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Thomas Jefferson School of Law about to go under?

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Thomas Jefferson is a big, although shrinking, ABA law school in San Diego, featuring horrible employment statistics (less than three in ten graduates have legal jobs nine months after graduation), terrible bar passage rates (over the past three years less than half of the school’s graduates who have taken the California bar have passed), and mind-boggling debt figures (the 2013 class took out an average of $180,000 in law school loans, which means its members had an average of around $215,000 in law school debt alone, not counting undergraduate debt, when their first loan payments became due in December).

A few years ago, this institution decided it would be a good thing to build a swank 305,000 square-foot eight-story building in downtown San Diego, at a cost of around $90,000,000. The project, which was completed in 2011, was beset by litigation over “alleged construction flaws and unpaid debts.”

The project has also been plagued by remarkably bad timing, as it opened just as the law school reform movement was generating the kind of major media coverage that led to a crash in applications to law schools generally, and to TJSL in particular. Applications to the school plummeted by more than 50% between 2010 and 2013, and even moving to a de facto open admissions policy (acceptance rates went from 45% five years ago to 80% last year) hasn’t stopped the student body from contracting.

Even as of July 2012, the school’s tax filings revealed an already-precarious financial situation, as revenue was failing to meet expenses, and the school’s assets consisted almost entirely of the new building and the land on which it sits (remarkably, the school, which is 45 years old, has literally no endowment). Meanwhile the school was carrying $92.5 million in bond liabilities, which in turn were requiring nearly $11 million per year in debt service. In addition, the building and land are apparently subject to what was as of two years ago a $33.4 million dollar mortgage.

This past December, the school’s new dean (his predecessor had been paid $529,000 in FY2012, apparently in recognition of his success in bringing the school to the brink of bankruptcy) announced staff layoffs and salary cuts, at the same time that the school’s bonds were being downgraded to junk status.

Now comes word that TJSL didn’t meet its payment obligations on its debt this summer, and that the school is frantically negotiating with its creditors to keep them from pulling the plug on this mess. The bondholders must now calculate whether it makes more sense to try to maintain the school as a going concern, or to get out while the getting is relatively not so bad, given the for the moment robust southern California real estate market.

A few months ago I did an analysis of 22 law school budgets, and discovered that almost all of them dedicated between 60% and 70% of their expenditures to employee (not just faculty) compensation. The major outlier was TJSL, which in FY2012 — that is, before the recent round of layoffs and salary cuts — dedicated only 39.5% of total expenditures on employee compensation. So it’s unclear how much more cutting of expenses the school can realistically do. Although TJSL has yet to officially report its 2014 class size, the admissions office told me that fall enrollment totaled 204 1Ls, to go along with around 60 spring matriculants (the school enrolled 440 1Ls three years ago). Given that the school is essentially 100% tuition-dependent, closing it down may well be the most prudent course of action from the perspective of its creditors.

But there’s another group of people whose interests are likely to be best served by the school closing: a large portion of its current students. Federal educational loans (and almost all postgraduate borrowing now consists of such loans) are almost never dischargeable, with one striking exception: if the school at which the debt was incurred ceases operations prior to the student’s graduation, and the student doesn’t subsequently complete his or her degree at another institution. In other words, the shuttering of TJSL would be a get out of debt jail free card for its students.

. . . A correspondent notes:

Edifice Complex

Term coined by the lawyer and historian Professor Cyril Northcote Parkinson inParkinson’s Law: The Pursuit of Progress, London (John Murray 1958, Houghton Mifflin, 1962) referring to the tendency of successful organizations to build new headquarters just before they begin to decline. See New Headquarters/Office Syndrome, Shiny;Business Week, Curse of.
http://www.ipglossary.com/glossary/edifice-complex/

New Headquarters/Office Syndrome, Shiny.

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  • twbb

    So many of these capital improvements that so many schools are addicted to are basically just vanity projects. They can talk about “student experience” and “attracting quality applicants” all they want, but what it really is, is just a way of self-aggrandizement; administrators want to have a nice office. They want to feel better about themselves when they get to work and massage their own ego.

    • Orin Kerr

      There’s some of that, I think. Although I’ll offer an amended version: The Deans and Associate Deans who tend to decide on these projects are usually in their jobs for the short term, and one lasting and visible contribution they can make is a new building. The nicer the building, the more impressive they may feel their contribution has been. It’s easy to convince yourself that a new building is a great idea if you imagine yourself getting the credit for what a great place it is.

      • BoredJD

        Don’t forget having a headline for their resume as they jump the College Administrator career path. Showing you can raise that type of cash can’t hurt.

      • twbb

        Good point, though in the end it’s still in the service of vanity. The obsession with building is going to bring down a lot of schools.

        • The Dark Avenger

          “Look upon my works, ye Mighty, and despair!”

          • rea

            Vanity of vanities, saith the Preacher, vanity of vanities; all is vanity.

            What profit hath a man of all his labor which he taketh under the sun? Or in law school?

        • Mike G

          My campus features lots of lavish new buildings amongst many shitty, cratered roads.
          Big donors don’t give money for mundane infrastructure.

      • Unemployed_Northeastern

        A pity university bonds don’t come with the personal liability and lack of consumer protections that student loans sport, eh?

  • Emily68

    Thomas Jefferson himself had problems handling debt, I think. So it’s only fair that a law school named for him would go under.

    • cpinva

      mr. Jefferson wasn’t known for his excellent business skills. were we relying on that for his reputation, we’d all be going “Tom who?”.

      • Manju

        Who’s Tom? He’s a pinball wizard.

        • Unemployed_Northeastern

          +100

  • Malaclypse

    If comp costs were so much lower as a percent of total expense, what was higher?

    • hillie97

      Presumably, debt service.

    • Hogan

      Debt service, presumably.

    • Paul Campos

      The big item is the $11 million in annual debt service on the bonds, which as of a couple of years ago was a sum greater than a quarter of the school’s annual revenue.

      • Malaclypse

        which as of a couple of years ago was a sum greater than a quarter of the school’s annual revenue.

        Holy fuck. Even assuming revenues when the debt was incurred were 4X revenue now, that’s an insane ratio. Nobody on either side of that agreement should have agreed to it.

  • Bitter Scribe

    I’m tempted to apply, just to see if they’ll take a 58-year-old with a mediocre undergrad record (altho from a good school). That would prove they’re desperate.

    • Keaaukane

      If you don’t have to go into debt to do so, go for it. The world needs more lawyers.

  • Posts like this make me all nervous about the University of Manchester’s £1 Billion over 10 years building plan.

  • cpinva

    the second I saw the debt service on the bonds, “Junk” came to mind, I didn’t need someone else to tell me. no low-risk debt has double-digit interest rates. were I an investor, I’d go for forced bankruptcy, sell the assets and get what I could out of it now, before the RE market plunges again, and I got nothing but pennies on the dollar.

    at least, the students, while not completing their (worthless) degree, would see their TJ incurred student loan debt expunged, free of charge. and that a’int nothin’.

  • BoredJD

    Paul, do you know whether the upkeep/maintenance costs for these buildings are usually included in the donations raised? This probably doesn’t apply to TJSL since I can’t imagine donations played much of a role, but it seems all these new buildings would put additional pressure on law school budgets.

    I assume it’s like winning the lottery, you spend all the money on the new house then lose everything the next year because you didn’t factor in the increased property tax payments.

    • Paul Campos

      I doubt upkeep and maintenance costs for a school’s new building are themselves significant sources of financial stress (for one thing, maintenance costs for old buildings tend to be higher).

      But there’s another dynamic which plays a much more invidious role: the new buildings tend to be much larger than the old ones — indeed, the need for more space is often a key rationalization for such projects — and imperially-minded administrators are eager to fill up that new space with more centers and programs (and the new administrators for them).

      So the new building ends up generating much higher operating costs, because the operation expands to fill it.

      • Morse Code for J

        The bureaucracy is expanding to meet the needs of the expanding bureaucracy.

      • rea

        C. Northcote Parkinson famously pointed this out, among several related principles.

    • Joe Bob the III

      I have no expertise in law or law schools but a lot in building design and construction. The answer to your question: Hell no. Capital campaigns and new construction expenditures are entirely different animals from operating expenses. Smart owners don’t buy more building than they can afford to operate…but not all owners have that much foresight. The concept of being ‘house poor’ can apply to commercial buildings just as well as residential.

      The current average for commercial building operating expenses in an urban area is about $8/square foot. That covers energy, water, custodial, grounds, maintenance, etc. So, at 305,000 square feet, figure it’s costing TJSL between $2.0 and $2.5 million per year just to run that building.

      • Might be more than $8. I interpreted the lawsuit to most likely mean that the roof and/or curtain walls leak.

      • ichininosan

        $2.5 million translates to roughly 55 full-freight full-time students at TJSL’s insane tuition rates, which accounting for discounts, probably translates to something like 80 actual full-time students. TJSL probably has about 625 full-time and 275 part-time students. I believe the revenue stream is basically tuition and nothing else. Lots of assumptions here, but I would estimate that operating expenses are probably eating up 10% of that revenue stream. That seems high to me. Then again, the school was probably expecting to have 1,500 students feeding into that stream.

        • Paul Campos

          In FY2012 they got $2.3 million in net rental income (it’s a big building), so that probably more or less covered the building operating expenses.

          They had $41 million in net tuition revenue, and just a few hundred thousand from everything else.

  • PaulB

    Whether the bondholders decide to foreclose will probably depend upon the value of the collateral. If the building can easily be repurposed into something that San Diego County or a private user would be willing to buy at a price close to the outstanding debt, then TJSL is toast. If this isn’t the case, then the bondholders may decide that taking a haircut and letting the college continue in business is their only option for now.

    • MacK

      A nice thing about modern buildings – especially concrete frame – the decks are flat and the interior walls (and not fixed floors) are metal stud and drywall – a few days with a wrecking crew and this is just a big office building with a few nice high ceilings. Class 1 office space here we come.

    • Paul Campos

      But what if the mortgage is senior? If the bondholders are in second position, do they really have much leverage here? (This might explain both the very high interest rate and TJSL’s apparent willingness to play chicken).

    • CBR

      I’m curious what the “currently contemplated deed-in-lieu restructuring transaction” entails. Paragraph 3(f) is also interesting: “failure by TJSL to complete any of the items set forth in this paragraph 3 in accordance with the terms set forth herein shall result in an immediate termination of
      this Consent; provided, however that in the event of a default by TJSL with respect to the covenants set forth herein, this Consent or any other default whether monetary or otherwise under the Loan Agreement, the Indenture or any other documents executed in connection therewith, TJSL shall be permitted to continue to pay operating expenses from the Gross Revenue Fund in the ordinary course of business through the end of the fall 2014 academic semester …”

  • MacK

    Damn autocorrect – just when you think you have it under control, rejected its changes, it creeps in and turns what you wrote to gibberish.

  • Vance Maverick

    The Edifice complex is real. Here in Silicon Valley, Google’s headquarters were built by SGI, and Facebook’s headquarters by Sun.

  • CSI

    Here’s another couple of lavish law school building programs from JD Underground:

    American University:
    http://tenley.wcl.american.edu/news/present-and-future/

    Syracuse University:
    http://www.syracuse.com/news/index.ssf/2014/09/see_syracuse_universitys_new_90_million_law_school_building_dineen_hall.html

    A.B.B.B. Always Be Building, Bitches.

  • ValpoGuy

    Is there some hidden significance to the fact that the “litigation” link points to a JPEG of Alanis Morrisette?

    • Fortunado

      Imagine a shoddy legal institution that produced hundreds of insolvent students was itself suing (and being sued for) shoddy construction and refusal to pay debts.

      What term would you use to describe this situation?

      • Unemployed_Northeastern

        What term would you use to describe this situation?

        America

      • DW

        I can think of two:
        1) rain on my wedding day
        2) a fly in my Chardonnay

  • n00chness

    It would appear as though TJSL is leveraging the bondholders inferior position on their secured loans to get TJSL on an Income Based Repayment Program, so to speak.

    The irony…

  • Ken

    If this weren’t a prominent, reputable law school, I’d say that the recent finances look a lot like a bust-out scheme. But since they have plenty of lawyers, I won’t say that.

  • Fortunado

    Hypothetically, could another entity (say private equity) assume the debt obligations of the school and operate it as a for-profit institution?

    Or are there too many moving parts?

    • Unemployed_Northeastern

      Private equity firms do not take on debt obligations; they much prefer to have third parties take on the debt (i.e. the company they are acquiring). It’s pretty much the lynchpin of the sector. Since TJSL already has the debts, a private equity firm cannot purchase TJSL in a deal designed to frontload the school with debt from which the managing partners would pay themselves, so it is a non-starter.

  • Unemployed_Northeastern

    On the other hand, Drexel Law School (of all places) got a $50 million donation today. On the bright side, that’s more than enough money to vault them past dear Northeastern to become the number one co-op law school, which is one of the premier “world’s tallest midget” type of accolades.

    • DW

      Who’d they get it from?

      • Unemployed_Northeastern

        A trial lawyer who went to Dusquene [sic, I’m sure]. Go figure.

        http://www.philly.com/philly/news/20140918_Trial_lawyer_Kline_gives__50M_to_Drexel_law_school.html

        But what is good news for Drexel is probably bad news for Northeastern, my alma mater and the other co-op law school, so I’m all for it.

        • Fortunado

          So insane to think that guy worth 100’s of millions went to what is now considered a TTT instead of Harvard or Yale.

          • NewishLawyer

            As far as I know, plaintiff’s lawyers including and maybe the very rich ones always went to the non-elite law schools for a variety of reasons.

            1. This is a very old joke “A students become professors, B students become judges, C students become very rich lawyers.” The C students probably needed a bit of necessity is the mother of invention to get careers even in better times.

            2. Plaintiff’s lawyers tend to be the very wealthy ones because while an hourly bill is nice, contingency fees can be much nicer. Contingency fees can also lead to zero profit and ruin but a lawyer who is good at keeping overhead low and knows how to pick winning cases can probably make a few million on a contingency case if not more. I know lawyers who received jury verdicts of over 100 million dollars. Even if this gets reduced to being in the tens of millions, collecting 33 to 40 percent on tens of millions of dollars is very nice.

            3. The T1 lawyers always tended to sneer at plaintiff’s work. At least they did until recently. Most plaintiff’s firms are small and always had trouble recruiting Ivy Leaguers because those people all went to clerkships, public interest, or big law. Now the Ivy Leaguers are becoming plaintiff’s lawyers but it took the crisis to make this happen.

    • BoredJD

      Can’t Legal Aid or the Innocence Project agree to slap some rich guy’s name on the front door so this money will go to a good cause? I’d like to think this type of crap will end with the boomers, either out of principle or simply because nobody in the younger generation will have that kind of scratch.

      • Unemployed_Northeastern

        The money might not end up meaning anything. You know where the second-largest law school gift of all time went? Ave Maria. $100 million from the Papa Gino’s guy (or was it Papa John’s?). Check that, it was the Domino’s guy. http://taxprof.typepad.com/taxprof_blog/2014/09/philadelphia-trial-lawyer-.html And yet, Ave Maria’s enrollment and LSAT splits are tumbling – hell, their 75th percentile is like a 148 now – and their employment stats are not substantially different than a New England Law Boston or Cooley. For all that money, Ave Maria sure hasn’t been able to move up the rankings or bring in a better-credentialed class.

        • BoredJD

          Oh the money won’t mean anything in terms of rankings. It’s that it allows the school to stay open another few years when it should be closing that concerns me.

          • Unemployed_Northeastern

            Ave Maria’s class size has basically dropped from 200 to 100 since 2010, so there’s little doubt that they’re burning through that gift at this point. Besides, Ave Maria is in Naples, Florida (I think) – one of the wealthiest towns in the country.* And the wealthy can always afford lawyers, so um, Ave Maria grads will always have jobs. Or something.

            *So is Nantucket, if my sarcasm isn’t coming through enough. Wealthy places != epicenters of large law firms. You can probably count the number of non-solo law firms on Nantucket on your fingers. Or the Vineyard, for that matter.

      • NewishLawyer

        I wrote about this below. You are right but people seem to like donating to capital campaigns over anything else. This happens more than in law school. It also happens a lot in the arts.

      • Barry_D

        “I’d like to think this type of crap will end with the boomers, either out of principle or simply because nobody in the younger generation will have that kind of scratch.”

        Principles?!?

        Some in the younger generation will *always* have this kind of cash. Remember, Drexel is a low-ranking school. It’s likely that the overwhelming majority of grads are just getting by.

        These donations come from the 1 out of a thousand (or ten thousand) who strike it rich.

    • Fortunado

      So is anyone else sort of sardonically amused that the lawyer (Earl Macke) who allowed having his name removed from the school – purportedly so that it could present a more familiar name to the public- is now being replaced by someone else who donated 3+ times as much?

      • Lee Rudolph

        I’m sure that Macke will be just as glad his name’s not on the school when it does go under in a few more years.

        • Hogan

          I just hope they don’t take the Beneficial building with them when they do.

  • NewishLawyer

    Some thoughts and capital campaigns:

    1. People just like donating to capital campaigns because buildings last and you can put names on them. This is true of more places than just law school. A friend of mine is very hard on prestigious theatres that make shiny new spaces instead of paying their actors. He told me about seeing a performance where it was canceled because the theatre could not afford an understudy because of the money spent to refurbish the lobby. The casted actor got sick. It is seemingly impossible to get people to donate to the “Really Rich Guy or Gal Foundation for the Payment of Artists.” MacArthur seems to be the exception over the rule.

    2. Is there a vested interest for alumni (pre-crash) to save TJIL from going under? How about San Diego? San Diego already has a surprising number of law schools.

    • Hogan

      As Garrison Keillor once said, you can’t put a plaque with the donor’s name on the electric bill.

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