Loan with 24% rate a ‘necessary evil’ for historically Black college to stay afloat

A controversial, high interest-rate loan is helping one of the oldest historically Black colleges in the country, Saint Augustine’s University, stay afloat – for now.

After struggling for years to maintain steady enrollment, the Raleigh, North Carolina-based school was running out of options. The college, facing millions in liabilities, owed money to its employees and was missing two years of audited financial reports. So when Gothic Ventures, a little known investment firm, approached the college with a $7 million loan, school officials described the offer as a “big win.”

Agreeing to the lifeline means Saint Augustine’s is now on the hook to pay 24% in interest, plus a 2% loan management fee and $75,000 in due diligence and documentation fees, according to details of the loan agreement, which were first reported by local news organizations. The loan is also secured by a mortgage on the campus. 

The debt was a “necessary evil,” Saint Augustine’s president Marcus Burgess said when reached by phone.

“Gothic Ventures stepped in to provide crucial support when other lenders declined to engage with SAU, despite our ongoing efforts since February 7, 2024, to secure alternative funding,” the school says on its website.

Even as more colleges struggle financially, such high rates are unusual. Higher education institutions tend to turn to local banks or the municipal bond market for funding, where borrowing costs are lower. But Saint Augustine’s was denied by other lenders and had few options left when the school was contacted by Gothic Ventures. As small schools across the country contend with a darkening financial situation, these high-interest arrangements may become more common. 

Matt Fabian, a partner at Municipal Market Analytics, said the interest rate suggests a “real lack of alternatives” for the school. He said that higher education and charter schools represent the “epicenter” of credit worry within the municipal bond market, which colleges often tap to raise debt.

“Saint Augustine’s is not going to be the last college we discover making a last ditch effort to to stay alive,” Fabian said. “After expecting credit quality to get worse for 20 years, it actually is happening now.”

At a December meeting, members of the Southern Association of Colleges and Schools Commission on Colleges voted to deny the school’s accreditation, according to a Tuesday statement. Saint Augustine’s plans to appeal the decision and will remain accredited until a final determination is made. 

The school has struggled for years to maintain that status, which provides access to federally subsidized loans and Pell grants.

Though Saint Augustine’s has said the money made it possible to start the fall semester, faculty and alumni have taken issue. They staged a protest last month over the terms of the loan, arguing it was unfair and puts the school’s real estate, and its future, at risk.

The private school enrolls about 810 students, it says on its website.

The biggest asset most colleges have is their campus real estate, which makes it a major consideration for lenders who can recoup their investment if the school closes and its property is sold. Raleigh, located in what’s known as the Research Triangle, is home to a hot real estate market. 

‘Unreasonable’ Terms

After reviewing the terms of the deal, Martin Eakes, the chief executive of the Self-Help Credit Union and the Center for Responsible Lending, a community development institution, said the loan is unreasonable. A more appropriate rate would’ve been closer to 9%, he said. 

“When you have four to six times the collateral, there is no way you can justify a 26% rate,” Eakes said. “I think it is taking advantage of an institution that is very important in the community.”

The lender disagrees. The terms were fair given the risk of lending to a struggling school, according to Kip Johnson, Gothic Ventures’ founder and managing general partner. Johnson, an alumnus and visiting professor at nearby Duke University, said his fund has been providing credit to lower middle-market organizations for about a decade, and has invested in a number of real estate and loan transactions, but never a university. He said he’s open to more in the future. 

First chartered in 1867, Saint Augustine’s eventually became the first nursing school in North Carolina for Black students. Even as many small colleges across the country grapple with enrollment challenges, many HBCUs have been reporting a renewed surge in interest. A spokesperson for the school did not respond to phone and email requests for comment.

Though that growth hasn’t been universal and some schools are facing tough choices to curb costs. Saint Augustine’s has cut 50% of its university employees, including more than 30 full-time faculty positions, to save money in the 2024 fiscal year.

A group of alumni filed a lawsuit earlier this year against the school’s board members. The lawsuit said they have been harmed by the “devaluation and diminishment” of their degrees from SAU as a result of the accreditation issues. In November, a judge dismissed the lawsuit, saying the plaintiffs lacked standing.