Lenders will favor core markets and stronger institutional developers for non-recourse loans during the next few months.  As the year progresses, expect to see lenders break on recourse for a wider variety of borrowers.  Leverage will range from 65% to 80%, depending on strength of buyer and the location.  

Due to the lack of forward commitments for takeout financing, many lenders will be careful when sizing loans.  While the government tries to keep rates low, there will be no certainty.  Many lenders will scrutinize projected cash flow and will insist that rents be based off current rates not including inflation.  Deals for projects in coastal markets will be carefully sized to be sure the loan will not be too large for takeout financing in two to four years.  Many lenders will look hard at the appraised NOI using a projected 6% or 6.5% interest rate with a 1.15x DSC.  This will allow lenders to be certain the loan will qualify for a refi. 

Many developers will choose to use HUD loans, which go up to 83.3% leverage with a 1.20x DSC.Â
These loans may take longer, but will be worth the wait.  The HUD program will provide the construction loan, as well as a 40-year, fixed-rate takeout loan.  Expect to see HUD favor projects with some aspect of affordability.  HUD will be careful not to cannibalize loans it has already made, so don’t expect to see numerous HUD loans in one market. 

More projects will break ground this year and cap rates for existing product will be roughly 4% to 5% for Class A product.  Timing begins to favor developers who will be able to build projects at 7% to 7.5% cap rates.  Lenders will keep a watchful eye on cap rates.  With caps so low, there is concern that a multifamily bubble could occur.  Bankers will be cautious when underwriting with this on their minds.

 

Borrowers with strong equity and a feasible project will most likely find short-term financing through national banks, regional banks and possibly private money, but chances are the majority will be recourse loans.  Existing relationships can help hasten the process, especially when dealing with regional banks.  Due to risk levels, lenders are more likely to do business with a previous customer in good standing than develop a new relationship. 

 

The University of Kansas in Lawrence, Kan., receives a $16M construction loan from Mutual of Omaha Bank.  The proceeds will be used to fund a 205,591-s.f. student housing project, which will boast 172 units with around 500 bedrooms.  Buildout will take 36 months.  Mutual of Omaha SVP of Commercial Real Estate TJ Heither explains student housing has always been a good bet, but now it’s a safe one as well.  The Bank has recently financed several student housing developments at the major state schools in Texas, Nevada and Colorado. 

 

Piermont Properties inks a $7.7M loan from People’s United Bank for the acquisition and adaptive reuse of a site at 240 Jericho Turnpike in Long Island, N.Y.  The site will be converted from a former car dealership into a 30,000-s.f., high-end retail center.  The borrower had an existing relationship with the regional bank, which goes to show that prior relationships can help get deals inked in this environment.  The LTC was 75% for the two-year construction loan.  This is a floating-rate loan at a rate of Libor plus 200 bps.  At the end of the term, it can covert to a permanent loan based on the banks’ cost of funds at that time plus 190 bps. 

 

Carlson Hotels secures financing for its Radisson Blu hotel, which will be connected to the Mall of America in Minneapolis.  The hotel will cost roughly $121M and the company was able to ink two hefty pieces of debt totaling $80M.  Tax exempt bonds will be used for $40M, while another $40M will come through taxable notes.  Of the total debt, approximately 70% was through investments by trade pension funds, with the remaining 30% of the taxable portion issued through several small consortiums of banks.  The hotel will break ground at the end of the month with buildout anticipated for March 2013.  The hotel will boast 500 rooms, roughly 28,000 s.f. of meeting space and a walking bridge to the mall.  It marks the second Radisson Blu in the U.S. with the first opening in Chicago this year. 

A joint venture between Normandy Real Estate Partners and investor Mark Yeager borrow $15.47M from The Provident Bank for the acquisition, renovation and construction of Summit Executive Center in Summit, N.J.  The Class A, 65,518-s.f. office property will be completed in March 2012.  The loan carries a 36-month term.  The lender was attracted to the location, the best-in-class sponsorship and the fact that the building is already about 50% pre-leased.

Student housing transaction volume for Q1 closed in on $500M.  If activity continues to pick up, transaction volume for 2011 should be even more than last year, which totaled more than $1B.  Despite high expectations for this year, expect things to slow in Q2 as companies finish off pre-leasing for the 2011/2012 school year.  Activity will come back in full force sometime in August, paving the way for heavy transaction volume through the rest of 2011.

During the last year, the surplus of capital has been going to larger players, while new or smaller operators haven’t been able to access debt as frequently.  Many believe the divide in availability of debt capital will narrow later this year and will allow the smaller players to pick up the pace.  CMBS players and life companies are winning some deals from Fannie Mae and Freddie Mac and increasing competition will force debt and equity sources to present more competitive terms, which should empower buyers to place more aggressive offers.  Keep an eye on interest rate volatility, which will be one of the greatest concerns in 2011. 

Phillips Acquisitions enters the Oxford, Ohio, market with the purchase of a 304-unit student-housing asset located half a mile from Miami University of Ohio.  The buyer paid $7.9M, nearly $26K/unit, to grab Candlewood Terrace.  The complex, which was originally constructed in five phases between 1965 and 1978, features a mix of garden- and townhome-style floorplans.  Rents range from $255/bed to $495/bed and $495/unit and $1,000/unit.  CEO Eric Phillips has no plans to increase rents at this time.  In addition to students, this off-campus buy is also home to professionals and families and is showing strong pre-leasing for 2011/2012.  Phillips budgets $400K for renovations and hopes to complete the work by the end of May or June.  Phillips Property Management LLC will manage the property.

Phillips looks at on- and off-campus housing and plans to acquire three to four more properties this year.  The company is a long-term investor and is open to all markets.  When making purchases, Phillips searches for value and properties with repositioning options to improve its standing in a market. 

Salmanson Capital LLC acquires an off-campus student housing complex in Lincoln, Neb., which serves the University of Nebraska.  Around $7.65M was paid for the 88-unit, 238-bed Claremont Park Apartments.  The company assumed a Fannie Mae loan in the amount of $5.18M.  The loan is interest only until August 2012 at a rate of 5.76% and matures in August 2017.  Salmanson bought the property based off its solid location, which is within walking distance of campus, and its upscale amenities. 

President David Salmanson notes that the barriers to entry are very high in Lincoln and there is very little land within walking distance of the campus to build any new product.  The property is 100% leased, which sticks to the company’s strategy of solely purchasing properties that have a proven track record of being fully leased.                  

Pre-leasing has already begun for the 2011/2012 school year and is on pace with last year’s leasing, even after implementing a solid rent increase along with some new revenue streams.  Salmanson typically likes to achieve at least double-digit, cash-on-cash returns on its investments.  University Capital Management LLC, an affiliate created by Salmanson Capital LLC, will manage the property.  The Claremont Park Apartments purchase brings the company’s student housing portfolio to 344 apartments and 942 beds.  Salmanson is ambitious and looks to grow its footprint in the industry.  The company has previously funded all deals without partners, but is open to taking on equity partners in an effort to create more deal opportunities. 

JMG Realty and Trident Partners have teamed up to buy an 816-bed student housing complex in Harrisonburg, Va., dubbed North 38, nearby James Madison University (JMU).  The purchase price for the 288-unit property was $32.75M, or $143,640/unit, financed through a seven-year Freddie Mac loan.   Wood Partners constructed the 19-acre property, which was completed in 2009.  JMG particularly liked North 38 because it is a newly constructed quality asset strategically located on the JMU bus line, just three miles from the University.  The unit mix is made up of three- and four-bedrooms, with an average unit size of 1,312 s.f. 

The asset was 94.6% occupied at the time of the sale and was already more than 60% pre-leased for the 2011/2012 school year.  Average rents are currently $490/bed and JMG plans to increase this by $15/bed to $20/bed.  JMG SVP Lori Johnson is targeting returns in the high-teens to low-twenties and plans to hold the property for three to five years.  JMG generally likes Class A products in growth markets.  The company prefers newer student housing products located close to campus and along campus bus lines.  

ING Clarion Partners picks up The Warehouse in Chapel Hill, N.C., for $19.9M located just three blocks from the University of North Carolina’s main campus.  ING is banking on stable demand, strong historical occupancy and challenging barriers to entry to provide an attractive risk adjusted return.  The transaction was partly financed at closing with a low LTV loan.  Built in 1999, the four-story property has 215 beds spread in 55 apartments in a mix of two-, three-, and four-bedroom units.  The Warehouse is 100% occupied and is currently 75% pre-leased for the 2011/2012 school year with full occupancy expected to happen in the near future.  ING acquired the asset as a long-term hold investment.  Campus Apartments, the existing property manager, will continue to assume management duties at the property. 

ING Clarion invests in all property types and typical transaction sizes range from $25M to $75M, however, there is no maximum deal size.  General acquisition criteria for student housing would most importantly include a strong location on-campus or within easy walking distance to campus.  Target markets include a major university with student populations generally greater than 8,000 that are anticipated to benefit from strong future growth.  An attractive amenity package and construction/design, which allows for straightforward long-term maintenance, are also important considerations for ING. 

Education Realty Trust (ERT) purchases two housing communities from Wade Apartments adjacent to the University of Virginia (UVA) in Charlottesville, Va.  ERT paid a total of $23M for the assets.  Wertland Square, which opened in 2006, is a 50-unit, mid-rise apartment complex with two- and four-bedroom unfurnished apartments.  The building contains a total of 152 beds with an average monthly rental rate of approximately $708/bed.  Jefferson Commons, which opened in 2007, is slightly smaller with a total of 22 unfurnished apartments.  The 82-bed complex has an average monthly rate of $578/bed.  Both buildings are within walking distance of UVA and are currently 100% occupied and fully pre-leased for the 2011/2012 academic year. 

Pierce Education Properties purchases Block 1949 for $52M near the campus of Arizona State University in Tempe, Ariz.  The property was bought from JLB Partners facilitated by a $38.5M acquisition loan provided by Deutsche Bank Securities Inc.  Block 1949 was developed in 2010 just in time for the 2010/2011 academic year.  The 640-bed, 225-unit student housing property is located 1.5 miles from campus and consists of studios, two-, three- and four-bedroom units.  The buy was strategic largely because Pierce Education recognized it as one of the highest quality student housing communities in the country.  The property is currently 95% leased.  Pierce Property Management, a division of Pierce Education Properties, will manage the gated community.