Get schooled in student housing loans

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Ask a Lender
March 2, 2016 | Updated September 7, 2017

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Key Points

Student housing basics

  • Forecasters say rents will continue to increase through the decade.
  • Typical occupancy rates are more than 90 percent.
  • Banks offer GSE-backed student-housing financing.
  • Lenders want borrowers to have management experience.
  • Fall is a prime time to close a loan.

The student-housing market has been strong since the end of the recession, and forecasters say that strength is likely to continue.

Once thought of as a small niche in the multifamily market, student housing accounted for more than $4 billion in transactions in 2015, and more than half of that total came from large institutional investors, according to the real estate research firm Axiometrics.

A few numbers explain the popularity of the sector: Rents in student housing have been on the rise by between 2.4 percent and 4 percent per year since 2010, and forecasters say the trend will continue at least through 2020. About 95 percent of existing student-housing units were leased at the beginning of the 2015-2016 school year. In addition, the number of new units available for the 2015-2016 school year was down by 24 percent from the previous year, which Axiometrics says is an indication that occupancy rates aren't likely to drop anytime soon.

As defined by multifamily lender Red Capital Group, student housing encompasses any commercial multifamily property that is specifically built for students, has at least 20 percent of its units leased to undergraduate or graduate students, and is in close proximity to a major university campus. Large real estate development companies specialize in the market, and massive public-private partnerships at universities are becoming more common, but the student-housing sector still has room for smaller-scale owners and investors, especially if they have some experience in the field.

Fannie, Freddie programs

Fannie Mae and Freddie Mac, the government-sponsored entities (GSEs) that purchase loans from private banks, both have student-housing financing programs and together facilitated more than $3 billion in financing for student-housing developments in 2015. As with all of their programs, Fannie and Freddie purchase loans that are originated by local banks that apply the loan standards established by the GSEs.

Freddie Mac's Student Housing Mortgage program includes a 30-year amortization schedule, loan terms typically of 5 to 10 years and requires a debt-service coverage ratio (DSCR) of no lower than 1.4. (That means a property’s revenue must be at least 1.4 times greater than its debt obligations.) Freddie also requires that students represent at least 50 percent of a project’s tenants.

Fannie Mae will fund up to 75 percent of the value of the student-housing property via loans that are amortized for up to 30 years, with loan terms of 5 to 30 years. The loans are available for projects with a DSCR as low as 1.3.

A property can qualify for Fannie Mae financing if students make up 20 percent of total occupancy. As with the Freddie Mac program, Fannie Mae requires that housing be within two miles of a college or university, or on a transportation line. The agency will fund some privately owned on-campus housing, provided the operator has five or more years of experience in the business and operates at least one other housing facility on university-owned land.

Experience is key

A track record of managing student properties is important in winning approval for a student-housing loan, regardless of whether that loan comes with GSE backing. Many lenders, for instance, require out-of-state owners to hire a third-party manager with student-housing experience.

The requirements reflect the fact that owning and managing student housing is specialized and sometimes difficult work. In a white paper on the subject, Arbor Commercial Mortgage emphasizes that larger, experienced operators "will be much more successful than the smaller owner who thinks a student property will operate similar to his or her regular family-targeted property." Marketing and oversight of the student properties are especially problematic, the lender says.

If you're still game, Multifamily Executive says timing is important when you approach a lender for financing. "The absolute best time" to close a student-housing purchase loan is in September or October, when the lender can see a fully occupied (or nearly fully occupied) complex, with a group of new student-tenants paying recently increased rents, the publication says.

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