Student Housing: Sourcing the Institutional Equity

By Bruce Davis, Principal,  Lee & Associates Atlanta

In this short intro, I will convey what I have learned to help simplify the task of identifying and sourcing the right JV equity partner for your purpose-built student housing project. This sector is a very specialized type of development, with everything from its own nomenclature to specific performance and underwriting guidelines. Learn these to save time and trouble in reaching a successful closing or your capital stack.

HAVE YOU DONE IT BEFORE?  Student Housing is all about delivering the property simultaneous with the fall semester of the school year, typically early August.  It must be 100 percent pre-leased, and yes, everybody moves in on the same weekend before classes begin. Failure to meet this requirement, with a completely CO’d project, chances for success are diminished. For this reason, someone on your development team must have extensive and recognizable success in this space. Also, plan to have skin in the game; no less than 10 percent (Developer Equity) on board, and not a “deferral of fees”.  Some Equity sources will guarantee the construction loan, but at a cost to your promote or waterfall (if one is even offered) with which you as developer will not be enamored.

SPECIALIZED MANAGEMENT.  One is advised to engage a tested, recognized and reputable third party management team with this student housing specific skill set. This sector is all about the pre-lease.  In getting management on board early, they can consult with you and bring good ideas about this demand set’s requirements, and you will benefit by their buy-in of the property’s features. Get three or four proposals. Not too early, however, as some equity funds  have their own “pet” management team that they will prefer or require you to select.

SIZE OF ENROLLMENT.  Institutional equity investors like to see schools of 10,000 or more enrollment, and they only want to see four-year schools, for obvious reasons. Variables can exist to this requirement with legacy or prominence, but the equity thinks about size of the school in its exit strategy.

SUPPLY & DEMAND FUNDAMENTALS.  The size of university-owned beds as a ratio is an important consideration. A safe environment for private sector off campus product is when there are no more than 25 to 30 percent of the student population is covered by the university-owned product.  Are all students allowed to move off campus beginning with the sophomore year? What is the cost of on-campus housing compared to the private market?  It is best to hire a third-party consultant to prepare a feasibility report to document supply and demand not only of the university-owned product, but all conventional apartment complexes as well as existing purpose-built student housing projects in that market. The accomplished consultant will provide this down to a specific number, and this must include market pipeline deals. More than one surprise, unannounced competing project can give the equity partner pause.

Institutional equity likes adjacent to campus, or at least walkable distance. Most require the site to be inside a mile.  All require the site to be subjected to a “barriers to entry” test. It is best to offer a project that has an on-campus deficit supply of a couple multiples of the number of units that you plan to deliver.  It is imperative that a developer not be caught off-guard with questions about competing projects.

INTANGIBLES.    The ratio of students receiving financial aid, and in what dollar amount are important points to know. Research the graduation rate, but more importantly the student loan default rate.  The investor may have genuine concerns that federal money for student aid could become more scarce in the future, and projects at schools suffering in these areas could become difficult to get projects financed.

The developer chooses to get into student housing in attempts to remove the demand risk as an unknown.  The presumption is that a well-located project will always enjoy excellent occupancy because the baby boomer generation will always find ways to send their kids off to college. Mistakes can still be made, however by the developer in pursuing this path. Do your homework. Even though the equity funds are plentiful and anxious in the institutional market, the scrutiny to which they will subject your proposed project will be learned, thorough and exacting.