Why Troubled Law Schools May Remain Open
For years, pundits have declared that many law schools were on the verge of closing. In particular, low-ranked, stand-alone law schools operating in competitive marketplaces were repeatedly highlighted as being at the highest risk of closing. And with enrollment plummeting at law schools around the country, many were wondering which law school would be the first to keel over. Thomas Jefferson School of Law was often highlighted as a particularly likely candidate. But instead of closing, Thomas Jefferson recently restructured $127 million in bond debt, writing down $87 million and having the interest rate on its remaining $40 million reduced to 2%. In exchange, the school handed over the only significant asset it had on its balance sheet—its new law school building. But the building was promptly leased back to the school and Thomas Jefferson remains open for business. This ignited my curiousity and I decided to investigate.
A look at Thomas Jefferson’s audited financial statements helps make sense of the school’s restructuring and what it implies for other law schools.
In the future, will Thomas Jefferson or some other law school close? Perhaps. Substantial year-on-year declines in the pool of potential law school applicants are likely to affect law schools’ ability to generate net assets. But as long as law schools are able to generate substantial revenue in excess of their operating and maintenance costs, AND the value of a repurposed law school building (or other assets) remains lower than the value of this revenue stream, creditors are unlikely to be in a rush to force law schools to close.
Like me, you may have wondered if Thomas Jefferson’s creditors would have done better by forcing the school into bankruptcy. In my next post, I’ll discuss why the U.S. Department of Education regulations suggest that creditors would not have done better in a bankruptcy proceeding.
thanks
Posted by: l | February 26, 2015 at 11:48 AM