Parallel-Lumen

Tackling the Challenge of Incorporating Affordable Housing Units in Student Projects 

by Katie Sloan

The push to create affordable housing is creeping into student housing properties, further blurring the line that distinguishes the category from conventional multifamily assets.

Municipal policies are largely driving the movement. Although the programs differ from one city to the next, they typically offer private developers density bonuses, fee waivers and other incentives to build the housing and secure long-term commitments to affordability with deed restrictions or other agreements. Some cities allow developers to contribute to a public housing fund to either opt out of providing on-site affordable units or reduce the number required. 

Student housing developers are well aware of the need for affordable housing, but some question whether it makes sense to emphasize placing non-students, regardless of their income, into student-centric properties. Under some city programs, students are not necessarily eligible to rent the affordable units unless they are working and meet the income limits. Still, developers do not want to run afoul of the Fair Housing Act by excluding non-students — and they will rent to them to fill empty beds in conventional scenarios. But the projects need to work financially, they say.

“If you want to develop student housing, you should develop student housing. If you want multifamily housing with varying income levels, that’s just a different kind of building,” said Jared Hutter, co-founder and principal of Aptitude Development, a student housing developer based in Elmwood Park, New Jersey. “But there are places that are mandating affordable units in new development, so at times you have to do it.”

Prolificate Programs

Aptitude last summer completed the Ithacan, a $70 million, 240-bed community near Cornell University in Ithaca, New York. The developer razed and rebuilt a three-story parking garage, on which it placed 10 stories of housing with a rooftop terrace. Aptitude also agreed to reserve 10 percent of the roughly 200 units for people earning 80 percent of area median income (AMI) for 30 years.

During pre-development negotiations a few years ago, the  city of Ithaca raised the percentage of required affordable units to 20 percent, and Aptitude agreed to pay $500,000 into Tompkins County’s Community Housing Development Fund (CHDF), a joint effort between the county, Ithaca and Cornell, to provide housing for low and moderate-income residents. The developer is leasing part of the garage to the city and is receiving tax exemptions valued at $9.6 million, according to the Tompkins County Industrial Development Agency.

In addition to Aptitude, other student housing developers that have had experience setting aside affordable units include LV Collective and Parallel, which are both based in Austin, Texas, Chicago-based Core Spaces, and Athens, Georgia-based Landmark Properties. 

At its new 307-unit, 1,021-bed luxury student housing development in the Dinkytown neighborhood near the University of Minnesota, for example, Landmark is making 30 units available for people earning 60 percent of AMI when it opens this year. In 2019, Minneapolis adopted an ordinance to create mixed-income communities by requiring affordable units in new market-rate housing projects. 

Student Inclusion

The city of Austin has taken a different approach. It set out to promote affordable housing years ago through its SMART Housing program (safe, mixed-income, accessible, reasonably priced, transit-oriented), which provides incentives such as fee waivers and density bonuses to developers in return for building affordable units into projects. 

But beyond helping workers and families who qualify for the housing under median family income (MFI) levels, as defined by Austin’s Housing Authority, SMART Housing targets students who are receiving need-based financial aid. Typically, the prices range from $700 to around $1,200, depending on the unit and complex, according to the leasing website for Rambler, an LV Collective property in Austin.  

In 2004, the SMART Housing program offered density bonuses to residential developers who set aside 10 percent of their units for renters earning 65 percent of MFI or less — or 80 percent of MFI plus a $1-per-square-foot fee into a housing trust fund — in areas governed by the University Neighborhood Overlay (UNO) zoning. Among other areas, these include West Campus neighborhoods near the University of Texas.

But in 2014, Austin officials broadened the program to incentivize developers to provide 10 percent of affordable units for renters earning 60 percent of MFI. The change also increased the on-site affordable commitment to 40 years from 15.

Further changes in 2019 expanded height bonuses in one West Campus district by 125 feet over what was then a predominant 175-foot building height cap in return for additional affordability — namely, another 10 percent of units reserved for people earning 50 percent of MFI. That opened the door for developer LV Collective to construct Waterloo, a 300-foot high student luxury housing project in West Campus totaling 796 beds in 241 units with a fitness center, coffee shop and rooftop pool. LV sold the asset, now known as Yugo Austin Waterloo, to Global Student Accommodation around the time of its opening in the summer of 2022. 

“The question is, how do we increase affordability? In today’s world of higher construction prices, land prices and interest rates, you have to increase your density,” says David Kanne, CEO of LV Collective, formerly known as Lincoln Ventures. “In Austin, we worked closely with different constituents — the neighborhood, the city and the development community — to ensure that changes to the overlay district would increase on-site affordability.”

To date, student housing limited partners have been fine with the arrangement if it makes financial sense, developers say. Plus, most like the idea of increasing the supply of affordable housing, and by the time developers are assembling their financing, they have a good idea of the affordability requirements and how to meet return expectations, Kanne adds.

Still, investors are likely to feel more comfortable with affordability requirements when cities allow students on financial aid to qualify for the housing, points out Kristen Penrod, a principal with Parallel, who have developed projects in Austin’s West Campus neighborhood before selling them a few years ago. In the early days of Austin’s SMART Housing program, rules surrounding how to qualify students in particular were somewhat muddy, she says.

“We opened University House Austin (now Ion Austin) in 2016, and I had a lot of conversations with the city to make sure we were compliant and also allowing eligible students to live there,” Penrod adds. “Ultimately, the city was able to produce a list of allowable financial aid for students.”  

Redevelopment Tool

Allowing financially strapped students to specifically qualify for affordable units is becoming increasingly relevant. In a report on the affordability of purpose-built student housing published in March 2023, the National Multifamily Housing Council Research Foundation found that the per-bed real rental rate of student housing increased 24 percent from 2013 to 2020. That represented a faster rise than the cost of tuition and income over the same period, which averaged about 20 percent and 15 percent, respectively. [And that study did not take into account the surge in rental rates seen in the last three years].

In 2021, Core Spaces received approval from the city of Madison to build oLiv Madison, a 10-story project downtown near the University of Wisconsin that set aside 10 percent of the 1,101 beds for students of low to moderate-income households for a minimum of 30 years. That allowed the developer to construct a 10-story building — two stories higher than zoning — and demolish five buildings in return for preserving the historic facades of two. 

Core Spaces agreed to offer qualifying students 40 percent off the market rental rate after initially proposing a 30 percent discount, according to a letter and documents submitted to Madison’s planning department in July 2021 by economic strategy and planning consultant Vandewalle & Associates. oLiv Madison is scheduled to open this August and will include a fitness center, rooftop deck, hot tub and other amenities.

The letter also noted that redevelopment did not rely on tax increment financing or tax credit programs to promote affordability. “This component is supported financially through the request of two additional floors in height,” it stated. Core Spaces’ proposal was largely aligned with Downtown Madison, Inc.’s 2021 ‘Civic Engagement Agenda,’ which called for accessible housing for all socioeconomic groups, among other goals. 

In all, Core Spaces worked with four groups to reach a development agreement — the university, the city, neighborhood groups and students — says Austin Pagnotta, director of acquisitions at Core Spaces. Even though the density bonus didn’t fully offset the cost of offering the affordable units, it moved the project forward, he says. Ultimately, it could serve as a model in other markets, he adds.

 “This was a challenging endeavor due to the complexities of student housing and fair housing laws,” Pagnotta declares, “but we loved the idea of being the first developer to tackle the issue of providing students more affordable housing in a growing market.” 

Last fall, Madison officials gave their blessing to Johnson & Broom, a similar Core Spaces development. This student housing project is reserving 10 percent of its 1,650 beds for eligible students at the 40 percent discount rate for 40 years. Core Spaces is razing as many as 13 buildings primarily used for student housing today, and the final product will range from eight to 14 stories.

Varying Strategies

The number of cities incorporating affordability requirements into multifamily projects that also affect student housing continues to grow, observers say. And while it’s more common in urban college locations, it’s also happening in more traditional college towns like Ann Arbor, Michigan, Penrod says.

Parallel recently completed Lumen, a 351-bed project near the University of Ohio in Columbus, which is incentivizing affordability in designated community reinvestment areas (CRAs) by providing a 100 percent tax abatement for 15 years. The program also gives developers the option to pay into a housing fund as an alternative, which Parallel chose. But it appears that cities are trying to move away from the in-lieu payment approach, Penrod adds.

“Most developers would choose a fee in-lieu that goes into a housing impact or similar fund because it’s simpler, but a lot of municipalities are phasing out that option,” she remarks. “I think it’s one that they should still provide, especially because cities have a hard time figuring out how to allow students with financial aid to qualify.”

Ensuring that projects remain in compliance adds complexity to deals and operations. In conventional affordable housing projects financed by equity investors who buy low-income housing tax credits, penalties for non-compliance include forfeiture of the credits. 

In student housing deals, penalties depend on the municipality, observers say, but can typically include the denial of a certificate of occupancy and fines. In Austin’s UNO district, non-compliance offenses can cost as much as $500 a day while they remain in violation, according to the city’s land development code. Core Spaces’ Johnson & Broom development could be subject to an $8 million fine if it fails to live up to the 40-year contract, according to press reports.

Despite the extra scrutiny, some developers are not shying away from providing on-site affordability in return for density. In fact, as evidenced by Core Spaces, they are embracing it. LV Collective falls into that category, too. Three years ago, it took the model it assembled in Austin on the road to Gainesville near the University of Florida to develop Sweetwater, a mixed-use project that includes structured parking, retail and 151 housing units.

In return for adding an extra floor to the 10-story development, LV Collective is setting aside 15 two-bedroom units for renters who earn from 50 percent to 80 percent of AMI in perpetuity, Kanne explains. Sweetwater opened last August.

At the end of the day, Kanne says municipalities across the U.S. are trying to figure out ways to increase affordability. For those that may have housing programs in place, that may mean a fee-in-lieu to fund separate affordable development, while other cities may prefer requiring on-site affordability in new projects, he adds. 

“We’re always working through financial models of increased density to add affordability, depending on what’s best for that particular municipality and location. But I think requiring some sort of affordability is becoming standard as cities struggle with how to provide housing options,” Kanne shares

Translation: With growing frequency, it’s just becoming another cost of doing business. Despite his reservations about creating affordable units in student housing properties, Aptitude’s Hutter is now considering a project near the University of Connecticut that may also require an affordable component, he acknowledges. 

“We want to continue to add value to communities and invest in areas that we believe in,” Hutter affirms. “There’s a lot of give-and-take with these affordable requirements, and I think municipalities need to be more thoughtful about it.”

Joe Gose

This article was originally published in the March/April 2024 issue of Student Housing Business magazine.

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