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Why creditors are unlikely to foreclose on Thomas Jefferson

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Thomas Jefferson School of Law may have one of the best buildings in the nation, but it’s causing financial headaches for the stand-alone law school. A smaller than anticipated enrollment during the last few years has left the school in a precarious financial position, and forced it to miss a payment to its creditors in June.

Standard & Poor’s Ratings Services, as a result, dropped the ratings for its bonds to “default imminent with little prospect for recovery.”

But while it appears the school will default on its $133 million of bonds, the school said it is in the process of restructuring the debt and is confident it will resolve the matter soon.

That would provide much needed relief for the beleaguered school. It carries a heavy debt load from the construction of the new building. It paid $10.8 million in interest in 2011, or about 21 percent of revenue.

With a small endowment, Thomas Jefferson generates 95 percent of its income from tuition, according to tax filings.

Critics, including Paul Campos, have called for the creditors to cut their losses and liquidate the schools assets. Campos, a law professor at University of Colorado, is a vocal critic of legal education.

But the death knell may be premature.

It may not be so easy for Thomas Jefferson’s creditors to recoup their money by selling the school’s building. While local real estate brokers say the building is in a high demand area and would fetch good rental rates, a new owner would first have to invest significant resources to renovate the building and prepare it for a larger number of lessees. That would bring down the value, they said, and make it unlikely a creditor would want to foreclose. 

Also, the school cut expenses by about 10 percent last year when it laid off 14 staff, and it carved out part of its building and rented it to a high-end restaurant, bringing in more revenue.  

But most importantly, the enrollment decline appears to have abated.

Thomas Jefferson’s first-year enrollment dropped from 348 in 2010 to 255 in 2013. To make matters worse, 47.7 percent of the class that entered in fall 2010, either failed or transferred.

But this year’s first-year class is larger — 264 students, according to Paul Campos. The school also has close to 100 graduate law students, more than half of whom attend online. That should give creditors enough confidence to approve a restructuring of the debt and allow Thomas Jefferson the time it needs to work out of its precarious financial situation. 

Jack Crittenden

Jack Crittenden

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