Silicon Valley’s high housing prices blamed for charter school default

California’s expensive Bay Area housing market was blamed by a charter school operator for its bond default. 

Downtown College Prep, a three-campus charter school operator in San Jose, defaulted on $34 million of municipal bonds earlier this month. The school caters to low-income, first-generation students and has been struggling to meet enrollment targets for years. With funding dependent on how many pupils attend, the school’s finances were pressured. School and local officials blamed the area’s high home prices for deterring students. 

“All schools in Santa Clara county have experienced a decline in enrollment due to fewer children and families, mainly linked to the high price of housing in this area,” Downtown College Prep said in a statement posted to its website. “We cannot meet all of our expenses. We would need upwards of 400 new students.” 

San Jose, like many urban areas in the U.S., has been struggling with an affordability crisis. It was listed as the locale that requires the highest salary to live comfortably in the U.S. by SmartAsset Advisors, LLC. 

In the Silicon Valley’s largest city, about 50 miles south of San Francisco, the median home price is roughly $1.5 million, according to data from Redfin Corp. That’s in line with housing costs for the broader county of Santa Clara, buoyed by headquarters for major technology companies like Intel Corp. and Nvidia Corp. 

Prospective buyers would need an annual income of about $566,265 to afford the median-priced home in the area, according to the Harvard Joint Center for Housing Studies. The median household income in San Jose is one-quarter of that, according to the U.S. Census Bureau. 

“Downtown College Prep’s closure is a painful example of how declining student enrollment harms our entire community,” said San Jose Mayor Matt Mahan. “The primary driver of this trend is California’s high cost of living, which pushes families out of our region and state.” 

Due to the expense, first-time home buyers in San Jose are also getting older, which may impact school enrollment, said Daryl Fairweather, chief economist at Redfin. 

“Far more people are leaving San Jose than are moving into San Jose,” Fairweather said. “People are definitely getting priced out and having to move to more affordable areas.”

Across Santa Clara County, public school enrollment — including charters — is down more than 12% over five years, according to California Department of Education data. The county’s population was essentially flat over that period, according to state Department of Finance data.

Bond Default

Downtown College Prep failed to make interest and principal payments to bondholders on June 1, according to a June 5 regulatory filing by Wilmington Trust, National Association, the bond trustee. AllianceBernstein Holding LP is the largest holder of the outstanding debt, according to data compiled by Bloomberg.  

Representatives for the school and Wilmington Trust did not reply to requests for comment. A spokesperson for AllianceBernstein did not reply to a request for comment. 

The not-for-profit organization borrowed $36 million from muni investors in 2016 to build two new campuses in San Jose. The group focuses on preparing first-generation students for college. Most of the school’s students come from low-income, predominantly Latino families, according to bond documents. 

The organization had ambitious enrollment targets, initially estimating that three schools would educate more than 1,630 students in the 2020-2021 school year, according to the 2016 offering documents. Disclosure filings show each of the schools missing targets. 

“Over the course of the last several years the combined enrollment of the DCP organization has suffered significant declines, which has put the organization in a precarious financial position,” the school’s board said in a statement announcing its closure at the end of the current academic year.

To be sure, charter schools are a difficult business proposition and an unaffordable housing market isn’t the only challenge pressuring them. Nationwide, many schools are contending with falling enrollment as the birth rate declines, inflationary pressures, and the depletion of Covid-era stimulus funding that helped paper over problems in the aftermath of the pandemic. 

So far this year, there have been 20 new charter school impairments added to Municipal Market Analytics’ database of distressed borrowers. That’s more than any other muni sector, according to the data. 

“It’s a sector where investors can of course find great opportunities but they have to be careful, and carefully manage expectations,” said Matt Fabian, partner at MMA. “There are more challenges emerging all the time.”

In November, Downtown College Prep provided bondholders with five cost-cutting scenarios that included reducing staff and rolling back teachers’ salaries and benefits.

Another option was to increase enrollment. Officials concluded that any uptick was unlikely, noting that Santa Clara County has “no upward trend in the foreseeable future” and that “any additional additional enrollment would be gained from recruiting from an already decreasing population.” 

Plus, the school’s recruitment coordinator had been laid off in July.