The Murky Economics Of Law School Facilities: Who Does This Law School Owe?

When a law school enters into a deal starts looking like an outtake from The Big Short, something's wrong with the school's commitment to transparency -- and that should matter to students.

future_main1Pop quiz, hotshot! You run a law school and need a new building. Do you take out a bank loan? Or do you invite private, shadowy investors to throw money into a Byzantine arrangement of special purpose vehicles? If you said the latter, then you are ready for big time leadership in the legal academy!

Some law schools build temples to children’s toys, some buy abandoned warehouses, others turn a swamp into a celebration of cheap pizza and broken dreams. Most people take for granted how their law school acquired its pre-existing facilities (probably slavery), but when a new building joins the campus, it’s worth wondering exactly how much — directly or indirectly — students are footing the bill for those facilities.

And understanding the answer to that question may be more difficult than you’d think if the law school goes out of its way to make a mess of the deal. Take, for example, Oklahoma City University Law School and its new building.

Before we go any further, let me be clear: I’m not saying there’s anything untoward about how this law school financed its facilities. But that’s also entirely the point… it’s impossible to tell what’s going on based on the school’s convoluted disclosures. And that means students, faculty, maybe even the trustees… are all left grasping at air when they try to figure out just how this deal went down. Transparency is a value all unto itself, even if there’s nothing rotten under the veil.

It’s also worth noting that I reached out to OCU Law and asked them if they had any comment on the structure of the deal or if they wanted to shine some more light on the investment. I received no response.

The move to the historic old Central High School generated a lot of fanfare and platitudes to “revitalizing” the neighborhood, but no one seemed too interested in figuring out how the school got its new digs, because if you thought “the school must have bought it,” you’d be a bit off. OCU doesn’t own the own building, but who does own the building is a thornier matter wrapped in tiers of investment vehicles that even the school’s financials don’t fully explain.

So the first step in the building mystery brings us to an entity known as “OLBA, LLC”:

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In December 2012, OLBA, LLC utilized $10,000,000 of the loan proceeds to acquire a building located at 800 N. Harvey Avenue, Oklahoma City, Oklahoma, and $521,023 for title work, attorney, and consulting fees. The balance of the funds is to be used for renovation and other operating expenses.

Fair enough. The school has a limited liability company holding its building, presumably shielding the school from some litigation exposure. Pretty standard. And this LLC must have taken out a loan to purchase the building and now rents it out to the school to make everything kosher? Sort of. But it’s not nearly that simple:

During fiscal year 2013, the University made an equity investment of $700,000 into OCU Law Building Associations, LLC (“OLBA, LLC”), which was formed to acquire and lease a facility to be used as the University’s Law School. OLBA LLC also raised an additional $1,300,000 in equity investments from other sources. The University’s investment represents a 35.0% ownership interest in OLBA LLC.

In connection with the above investment, the University loaned $1,780,000 to OCU NMTC Investment Fund LLC (the “Investment Fund, LLC”), which was formed to raise funds for investment in a qualified equity investment vehicle. The Investment Fund LLC also raised an additional $10,341,120 from other sources for a total of $12,121,200. The Investment Fund LLC invested $12,000,000 of these funds into MF OCU Law Building, LLC (“MF Building, LLC”) as a qualified equity investment.

MF Building LLC loaned the investment proceeds of $12,000,000 to OLBA, LLC.

OK. So the school owns 35 percent of OLBA and should — at some point — get back the $1.78M that it loaned to a fund that then invested in the fund that then invested in a fund that loaned money back to OLBA. That seems… unnecessarily complex. If you feel like you’re watching The Big Short right now, I don’t blame you. Frankly, I feel the worst for whatever poor suckers invested the other $10M or so in the Investment Fund because it is, in fact, a pretty s**ty investment with almost every cent “invested” going into a mere loan.

In case you thought this was already complex, don’t worry, it gets messier. Two years down the road, the school created a different vehicle, increased its investment, and loaned some more money:

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In April 2014, OLBA, LLC entered into a lease agreement with Master Tenant, LLC to lease the acquired building who simultaneously entered into an agreement with the University to sublease the acquired building to the University.

Wait. Who owns what? What’s happening here?

What exactly is the cost of this deal in law school funds? Well, in the short-run, the rent isn’t too terrible for a full-sized school building:

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But what happens after 2024? Does the school own the building outright? Or does it at least continue its tenancy in perpetuity? No, because at that point:

The University has an option to purchase the leased premises, which becomes effective on the later of (i) the 5th anniversary of the leased premises being placed in service and (ii) December 5, 2019. The optional purchase price of the leased premises is the greater of (i) the fair market value of the premises at the time of the exercise of the purchase option and (ii) the sum of (A) an amount calculated to provide the Owner with a guaranteed positive return over the term of the Master Lease, and (B) the termination payment (as defined in the Master Lease). The termination payment is $950,000 if the University exercises its option to purchase the leased premises on the initial exercise option date and such payment shall be reduced proportionately each month through the lease term that the purchase option is not exercised.

It seems as though OCU is going to pay millions in rent and then pay millions at the end? Right? Unless something really goes wrong, the fair market value of a building is always going to be the greater of the options over $950K and rent-paid. And that means that some group of investors is making good money off a law school that collects tuition from students — many of whom can’t get a job out there (well, the law school will get some of it as a minority investor in various stages of this deal). To some extent that was inevitable — buying a building requires a good deal of capital, and that probably means securing investors who will want to be paid back — but getting a loan from the bank is a much more transparent story to tell and probably a cheaper option than all this mishegoss.

The worst possible result would be the risk that administration insiders invested in these funds, and no one could tell because of the opacity. Again, I asked OCU Law directly to comment on this and received no response. Imagine a decision-maker investing heavily in one or more of these funds. On the one hand, this would align him or her with the success of the school. On the other hand, any administration official in that position would be personally profiting as a direct result of a decision to expend school funds and put the school in a potentially disadvantageous deal. That would at least be a conflict of interest. Again, it’s not as though we can say this happened, but this is why transparency is so important: deals shouldn’t look this way and raise these sorts of questions. The school owes it to everyone — as a professional institution — to dispel any speculation of impropriety.

It’s really not that hard.

Earlier: How Much Did It Cost To Build Lego Law School?
NYU Law’s Secret Slush Funds