California’s housing crisis has propelled a community college to issue junk bonds to fund housing for its students.

Lead manager Stifel priced $68.3 million in college housing revenue bonds for the California School Finance Authority on July 15 to support the project at Santa Rosa Junior College.

Santa Rosa Junior College is the first community college in California to issue bonds for student housing through a State Treasurer’s Office conduit.

The bonds, which carry a speculative-grade BB rating from S&P Global Ratings, were sold as a limited offering to qualified institutional buyers and institutional accredited investors.

“This is an outgrowth of a trend that might be growing,” said Tim Schaefer, deputy treasurer for public finance. “Many of these community colleges understand that in the world we live right now they are going to have to move from a commuter-based business model to somewhat of a hybrid that combines commuter as well as residential students.”

On-campus housing is not unknown among California’s two-year colleges. The California Community Colleges Chancellor’s Office lists 11 campuses with housing, not counting
Orange Coast College, a community college in southern California that opened a student housing project in fall 2020.

That project, like the one in Santa Rosa, used the nonprofit National Campus and Community Development Corp. as the borrower, but its bonds were issued through a conduit called the California Community College Financing Authority.

The Orange Coast project had a bit of a rocky start, opening amid the COVID-19 pandemic when the campus was closed to in-person learning.

As of July, though, the project was preleased for the fall 2021 semester at a 96% occupancy rate, according to a disclosure to investors.

“There is an urgent need for housing community college students,” California State Treasurer Fiona Ma said in a statement.

“I am so pleased that the CSFA could find an innovative way to help by providing low-cost financing for this much-needed housing project at Santa Rosa Junior College. We see this sale as a model that could help other community colleges throughout the state,” she said.

“Our service area suffered devastation from wildfires that destroyed thousands of homes and impacted many of our students and their families. Currently, one out of five Santa Rosa Junior College students are experiencing housing insecurity and homelessness. We are delighted to have access to this financing solution that will allow us to provide affordable on-campus housing for our students,” Dr. Pedro Avila, Assistant Superintendent at Santa Rosa Junior College District, said in a statement.

CSFA has convened a number of roundtables on the issue of student housing; the most recent one on April 2021, said Katrina Johantgen, executive director of the California School Finance Authority.

“There was a report put out by the Los Angeles Community College District and the Southern California Association of Nonprofit Housing around student housing and food security,” Johantgen said. “We wanted to elevate the issue and bring it to lawmakers.”

The LACCD report says that 55% of LACCD students experience housing insecurity, 18.6% of LACCD students have experienced homelessness and 82% of higher education professionals in California said housing was the biggest unmet need of their students that the campus was currently unable to provide.

The lowest tuition colleges in California, like the community colleges, are often the most expensive for low-income students due to disparities in grant aid, according to the report.

The conduit hasn’t had applications from other community colleges seeking to build housing at this point, but Johantgen said it is watching what will happen with money the legislature authorized to build housing for higher education.

The 2021-22 budget signed by Gov. Gavin Newsom in early July sets aside $2 billion to establish a low-cost student housing grant program for the public higher education segments, focused on expanding the availability of affordable student housing, and to support campus expansions for the University of California and California State University systems.

“I know colleges are planning on bonding to create housing surplus or stock,” she said. “We understand based on our conversations with stakeholders those colleges are waiting to see what is happening with those negotiations with legislators.”

Santa Rosa Junior College serves more than 20,000 students in nearly 300 degree and certificate programs on 80 acres on their Santa Rosa and Petaluma campuses.

The housing project on the Santa Rosa campus will be SRJC’s first on-campus student housing, and it will provide safe, affordable, and accessible housing to the culturally and economically diverse student population, according to the treasurer’s office.

The 95,281-square-foot project will offer 352 total beds and will include living room and common areas; common kitchens with grab and go options; public restrooms; activity lounges; game rooms; study areas; quiet study areas; co-ed restrooms; 24-hour security; and a 92-space parking lot, conveniently located on campus.

The bonds sold at an all-in true interest cost of 3.16%.

“It was actually pretty snappy. They were probably four and a half times oversubscribed,” Schaefer said. “There was a tax-exempt piece and a taxable tail. They were structured with five or six individual term bonds with sinking funds attached. It was very skillfully tailored to appeal to the audience that ended up buying them.”

There were 15 buyers, largely bond funds and money managers, he said.

The $67.3 million of tax-exempt Series 2021A bonds consisted of 4% term bonds maturing in 2031, 2036, 2041, 2051, and 2055 yielding 2.01%, 2.18%, 2.32%, 2.45%, and 2.52%, respectively. A $15 million term bond in 2060 incorporates an extraordinary call provision and sold at a discount with a 2.75% coupon, yielding 2.9%.

The extraordinary call will enable SRJC to prepay the bonds without penalty should it receive an external grant or charitable funding to offset the cost of the new student housing project. The $1 million taxable Series 2021B bonds consisted of a 3.50% term bond maturing in 2026, priced at par.

The revenue bonds are special, limited obligations payable solely from payments made by the underlying borrower pursuant to the transaction documents and from funds and accounts established under the transaction documents.

Neither the CSFA nor the community college district shall be directly or indirectly or contingently or morally obligated to repay the debt, which is to be serviced out of revenue generated by rents.

That explains S&P’s speculative-grade BB rating, in contrast to the AA rating the agency assigns to the Sonoma Junior College District’s general obligation bonds.

Kutak Rock was bond counsel.