much sooner for pennies on the dollar, according to the lawsuit.
On Aug. 9, S&P lowered its junk bond rating of BB on the 2017 bonds to CC with a negative outlook. The 2017A tax-exempt tranche of $206.3 million and taxable Series B of $45.4 million were originally rated BBB-minus.
“In our view, despite repeated efforts by POER [Provident Oklahoma Educational Resources] to partner with the university to facilitate increased occupancy, university cooperation and support has deteriorated,” S&P wrote in August. “Continued low 30% occupancy for the upcoming academic year 2019-2020 following project completion coupled with the recent scaling back of the university's agreement to lease all commercial and parking space for about $6 million annually render the project financially unviable, thereby triggering the current multi-notch downgrade.”
