Student Housing Financing: Yesterday, Today, and Tomorrow

by Katie Sloan

Adapting to changing circumstances in financing is the best chance for survival today.

The last year for me, personally and professionally, has been a tumultuous yet overwhelming year of growth. I lost two of the most important people in my life, my two grandmothers. At the same time in business while most of my competitors were closing their doors due to the harsh economic times that we are experiencing, I expanded my business. What is the secret to thriving while others are languishing? It is the ability to adapt to the circumstances we find ourselves in business or our personal lives.

In recent years, developers of student housing facilities had many options to choose from to finance the costs of their projects. Local banks, pension funds, Fannie Mae, and Freddie Mac were just a few of the options that were available to call upon. Equity requirements were much lower, debt service coverage ratios were higher, and banks were actually lending money. Developers could afford to build very high end facilities and command higher rents.

Finding financing in today’s market is a real challenge for both developers of new projects as well as the acquisition or refinance of others. Financing has gotten so difficult that many developers are sitting on the sidelines. Even some of the biggest developers are being scrutinized by underwriting guidelines that did not exist in prior years due to banks’ wariness of booking any bad loans. The biggest difference in the financing now is that developers have to put more equity into each transaction because loan proceeds are lower. A typical Loan to Cost for a construction loan is 65 – 70 percent.

Even though Student Housing has not suffered as much as the other multifamily sectors in this current economic environment, there are certain markets that have softened and enrollments are down across the country. Parents and students are looking for more affordable options for their housing needs.

What does a developer do in times like these?

Adapt to their circumstances.

Watching the changes in the economy over the last two years, I made a decision to partner our company with an Investment Bank that finances multifamily and healthcare related properties through FHA/HUD financing. At a time when conventional banks are not lending, and only the strongest developer will make it through the scrutiny of Fannie and Freddie programs, HUD offers another alternative that most student housing developers do not consider.

If a developer is willing to “adapt” his project to meet the guidelines of HUD financing, this can be a very viable option to consider. Many projects that are sitting on the sidelines waiting for the right time, could be restructured and under construction long before the economy changes. Changes to the structure of the leases and sometimes configuration of the rooms will be necessary to adapt to this program. This will at times decrease the profitability of the project but with creative origination and structuring of the loan the prepayment penalties can be reduced to accommodate a refinance within a shorter period of time.

The advantages to using this type of financing are much higher LTC’s up to 90% and lower dscr at 1.1. This along with a 40 year fixed construction to permanent loan and low interest rates, may be enough to compensate for the lower rents that may need to be charged resulting in a lower profit margin. The price of equity can be very costly and in some cases, we can use excess land value or seller held seconds to totally eradicate the need of any equity.

Another creative way of adapting to this environment is to create a joint venture either with a current landowner or company with parallel goals. Through the strength of a partnership, liquidity and equity issues can be resolved as well as management and experience requirements by lenders.

We are in a time of change. In order to not only survive but thrive as a developer in this tumultuous time is to be open and creative to new ways of financing. Our company is available to advise, structure and finance your student housing projects during this time.

Overall, lenders, investors and developers are confident that the Student Housing market will continue to thrive as the market rebounds. We are hopeful that conventional banks and life companies will re-enter the market. The numbers of students predicted to be enrolling in universities going forward is growing, thus the need for new developments increase as well. As a company, we will adapt to the changes coming our way and help our clients to navigate the ever changing times we encounter.

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