Clark Atlanta’s enrollment spells trouble for finance venture for student housing by Invest Atlanta, CAU

By David Pendered

Deteriorating conditions at Clark Atlanta University may force a company that’s comprised of Atlanta’s development arm and CAU to close, according to the latest audit of Invest Atlanta.

Clark Atlanta University did not meet enrollment forecasts made in the early 2000s. Credit: usnews.com

According to bondview.com, ADA/CAU Partners, Inc. already is in technical default of bonds it issued for more than $50 million to finance the construction of student housing. The company has depleted its reserve funds and had to borrow from its insurer to make its payment last year, according to the audit of Invest Atlanta.

The Invest Atlanta audit includes this cautionary statement about the partnership between Invest Atlanta and CAU: “Should the company’s operations not improve, the company might not be able to continue as a going concern.”

The next bond payment is due July 1, according to bondview.com.

The problems evidently stem from CAU’s trend of declining enrollment. That trend is exactly opposite forecasts made in the early 2000s.

A report by Price Waterhouse Cooper, that’s included in the 2004 bond package, predicted enrollment would rise to nearly 5,000. CAU’s enrollment this school year is just over 3,100, according to usnews.com.

The result is that CAU has a lower number of students in need of housing than was forecast at the times the bonds were sold. The consequence is the rent payments do not cover the payments required to service the bonds.

The Invest Atlanta audit notes that city taxpayers are not on the hook for repaying the debt if the company folds.

That’s because investors are to be repaid through the revenues collected from students who reside in the facilities built with proceeds of the bond sale, according to the official statement that accompanied the sale in 2004.

The bond’s risk level is such that the coupon, or interest rate, was 6 percent when it was issued. The upper end of the current yield range is 8.97 percent, according to bondview.com.

The company hired a new management company in 2011 to turn around the project’s results, according to the audit.

Documents issued in 2010 that relate to the hiring of a new management company indicate the project never performed close to its expectations. At that time, the two buildings had an occupancy rate of 59 percent and zero percent. Other comments note:

• Occupancy in the previous five years had averaged 82 percent;
• Rent concessions were being offered in 2010;
• The company did not know the percentage of rents that were past due at periods of 30, 60, and 90 days;
• There was no formal marketing plan for the project, according to the June 9 addendum to the company’s RFP for property management services.

The addendum also outlined these problems with the property:

• “Maintenance issues within the units and within the common areas of the project;
• “Occupancy issues;
• “Cash flow/collections issues;
• “Security concerns;
• “Student conduct and complaints.”

The fiscal question facing ADA/CAU Partners – how to resolve the debt situation – is the latest local example of the kind of hard times that are inside the mixed bag public finance of higher education.

Just last month, Morehouse College saw its credit rating downgraded by Moody’s Investors Service. Moody’s rated the bond slightly above speculative, with a negative warning that was based in part on declining enrollment.

On the other hand, the credit rating of Kennesaw State University was reported in November as solid investment grade. Moody’s cited KSU’s enrollment of about 22,000 and other factors.

Meantime, Georgia lawmakers are weighing Gov. Nathan Deal’s proposal to sell almost $200 million in bonds to pay for upgrades at the state’s institutions of higher education.