The last year for me, personally and professionally, has been a tumultuous yet overwhelming year of growth. I lost two of the most important people in my life, my two grandmothers. At the same time in business while most of my competitors were closing their doors due to the harsh economic times that we are experiencing, I expanded my business. What is the secret to thriving while others are languishing? It is the ability to adapt to the circumstances we find ourselves in business or our personal lives.
Even though Student Housing has not suffered as much as the other multifamily sectors in this current economic environment, there are certain markets that have softened and enrollments are down across the country. Parents and students are looking for more affordable options for their housing needs.
What does a developer do in times like these?
Adapt to their circumstances.
Watching the changes in the economy over the last two years, I made a decision to partner our company with an Investment Bank that finances multifamily and healthcare related properties through FHA/HUD financing. At a time when conventional banks are not lending, and only the strongest developer will make it through the scrutiny of Fannie and Freddie programs, HUD offers another alternative that most student housing developers do not consider.
If a developer is willing to “adapt” his project to meet the guidelines of HUD financing, this can be a very viable option to consider. Many projects that are sitting on the sidelines waiting for the right time, could be restructured and under construction long before the economy changes. Changes to the structure of the leases and sometimes configuration of the rooms will be necessary to adapt to this program. This will at times decrease the profitability of the project but with creative origination and structuring of the loan the prepayment penalties can be reduced to accommodate a refinance within a shorter period of time.
The advantages to using this type of financing are much higher LTC’s up to 90% and lower dscr at 1.1. This along with a 40 year fixed construction to permanent loan and low interest rates, may be enough to compensate for the lower rents that may need to be charged resulting in a lower profit margin. The price of equity can be very costly and in some cases, we can use excess land value or seller held seconds to totally eradicate the need of any equity.
Another creative way of adapting to this environment is to create a joint venture either with a current landowner or company with parallel goals. Through the strength of a partnership, liquidity and equity issues can be resolved as well as management and experience requirements by lenders.
We are in a time of change. In order to not only survive but thrive as a developer in this tumultuous time is to be open and creative to new ways of financing. Our company is available to advise, structure and finance your student housing projects during this time.
–Elizabeth Vallone is the Founder and Managing Partner of Equiventure Capital, LLC