The board of trustees of Florida Keys Community College (FKCC) on Monday voted unanimously to proceed with a forbearance agreement, designed to ease financial issues associated with its Lagoon Landing dormitory at the Key West campus.
Such an agreement between a borrower and lender is a temporary plan designed to help bring a borrower current on a debt.
The agreement will be signed by the dorms' majority bondholder, Lapis Advisers LP, of San Francisco; the college, acting as Lagoon Landing's operating manager; and The Campus Foundation, which is FKCC's direct support organization (DSO), created to oversee the project's construction.
Trustees are hoping the move will give the Campus Foundation -- and the college -- breathing room to try to renegotiate the bonds supporting the dorm project, which began welcoming students in the fall of 2011.
Attorney Ken Artin, representing the college, presented the board with a first draft of the letter, which was written with considerable input from Lapis Advisers.
According to the terms of the agreement, Lapis would accept 5 percent on its investment of $8.2 million in 30-year, non-recourse revenue bonds, rather than the 7 percent specified in the current arrangement, for a period of one year, or two, if all sides agree. During this period, the parties will attempt to come up with a more stable solution that could involve a permanent interest rate reduction, principal write-off, or perhaps some of both.
Attached to the agreement is an operating budget for the dorm which, if followed correctly, would result in FKCC recouping $262,000 of an $800,000 loan made to the DSO by the college during the latter phase of the project's construction.
During the discussion, both Artin and the board agreed upon the need for FKCC to build up a cushion of additional funds to pay for normal wear and tear on the property, which can house up to 100 students in shared suites. Should the DSO and the college follow the agreement to the letter, FKCC will also receive any income from the dorm in excess of the $262,000 figure.
But the agreement comes at a cost to the college.
In exchange for being allowed to keep the extra cash, the institution must agree to raise dorm rates to what the current "market will bear;" require a two-semester lease from dorm residents, and institute a security deposit. The last item was already on the college's radar, but had yet to be made a requirement.
Lapis also wants the college to conduct a capital campaign, and form a committee to explore other revenue stream possibilities, such as could be obtained through avenues like food and beverage sales. (Each dorm unit has its own kitchen.)
In addition, the college must try harder to keep the money-losing dorm full during the summer, and issue monthly reports on Lagoon Landing's financial progress.
Lastly, Lapis wants the college to agree to continue managing the property, and pick up the tab for audits and other administrative costs, currently running between $30,000 and 35,000 per year.
"This is not a free ride for two years," Artin stressed during the discussion. "This is about the limit that [Lapis] can do . . . they're going to sit tight for two years."
Board Vice Chair Tim Koenig said Monday evening that the breathing room will give all parties a chance to assess a realistic payment scheme going forward.
"The discussion about permanent interest or principal reduction will come after we've come through this one- or two-year period, when we all have a better understanding of whether or not that will be necessary," Koenig said. "During this time, the college and foundation will both do their best to reduce expenses and maximize revenues. Lapis meanwhile has put forth some ideas that they think might assist this process, which they've seen work at other colleges. It's a strategy we're implementing together."
Lapis currently holds about 80 percent of the bonds. Smaller shareholders own the rest.
As the price for his support of the forbearance agreement, board member Brian Schmitt insisted that two conditions be attached to the agreement: One, that no further college cash be advanced to the Campus Foundation, and two, that the college officially challenge a finding last year by the state Auditor General (AG), that FKCC acted illegally in loaning the $800,000 to the DSO. The AG says the loan came from Public Education Capital Outlay (PECO) funds.
The college disagrees.
"We have a letter from the Department of Education saying that $212,000 of the $800,000 was legally spent for capital expenses," Koenig explained. "Another $570,000 of college money was spent on the project. It wasn't PECO money. And the bondholders have already allowed about $60,000 of that to flow back to the college."
The AG's finding resulted in a warning being issued to the college by the Southern Association of Colleges and Schools (SACS) that its accreditation was in danger, as any loan of PECO cash to the DSO threatened the construction of the marine technology building, for which the money had been earmarked. The college has maintained that what it did was legal, and a common practice among Florida colleges and universities, and said as much in a three-page letter sent by Artin to the AG earlier this year.
In response the A.G.'s office merely restated its disagreement with that position.
Business and Administrative Services Director Jean Mauk announced at Monday's meeting that the marine technology building is now complete.
"This is not going to stop," Schmitt said of the AG's decision, and its effect on the college, via SACS. "It will continue to haunt this institution" until the matter is settled.
Schmitt also called the forebearance agreement "kicking the can down the road."
Artin agreed with Schmitt about the AG/SACS connection, stating that "this mess . . . is all interrelated."
Koenig was even more adamant about pursuing a legal remedy to the AG's claim.
"If you look at where the college is right now, our fund balance is at 23 percent, four times where the stress test threshold says it needs to be," he said. "And the marine building is complete. I think that speaks volumes. Despite what the AG said, the only issue remaining is how much of the loan we're going to get back from the DSO. Even if we were to get nothing back from them, we'd still be well above a 5 percent fund balance, where we need to be."
Artin, who works for the law firm of Bryant, Miller, Olive, of Tallahassee, said a final draft of the forbearance agreement could be ready for the parties to sign by the end of the week.
Both the board of trustees and College President Jonathan Gueverra indicated they would like to see the new arrangement in place before the next annual visit from SACS representatives, two weeks from now. State auditors will be right behind them a week later.
More than once during the proceedings, Gueverra shook his head when listening to the sums involved in what he called a waste of college resources and time, which was initiated before his arrival at the college.
"We're never going to do something like this again," Gueverra said, referring to the loan to the DSO. "It's just not going to happen."
Monday's vote was a long time coming.
Lagoon Landing has been losing money "before the doors were open" according to Artin, with residents complaining about its remote location, and frequent inspections for contraband such as drugs and alcohol.
Also during Monday's meeting, the board agreed to increase its numbers by two, for a total of seven. The board will request the governor's appointments to the body reflect the geography of the county, giving the board a makeup of three trustees from Key West, and two each from the Middle, and Upper Keys.