The Case-by-Case Realities of Student Housing Financing

Providing and securing financing for student housing properties — whether acquisition, refinancing or new development — is a competitive market.

“The rewards of working in student housing are numerous. There is a constant supply of tenants, revenue tends to be stable, and the sector is considered recession-resistant,” says Justyna Daniuk, commercial real estate lending analyst with Alliant Credit Union.

However, Daniuk notes, student housing financing does have risks, including occupancy stability, changing taste of student residents and market competition.

A lender’s familiarity with the nuances of student housing — like yearly turnover and unique leasing cycles — will lead to a better lending experience for both the borrower and lender. For example, Daniuk explains, lenders should understand that sometimes landlords have to offer shorter leases and incentives to win the business of their student-residents and their parents, who often guarantee the leases.

While most financing arrangements are a case-by-case situation, there is a particular set of criteria that lenders look for to ensure a successful lending package in the ever-evolving student housing sector.

Top Five Considerations for Student Housing Lenders

Proximity — A property’s distance from a university or college campus is often a top concern for lenders. Ideally, student housing properties are within a walkable distance or on a campus transportation route.

Enrollment Numbers — A school’s enrollment numbers are key to safeguarding continued occupancy rates. Lenders like to see these numbers trending positively. Stable or increasing enrollment numbers ensure that new leases will be signed with each school year, as long as the submarket is not becoming overbuilt.

Occupancy Stability — Requiring one-year leases and guarantors or co-signers on leases helps to guarantee a stable revenue for a property. Equilibrium in the submarket is key; if new inventory is coming to market, there should be a corresponding enrollment growth at the school.

Approved Off-Campus Housing — Being on a list of approved off-campus living options gives properties an extra marketing boost and a wider tenant base for residents seeking approved student housing properties.

Amenity Packages — Offering an amenity package that features at least the basics — including high-speed internet, community spaces or laundry facilities — are highly desirable for residents and lenders alike. Alliant focuses on property condition, age and amenities for comps and works with business partners, brokers, appraisers and subscription databases to determine a competitive set for each property.

Not One Size Fits All
The due diligence process that lenders use to vet potential student housing properties prior to approving financing is reasonable but specific and includes market, submarket and university research, as well as on-site visits and a review of future plans for the property. Schools typically have statistics on yearly enrollment, freshman retention rates and graduation rates, which speaks to the stability of the university and housing demand from upperclassman; and demographics, such as median family income of the students, can be gathered from various studies and online sources, Daniuk says.

“Through this process, we are able to ensure a successful lending experience that works for both sides — borrower and lender — and this allows Alliant to offer financing to fit a variety of needs,” notes Daniuk.

The research process enables lenders to provide financing across all property classes within student housing, as there is demand for student housing from all income levels. In addition to the acquisition of core properties that are close to campus, underwriting also ensures that borrowers are able to acquire, redevelop and rebrand aging value-add properties that otherwise may be overlooked by lenders.

For example, Alliant Credit Union recently closed an $8 million cash-out refinancing loan for Treehouse Apartments, a 138-unit student housing community serving Texas State University in San Marcos, Texas. While Treehouse Apartments was a Class C property, the borrower is implementing a capital improvement program to the property to keep it competitive in the market, including the acquisition of an adjacent retail building, which will allow the owner to relocate and expand its apartment leasing office and the community’s amenity offerings.

The financing for Treehouse Apartments is an example of how a borrower’s story can positively impact a lending package. Daniuk explains that borrowers can help sell the property’s story by highlighting management’s experience and the resources used to manage the property. The stability of the community’s rent roll, the safety record of the property, maintenance and upkeep, occupancy rates and the owner’s relationship with the school also go a long way with a lender.

Taking all these aspects into consideration allows lenders the flexibility to craft financing packages that help to ensure the availability of quality student housing product with various price points and differing amenity packages.

“Every market has varying levels of demand for the different property classes and types within student housing, so lenders that perform in-depth research and lend across property classes, like Alliant, offer case-by-case financing options for borrowers for this always-changing market,” says Daniuk.

“Alliant is always open to student housing financing inquiries,” she notes. The Chicago-based credit union specializes in acquisition and refinancing financing packages, ranging from $7 million to $35 million, for real estate properties across the United States.

— By Amy Bigley Works, staff writer. This article was written in conjunction with Alliant Credit Union, a content partner of REBusinessOnline.

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