(Photo: Visitor7 via Wikimedia Commons)

Thomas Jefferson School of Law, plagued with costs associated with its new $90 million building, has reached a restructuring agreement that cuts its debt by nearly $87 million.

The deal involves nearly 90 percent of its bondholders, who will become owners of the school’s San Diego building, which opened in 2011. The school, which will lease the building, will cancel bonds and cut in half its $12 million in annual cash flow obligations in the form of quarterly payments on the debt’s principal and interest. Under the deal, reached on Tuesday, the school will pay $5 million in rent plus $1 million in interest each year.

Dean Thomas Guernsey said the deal “puts us in a good financial position, given our enrollment projections. And enrollment projections are we aren’t going to grow. This is a reflection of the fact that we think the market has fundamentally changed, and we are going to be a smaller and, I think, stronger law school.”

Thomas Jefferson issued about $130 million in bonds in 2008 to construct its building. As Guernsey came on board last year, the school’s financial problems were magnified by enrollment decreases that necessitated cuts in staff and classrooms.

“One of the first things I had to do was re-do the budget and ended up laying off staff and making significant budget cuts, which allowed us to balance the budget the last fiscal year,” he said. “That was the step to stabilize things and give us time to renegotiate the bonds.”

The deal came three months after Thomas Jefferson missed a bond payment. This fall’s incoming class of 204 is down from 259 last year, Guernsey said. He expects next year’s class size to remain the stable.

Under the new arrangement, Thomas Jefferson holds a 10-year lease on its building that is renewable in three years, Guernsey said. If bondholders choose not to renew at that time, they must provide a year’s notice and agree to reduce the school’s roughly $40 million debt to $20 million. If Thomas Jefferson doesn’t renew the lease, the bondholders must provide a loan to pay for its move to another building.

“It’s structured in a way that reflects the fact we all expect this to be a long-term relationship, and there are obviously incentives to help ensure that,” he said.