How a $250-Million Campus-Housing Deal Went Bad

David L. Boren had grand plans for Cross Village.

As the long-serving president of the University of Oklahoma, he planned to expand the Norman campus’s capacity for housing upperclassmen without incurring any debt. Cross Village would feature about 1,200 beds arrayed in apartment-style suites, as well as accompanying parking and some ground-floor retail space, all set to open in the fall of 2018. The project would be built through a $250-million deal that used none of the university’s money, just private capital.

By the fall of 2019, however, Boren was gone. Cross Village was only about a third full, and the ground-floor retail space was deserted. The bonds issued for the project have been downgraded, and the company that borrowed the money for the project could default on its loan payments. Accusations fly between the university and the borrowers and bondholders, and soon, so may lawsuits.

The deal-gone-sour between Oklahoma and the Cross Village developers provides a cautionary tale for colleges and private firms entering such agreements — called public-private partnerships, or P3s — which are an increasingly popular workaround to tight college budgets.

The standoff also highlights the importance of leadership to the success of long-term projects, the risks inherent in rocky presidential transitions, and the potential for problematic projects to cause reputational damage for universities in a time of rising skepticism of higher education.

Boren was following a well-worn path by pursuing a P3, which is designed to offer something valuable to every party to the deal. Colleges get access to money to build without having to borrow or raise millions. Private-capital investors can put their money into seemingly safe vehicles — public colleges, for example — that are typically defined by their stability and longevity.

The Cross Village deal, as agreed to in 2017, was fairly standard. The university owned about 10 acres of land where it wanted to build a dormitory. So it entered into an arrangement called a “ground lease” with a subsidiary of the Provident Resources Group, a nonprofit development and finance firm.

Under the terms of the agreement, the Provident subsidiary leased the site for 50 years and borrowed about $250 million to finance the deal. Balfour Beatty Campus Solutions, the actual developer, oversaw the design and construction of the residence hall and parking garage.

Provident was supposed to receive the revenues from student-housing fees until the bonds were paid off. The university was supposed to rent the 1,000 parking spaces and about 40,000 square feet of ground-floor retail space from Provident, collecting student-parking fees and charging commercial tenants rent, and then making an annual lease payment back to Provident.

The housing fees and the rent from the university, in turn, would help Provident pay off its debt.

According to Steve E. Hicks, the founder and chief executive of Provident, if Boren had remained in office for another year or two, the project would have been an “outstanding success.”

But that’s not what happened.

‘They Had No Interest’

The first sign of trouble came early. When a college opens a new residence hall, it typically starts marketing the facility to students the year before the new beds will be ready, in order to better attract tenants.

Hicks says the agreement with the university mandated that it sign off on all marketing materials associated with the project, so Balfour Beatty passed along the materials to the university’s housing department for approval in October 2017.

The hope was that brochures and social-media posts would be ready to send out to students by December of that year.

But it wasn’t until April 2018, just weeks before students were supposed to make their deposits for the following fall, that the housing department approved the materials. “We lost, in essence, an entire year of marketing,” Hicks says.

Standard & Poor’s, a bond-rating agency, took note. In May the agency saw that Provident was behind in its marketing and had few tenants for the apartments. It downgraded the bonds for the project, signaling a potentially risky investment to investors.

Hicks believes that the materials were slow-walked through the approval process because the Cross Village project was driven by the president and other top administrators. Housing-department officials had not been involved in the project, and according to Hicks, “they had no interest in it.”

The University of Oklahoma declined to make any administrators available for comment for this article. It referred The Chronicle to a recent op-ed by Anil Gollahalli, its general counsel, that appeared in The Oklahoman. In it, Gollahalli faulted Provident for going into “battle mode” by hiring public-relations firms and lobbyists, “all with the intent to pressure the university and the state.”

Not long after, at the end of the academic year, Boren took his previously announced retirement. His exit was messy. The final years of his presidency had been rocked by controversy after a 2015 video showed Oklahoma students performing a racist song. He later cut all ties with the university after he was accused of sexually harassing aides. Boren could not be reached for comment.

On June 26, 2018, less than a week before Boren left office, Hicks says university officials reiterated their continued support for the Cross Village project to investors during a conference call.

Days later, James L. Gallogly, a former oil-company executive, took over from Boren. He had his own priorities.

In his first meeting with the Board of Regents, in June, Gallogly criticized Boren and despaired over the university’s finances, saying, “We cannot continue to build new building after new building.” Gallogly, who has since resigned, could not be reached for comment.

As construction wrapped up on Cross Village in the summer of 2018, Hicks and his team requested a meeting with the new president to gauge his stance on the project. They were granted a meeting in January 2019, at which Gallogly made it clear that he did not support the project and that he would do only what he was required to do by the literal wording of the contracts, says Hicks.

When Hicks warned the new president that legal action might result, he says Gallogly responded that he was a pretty good lawyer himself.

‘Moral Obligation’

The ground lease between the university and Provident specified that the university would rent the ground-floor spaces and parking spaces on a yearly basis. As in many other states, Oklahoma law prohibits public entities from signing multiyear contracts. Annual payments to Provident started at more than $6 million and were set to rise during the term of the deal.

The size of that annual payment resulted from an unusual wrinkle in the deal that the institution itself had asked for: It wanted to front-load the amount of revenue it received for the ground lease. Instead of getting $1 million a year from Provident over the life of the deal, the university asked for $20 million upfront.

Hicks says university officials wanted the money to cover a $20 million cut in the institution’s 2016-17 budget brought on by a looming $1-billion state-budget shortfall.

The additional debt added to the deal by the upfront payment led Provident to charge higher-than-market price for the parking and retail space. Much higher. The commercial lease between the university and Provident pegs the payment for dining and retail space in Cross Village at $94 a square foot.

According to Brad Worster, a commercial real-estate agent in Norman, higher-end retail and dining space in town would probably rent for $30 to $35 a square foot.

“The above-market rates were agreed to” by the administration, Hicks says in an email.

After the first year, Gallogly balked at the arrangement. While the university paid Provident about $6.8 million to rent the parking and retail spaces for the 2018-19 academic year, it earned only about $40,000 in rent from the dining and retail space.

It became apparent that the university did not intend to renew its annual lease for the ground-floor space or the parking. According to the Oklahoma Daily, Gallogly later told the Board of Regents that the money paid to Provident for Cross Village was “significant, and it’s not in the budget. That’s not acceptable.”

Without the payments for the retail space, and with still only about a third of the beds in Cross Village occupied, Provident found itself facing a serious financial shortfall, and potentially having to default on the bonds, which had their ratings lowered in August 2019 once again. Hicks says the bonds are currently trading at about half their original value.

Gallogly’s decision not to renew the lease was consequential. In cases where a public entity is limited in signing long-term agreements, the tacit understanding is often that the public entity will, in good faith, continue to honor the terms of the agreement throughout the term of the project.

The term of art for such situations is a “moral obligation.” The borrower trusts that a public entity — an arm of state or federal government — will make good on the deal. The public entity, for its part, is motivated to continue to hold up its end of the bargain so that it doesn’t end up with, for example, a failed project built on public land.

But moral obligation is not necessarily an enforceable contractual mandate, says Ted Risher, senior project manager of the Scion Group, a company that owns and operates student housing, who emphasized that he wasn’t familiar with the details of the Oklahoma deal. “Moral obligation is great,” he says, “until the first time something like this happens.”

Letters flew between lawyers representing the two sides in the dispute. David L. Dubrow, who represents UMB Bank, the bond trustee, wrote that “the university had previously expressed to the [bond] market that it intended to renew the leases on an annual basis,” and invoked moral obligation. He called the reversal of the deal a “reckless repudiation” and an “outright betrayal.”

He warned that the message the university was sending to the bond market was: “YOU CANNOT TRUST AND SHOULD NOT DO BUSINESS WITH OR BUY BONDS OF THE UNIVERSITY OR THE STATE OF OKLAHOMA.”

Molly Stephens, the lawyer representing the university, wrote that the university “wants Cross to succeed, but it must also protect the interests of its stakeholders, including students and taxpayers.”

She wrote that the university was under no moral obligation because it had not budgeted any funds to repay the debt on the project, and that the contract specifies that neither the university nor the state is obligated to pay the debt or any interest: “The university broke no promise, but simply exercised its explicit contractual rights.”

‘A Cautionary Tale’

Not all private-capital deals with colleges are likely to be this volatile. It has become a common practice for such partnerships to include clauses that allow either party to end the agreement, including for simple convenience, says Jill Jamieson, managing director of Jones Lang LaSalle, a commercial real-estate company that works with colleges.

Either side can get out, but the clauses spell out how that can happen, and how either party will be compensated. If such clauses existed in the ground lease for Cross Village, “There would have been clear rules of the road,” she says.

At the University of Kentucky, which built nearly 7,000 new beds over the last decade through a private-capital deal worth $450 million, termination-for-convenience language was a key part of the contract — and required by state law. “You always need an exit strategy,” says Penny Cox, the university’s associate vice president for administration, who was in charge of the project.

The Cross Village ground lease includes no termination clauses, because bondholders wouldn’t have abided them, Hicks says. “Frankly they were taking enough risk with the annual renewal required due to [Oklahoma] state law,” he says in an email.

The ground lease for Cross Village does state that in the event that Provident’s subsidiary defaults on its debts, that would invalidate the ground lease. The university would then be able to take possession of the building. Hicks believes that’s the university plan.

Hicks says that the university, and the state, could suffer financial consequences once potential bond investors learn of the university’s refusal to keep making lease payments, and may face steeper interest rates next time it borrows money.

In September, however, Standard & Poor’s maintained the university’s long-term debt rating as stable investment grade. The rating mentioned the Cross Village bonds but noted that since the university was not guaranteeing the debt, the deal had not been factored into the outlook.

While there’s no single reason the Cross Village deal went bad, experts say, the transition between Boren, who supported the project, and Gallogly, who did not, was clearly the catalyst. Gallogly announced his own retirement from the presidency in May 2019, after less than a year on the job, in the wake of criticism of his handling of sexual-harassment allegations about Boren and of a video of students wearing blackface.

Cross Village might have gone better if it had had more champions at the university. If a project is close to the core of a university’s mission, like student housing, “you need to bring the university and all parties involved along, and they need to be part of the conversation about the deal,” Jamieson says. “It shouldn’t be one person, and it shouldn’t be one driver. You need to get consensus.”

Creating widespread buy-in across a campus, and involving stakeholders throughout the process, was one of the key elements of success for the housing deal at Kentucky, Cox says. A team of more than 20 people from across the institution met every week to discuss the latest developments, Cox says, and “once we made a decision in the room, we didn’t look back in the rear-view mirror.”

The controversy over Cross Village probably won’t put the brakes on future public-private partnerships — and, says Risher, of the Scion Group, it shouldn’t. “There’s still value to be had by doing a good P3 project,” he says.

But universities should always be circumspect when setting up such arrangements. “We see a lot of universities trying to rush out deals and get them done quickly — ‘Hey, we just want to get shovel-in-ground,’” says Jamieson. “If ever there was a cautionary tale, this is one. Take your time, do it right.”

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.

Update (11/25/2019, 6:22 p.m.): This article has been updated with a link to an op-ed by the university’s general counsel to which the university directed The Chronicle after this article was published.