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Student Housing FinancingBorrowers’ and Brokers’ Frequently Asked Questions, Answered by Ivan Kaufman, Chairman and CEO of Arbor Commercial Mortgage

Do you see traditional multifamily investors moving into the student housing sector?

Traditional Multifamily Investor Participation

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Yes. Multifamily owners are seeing the stability of the cash flow from student housing properties and the potential for increased rents, both of which are high on any owner’s wish list.

How do you analyze student housing rental demand when in the current market there are so many “amateur” landlords willing to rent out their houses near campuses?

Student Housing Rental Demand

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This is why knowing your operator is so essential from a lender’s standpoint. A good operator will provide the services to keep his tenants satisfied and his properties, therefore, filled, especially in competition with single-family rental properties. Without meeting the needs of the residents (i.e. Internet, cable television, pools, social activities, transportation to campus, lounges, etc.) the property will most likely suffer unless the location to campus is so strong that it doesn’t matter what services are offered. Living in a single-family house is obviously much different than living in a large apartment complex.

As an underwriter of student housing assets, what is important to you from an appraisal standpoint? What is needed to make a better underwriting decision?

Underwriting Best Practices

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As long as the appraiser is comparing student properties in the area, then the lender’s value holds up. The key underwriting criteria is really sponsorship and location.

Will Freddie Mac or Fannie Mae provide 10-year, 80 percent LTV financing for student housing?

Freddie Mac and Fannie Mae Financing

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Yes. Maximum LTV on student properties is 80 percent, with a minimum 1.30x debt service coverage ratio. Typically, loans are written on a 25- to 30-year amortization schedule with a 10-year balloon.

What is the smallest loan size Fannie Mae or Freddie Mac would consider?

Freddie Mac and Fannie Mae Loan Sizes

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$1 million is the minimum loan size for Fannie Mae, whereas Freddie Mac has a $5-million minimum.

In addition to Fannie Mae loans, what other financing options exist for Student Housing?

Other Financing Options

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Permanent financing can be obtained through Freddie Mac-, Fannie Mae- and FHA-licensed lenders, such as Arbor. Also, Bridge loans can be a critical interim financing source in helping a borrower eventually obtain a permanent Fannie Mae of FHA exit. Dedicated and traditional student housing properties are eligible for all loan product types mentioned above, including even new construction financing through the FHA.

How are community colleges viewed by Fannie Mae? Any different from a university?

Community College Housing

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Normally, properties serving community colleges’ housing demand are treated more like typical residential multifamily properties since most of the residents work, even on a part time basis, and therefore can qualify for their unit based on their income. In other words, they don’t need parental guarantees per Fannie Mae guidelines. Also, most community colleges serve those students who either live at home or commute from a different area so their effect on the local apartment market is not as significant as a “dedicated” college or university campus.

Are private universities evaluated any differently from public universities?

Private v. Public Universities

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No.

How often do Fannie Mae and Freddie Mac review their lending parameters?

Fannie Mae and Freddie Mac Lending Parameters

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Relative to student housing parameters, Fannie Mae and Freddie Mac review their lending parameters once a year.

Is it easier to arrange financing for a portfolio or a single asset?

Portfolio v. Single Asset Financing

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As a general rule, a single asset is easier to arrange, as portfolio loans can easily become problematic mostly because of size and market concentration issues.

What are the reserve requirements for financing per-bed or per-unit (dollars per year) and what are the growth rates on this value?

Financing Reserve Requirements

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Fannie Mae’s minimum underwriting requirement for replacement reserves is $250 per unit per year, whereas Freddie Mac’s is $350 per unit per year. More specifically, given the extra operational stress on a student property, the actual operating number is more like $350 to $500 per unit per year.

Are multifamily property managers generally positioned properly to understand the differences in managing student housing?

Multifamily Property Managers

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As a general rule, no. The large owner/operators that have a diverse portfolio of properties 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. The marketing and oversight of student properties are the two areas which comprise the largest difference from regular family-targeted properties and student properties.