Lenders still have a strong appetite for student housing sector.

Peter Stelian

According to Jim Tramuto, senior vice president of debt and equity finance for CB Richard Ellis, the lending environment for student housing as a whole has been very positive over the past eight to 12 months, and it continues to get even stronger. “The 2009-2010 leasing season in particular has shown how student housing can weather the storm quite effectively,” he notes.

Lenders such as Fannie Mae and Freddie Mac continue to lead the pack in terms of favorable financing; however, underwriting has changed along with the upheavals in today’s economy and lenders are looking for specific parameters in order to close a transaction. Frank Lutz of Fannie Mae notes that the reason that the GSE’s student housing portfolio is doing so well is because of stricter underwriting standards, meaning they only choose deals that fit within a specific set of parameters.

Ted Patch, senior vice president at Walker & Dunlop, one of the largest DUS and Freddie Mac Program Plus lenders, says, “One of the keys to ensuring financing for any student housing project are solid fundamentals such as an experienced operator and proximity to the university — the closer the better. And the size of the university is also important. Fannie Mae focuses on larger universities with an enrollment of 20,000 or more students and Freddie Mac will go as low as 8,000 students.”

In terms of obtaining financing for new developments, Tramuto explains that both of the agencies are very weary of the cash-out refinance and shorter term debt, and their underwriting parameters get significantly more conservative if either is the case. “If, however, a developer is just looking to take out the construction lender with longer term debt, then there is still very attractive 75 percent LTV [loan-to-value] debt available,” he explains.

In terms of student housing acquisitions, Tramuto believes that is going to be a bright spot on the horizon. “The agencies look favorably upon fresh equity going into a project.  As a result of this, acquisitions typically generate the most aggressive loan terms — and we have seen acquisition financing get up to 80 percent LTV in some cases with longer term debt.”

Frank Lutz

While some might say that underwriting standards have tightened, Lutz believes that it is more of a matter of going back to the way things used to be. “As changes over the last year were going on and financing was becoming more conservative, we went back to a more normal and traditional underwriting standard,” he notes. “My hope is that we remain there.”

Lutz, for the most part, believes that the capital markets have finally stabilized, but notes that many are still very cautious as to what might still lie ahead. “There are some people that feel that we are in for more pain ahead in the commercial real estate business, so we could tighten up more. But, I would say that in the future we will remain in this state of more traditional underwriting standards,” he adds.

Tramuto agrees with Lutz, noting that he expects that the state of student housing lending, particularly in regards to Fannie and Freddie, will remain business as usual. “We are hopeful that the life companies will re-enter the space they voided a while ago, which is lending on dorm-style assets that the agencies will not finance, but only time will tell on that front as the life companies are slowly but surely trickling back into the market with some very conservative money,” Tramuto says.

Tramuto, however, is not quite as hopeful when it comes to traditional bank financing. “It is a toss up as far as what we will see over the next year. The strength of local and regional banks are being tested on a daily basis with extensive loan maturities and bad debt,” he explains. “We are seeing some activity there, but not a significant amount and the loans that are getting done are with existing banking relationships.”

Patch believes that the future of lending for student housing product should remain stable, due largely in part to attractive demographics. “If you look at the number of students scheduled to enroll in universities going forward, it is growing, so the demographics are very good; thus, the appetite from Fannie and Freddie will remain strong going forward,” he says.

Ted Patch

Stelian also notes that the size of the loan also has a lot to do with obtaining financing. Currently, the market for new construction loans is spilt into two categories — loans above $25 million and loans below $25 million. “If a loan is below $25 million and the developer has significant equity to put toward the deal and they have a strong balance sheet then they might be able to get a construction loan,” he says. “But, it is very difficult to get a construction loan for anything above $25 million because that requires a bank syndication.”

However, despite the constraints in the market, Stelian says that Blue Vista is still actively seeking new properties through its funds. Blue Vista’s current fund, Place/BV Student Housing Fund, is a $280 million real estate investment platform which focuses on the acquisition and development of student housing properties across the U.S. The fund is a joint venture between Atlanta-based Place Properties, LP and Blue Vista Management.

Overall, developers, investors and lenders are positive that the student housing niche will continue to remain a bright spot in terms of future growth; thus, a bright spot in terms of lending. Tramuto notes that according to data points from his CBRE National Student Housing Team, the student housing market is expected to get better and better as fundamentals improve and the sector gets more attention on a national scale.

— Stephanie M. Specht