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.”