Following OU’s decision not to renew Cross Village commercial and parking leases, OU may face litigation from Cross bondholders on the multimillion-dollar project.
According to a letter to the university's outside counsel obtained by The Daily from finance attorney David Dubrow — who represents UMB Bank, one of the trustees on the $250 million bond for the Cross Village housing project — the university “drew on its status as a respected and trusted state entity” to seek investors for the project.
OU also assured investors it intended to lease the commercial and parking properties for the duration of the bonds, according to the letter, and knew the bonds included “long-term projections” showing that the university would renew and honor its lease payments.
"Major mutual funds, which aim to judiciously invest ordinary peoples' valued savings and pension monies, lent $250 million based on trusting the promise of the University that it would honor its obligations," the letter states.
But the university backed out of its leases after only one year — which, according to the letter, could damage the university’s reputation in other financial relations.
“In the few other instances that we know of where a governmental entity ... (withdrew) on a subject to annual appropriation credit, the governmental entity suffered a severe downgrade, and was either locked out of the marketplace for several years or was severely punished in the marketplace with high interest rates on its debt,” the letter states.
The letter states Dubrow expects a “similar outcome” for OU and would not be surprised if this “bad faith” causes a negative impact on the $1 billion outstanding OU Medicine Project Bonds.
But according to a statement from the university, OU began conversations "in good faith" with Provident Oklahoma Education Resources (POER) in May when it "notified POER that non-renewal was a strong likelihood."
"POER had ample time and opportunity to respond to the non-renewal and communicate changes to residents," the statement said. "The Cross Development Project was created through a debt-financed financial transaction with POER...under this financial model, POER owns Cross and is solely responsible for its development, construction, and management."
According to the statement, the university analyzed the costs and benefits of the leases and the analysis "showed little benefit to the University," as the university obtained only approximately $40,000 in retail rental revenue for the previous year and the dining and parking spaces were "not used enough to justify the lease rates" of over $6.8 million.
Renewing the leases "would have led to subsidizing a private entity, which the university cannot do with student tuition and fees," according to the statement.
"The University as a public entity has a responsibility to act in a fiscally responsible manner and in the best interests of the students and citizens of Oklahoma," the statement said. "The University has met all its legal obligations, and in not renewing these leases is simply exercising the annual right to terminate that is specifically spelled out in the written agreement."
According to the letter from Dubrow, the decision to withdraw from the commercial and parking leases could also result in a negative impact on the state.
While state agency lease purchase agreements contain language that allows for termination of the lease at the end of any fiscal year, and the markets recognize the leases are not legally state debt, they do “represent an on-going commitment backed by the state’s general resources,” according to the Oklahoma State Bond Advisor 2018 Annual Report’s section on Lease Purchase Obligations.
The state of Oklahoma’s credit rating and access to funds in capital markets could also be negatively impacted, according to the report, without proper appropriation to the stated agency for these lease payments — something the Oklahoma legislature has never failed to do.
“Given the likely negative impact on the state and its affiliates’ moral obligation lease arrangements, it is difficult to understand how the university could even contemplate dodging moral obligation relating to its leases,” the letter stated. “This is a major blemish for the state.”
OU also received a $20 million upfront payment to finance the construction of Cross, in return paying nonprofit corporation and owner of Cross Village — Provident Oklahoma Education Resources — over $6.8 million for the commercial and parking leases. This $6.8 million amounted to double the market rate for commercial space and almost 10 times the market rate for parking space, according to the lease termination notice.
“We just wish that the university would support the project that they had us build for them, that they would just do what they agreed to do,” said Steve Hicks, president of Provident Oklahoma. “We built exactly what the university requested that we build, and now they have turned their back on the project.”
According to the letter, the fact that OU backed out of its moral obligation to renew the leases “fundamentally undermines” its promises to support the project, and is “unprecedented by any governmental entity in Oklahoma and by any state-affiliated entity anywhere in the United States.”
The letter also states that they have “reliable sources” who have said the university’s behavior is part of the university’s strategy to “drag things out” until it can purchase the project at a cheaper cost.
“This sinister plan is more like that of a vulture hedge fund than of a governmental entity,” the letter states. “YOU CANNOT TRUST AND SHOULD NOT DO BUSINESS WITH OR BUY BONDS OF THE UNIVERSITY OR THE STATE OF OKLAHOMA.”
The possible suit against OU would be based on the university’s role in the issuance of the bonds, according to the letter, as well as its actions in connection with the project and its receipt of $20 million in bond proceeds, among other things. The letter states the university should retain all documents relevant to these claims.
“The university is responsible for its institutional decisions from one administration to another,” the letter states. “It is not too late for the university to change course and avoid the serious consequences of its ill-advised acts. However, as it continues on its misguided path, the window for reversal is continually closing.”
This story was updated at 9:52 p.m. to reflect a statement from the university.