A $250-Million Student-Housing Deal Went Bad. Now the U. of Oklahoma Is Being Sued.

Mike Simons for The Chronicle

The University of Oklahoma has been accused of making “empty promises” to a company that financed the construction of a $250-million student-housing complex on its campus. Now the university may be headed to court.

A lawsuit filed on Monday by Provident Oklahoma Education Resources says that the university’s Board of Regents and the State of Oklahoma breached their agreements with the firm, a subsidiary of Provident Resources Group, a nonprofit investment company that works with colleges.

The suit, which seeks nearly $800 million in damages, also accuses the university of unjustly enriching itself, among other allegations. The university called the claims “baseless.”

The furor arose around Cross Village, a 1,200-bed complex with 40,000 square feet of retail-and-dining space and a 1,000-space parking garage, financed through a public-private partnership. The arrangement, known as a “P3,” has become an increasingly popular way for colleges to build or improve their campuses without raising money or incurring debt; the deal-gone-bad has been seen as a cautionary tale.

Under David L. Boren, who was president at the time, the university signed an agreement in 2017 to build the complex on university-owned land, with Provident borrowing about $250 million to pay for it. Provident was to lease the land and own the building for 50 years and collect all the student-housing fees. The university was to rent the retail-and-dining space and parking spaces from Provident. In an unusual wrinkle, the university asked for $20 million upfront instead of receiving annual ground-lease payments of about $1 million.

To make up for the upfront expense, Provident charged the university nearly triple local market rental rates for similar retail and dining space. The university paid nearly $7 million to Provident to rent out the ground-floor space and parking spaces during the first year of the deal. Oklahoma collected only about $40,000 in rent from the retail space, which now sits empty.

Boren retired under a cloud in 2018, and his successor, James L. Gallogly, a former oil-company executive, considered the deal financially unsustainable for the university. Due to state law, the language of the ground lease for the site held that the leases for the retail and parking spaces should be renewed annually, and Gallogly did not renew them this summer. Between the loss of the university’s rent payments and a lower-than-expected occupancy rate at Cross Village, Provident faces the possibility of defaulting on its debt payments. Gallogly resigned in May.

The suit argues that the university reneged on repeated promises to continue to lease the ground-floor spaces and the parking for the life of the deal. It also contends that the university overestimated the demand for housing on campus, and that it asked that the units be built without in-room kitchens in order to encourage residents to patronize the eateries in the ground-floor space, despite the fact that the housing was designated for upperclassmen, who often prefer having a kitchen. This fall, only about a third of the residences had been rented.

The suit also states that the university deceived Provident by saying it had all the necessary approvals for the project. The minutes of a Board of Regents meeting in October 2018 note that the leases for the retail and parking spaces had not been properly approved by the board, although it subsequently voted to continue the leases for the remainder of their yearlong terms.

If Provident defaults on its debt, the ground lease would be invalidated, and the university would take possession of the building.

The suit asks for nearly $800 million for breach of the ground lease and of the university’s promises to the firm, and for the return of the $20 million. “The University should not be permitted to benefit from its wrongful conduct,” it reads.

The university issued a statement Monday afternoon that said Provident’s suit “parrots the same baseless claims it has previously put forth,” and that it will respond appropriately. “OU’s obligation remains to its students and the taxpayers of Oklahoma, not to Provident or its debt.”

Lee Gardner writes about the management of colleges and universities, higher-education marketing, and other topics. Follow him on Twitter @_lee_g, or email him at lee.gardner@chronicle.com.