Guest column by Matthew Lund and Michael Lee
Walker & Dunlop
In the world of commercial financing, the student housing product is unique, especially in the Midwest. It takes a comprehensive understanding of the current trends in the Midwest market and a full-service platform with access to a large market of lenders to achieve the owner’s goals. This means partnering with the right commercial real estate financing company.
The student housing difference
The student housing product in the Midwest is unique in several ways from more traditional apartment building and other areas of the country. As many Midwestern colleges are located in urban settings, the location of the development is of key importance. Students want to be in close proximity to the campus. They also want convenient access to restaurants, retail and nightlife. This often requires a developer to secure conveniently located existing properties for redevelopment into student housing. It is less common to see off-campus student housing that requires students to bus or drive to campus.
Purpose-built student apartments have higher bedroom counts than traditional apartment buildings. It is common to see new developments with a mix of two-, three-, four-, five- and six-bedroom units. The floor plans are typically smaller than market-rate apartments, but have significantly more bedrooms. This offers students their individual space while the developer works to maintain an affordable rent per occupant. The requirement to redevelop in an urban location contributes to high site and overall development costs.
Traditionally in the Midwest, indoor amenities such as study and social lounges played a more significant role than outdoor amenities such as pools commonly present in properties located in warmer climates. However, some recent Midwest developments are beginning to offer outdoor amenities such as outdoor/rooftop pools, seating/gathering areas and volleyball/bocce ball courts, among other touches. Additionally, developers and operators are focusing on convenience for students. This includes offering furnished units that make it easier for students who may be moving into their first apartment. Some operators also provide internet and cable TV service to the tenants. This allows for residents to easily move into their unit without the hassle of setting up these services on their own.
Trends in the Midwest market
Today’s student housing bears little resemblance to yesterday’s. Students demand high-end accommodations that seem more like their parents’ residence or a luxury apartment community instead of the disarray most imagine when conjuring up an image of student housing.
From granite counter tops to wall-hung flat-screen LCD televisions, these buildings are upscale properties from beginning to end. Other high-end amenities commonly offered include secured entry with video-camera surveillance throughout, wood floors, custom cabinetry, built-in closet storage, ceiling fans and leather furnishings.
For anyone building in the Midwest, it is no surprise that there is a lack of land available in the more urban areas in which most universities are located. Due to the lack of land and the high cost to assemble a developable parcel, developers are seeking to maximize the density within each project. As a result most of the newer projects are going vertical.
These new properties are tailored to fit the student profile. They come with higher rents and the loan per unit is higher than with the traditional apartment unit. While student housing requires a special skill set to operate and receives more wear and tear than a typical conventional apartment, student projects have demonstrated a resilience to market aberrations and have historically experienced stronger occupancies and achieved higher rent growth compared to conventional apartment product.
What to look for in a commercial real estate finance company
In order to successfully finance student housing today, a skilled commercial real estate finance company must be able to educate and convey the nuances of student housing to provide lenders with the information they desire to make a good mortgage investment. Each capital source within the industry has a different perspective on student housing, and the mortgage banker must understand these perspectives to secure a capital source that will achieve the borrower’s objectives. Access to a variety of lending sources will enhance the ability to achieve the desired structure. A finance company with access to all lending platforms including Freddie Mac, Fannie Mae, insurance companies, CMBS and bridge financing can better deliver custom financing structures that fit the client’s goals.
Several matters to consider when evaluating a refinance may include forward rate-lock options to eliminate interest rate risk when refinancing a maturing loan or construction loan, secondary flexibility, prepayment flexibility and loan duration.
In an example of a recent deal that Walker & Dunlop secured, an owner of a 10-year-old student housing project was seeking to refinance a CMBS loan that was maturing in 10 months to take advantage of historically low interest rates. This was a family-owned asset and therefore the borrower sought a long fixed-rate term.
Walker & Dunlop secured a 10-month forward commitment from a life insurance company for a 22-year fully amortizing loan. The borrower was thrilled that he was able to lock in the interest rate 10 months prior to his existing loan maturing. Similarly, several life companies have an ability to lock an interest rate 6 to 12 months prior to construction completion for projects under construction. Loan funding would typically occur when the property has achieved leasing to provide a debt coverage ratio of 1.25x and would require some type of credit enhancement until the property achieves stabilization. Common enhancements include a holdback, earn-out or a personal guarantee that burns off at the time stabilization is achieved. This feature may be compelling to developers to eliminate interest rate risk while their project is still under construction.
Another item to consider when using longer term financing may be the ability to obtain a secured secondary loan. Fannie Mae and Freddie Mac have programmatic guidelines to allow secondary financing beginning after a loan has seasoned for one year. As a general rule, life companies prefer to prohibit secondary financing. A borrower greatly enhances their ability to secure secondary financing rights by using a finance company that has access to a large market of lenders and the appropriate structuring knowledge.
At the end of the day, working with a finance company that has experience and knowledge in the student housing market and a full service platform with access to banks, insurance companies, CMBS, Freddie Mac, Fannie Mae and bridge financing, will allow a borrower to significantly increase the financing options and achieve the most competitive terms being offered in the market.
Matthew Lund, vice president, and Michael J. Lee, vice president, with Walker & Dunlop are responsible for financing income-producing properties including office, apartments, hotels, industrial and retail in the Midwest region. Lund can be reached at email@example.com and Michael Lee can be reached at firstname.lastname@example.org.