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Understanding Common Multifamily Assets Part 2
Examine some of the more common multifamily assets to finance..
Student housing projects can be incredibly profitable, however, for investors, understanding local market trends is key. Except in the (somewhat rare) cases where a university is located in a major urban area, or where there are multiple universities located in the same area, the success of a student housing development will depend upon demand from (and the building’s proximity to) a major college or university. Investors are often keen to purchase or develop student housing near schools with the highest area rent growth. In recent years, many of the schools with the highest rent growth have been larger, Southern schools with major football teams. Plus, research indicates that the highest rent growth usually comes from developments located within 1 mile of campus, so, when it comes to student housing, proximity definitely counts.
It’s also important for investors to realize that the student housing market is highly seasonal; the vast majority of tenants sign 9-month leases beginning in late summer or early fall (to coincide with the beginning of their fall semester). While some properties do require 1-year leases, many students will attempt to sublet their apartments for the summer, as they may have gone home or may be working or interning elsewhere. Therefore, if an investor purchases a student housing property and doesn’t make efforts to lease it before fall begins, they could find themselves facing an extremely high vacancy rate until the next fall rolls around. On a positive note, however, both Fannie Mae and Freddie Mac have specialized multifamily loan products designed specifically for student housing properties; plus, HUD multifamily loans (223(f) and 221(d)(4) are also available for student housing properties, albeit under certain conditions. Specifically, properties may not take more than one source of rent from a single unit. In addition, student housing rents must be comparable to other multifamily properties in the area. In essence, rents cannot be discounted just because the property is marketing units to students.
While Covid-19 has certainly taken a toll on the entire multifamily market, the student housing market is still relatively hot. As of Q2 2020, more than $1.58 billion of capital flowed into the U.S. student housing market, and, though some think the market may be due for a correction, most indicators show that the market remains relatively healthy, at least for the foreseeable future.
Seniors Housing/Healthcare Properties
With 75 million baby boomers in the U.S., and an additional 3.6 million Americans turning 65 every year (that’s 10,000 a day), there's never been a better time to acquire or build seniors housing. However, seniors housing comes in a wide variety of flavors, and investors need to make smart choices in order to choose the type of property that fits them best. Below, we’ll delve a little deeper into the five major types of seniors housing, including independent living, assisted living, nursing homes, memory care/Alzheimer's care facilities, and intermediate care centers.
When you see a seemingly-regular apartment complex that says “62+” or “65+,” there’s a good chance that this is an independent living community. However, depending on the state, ‘independent living’ can mean different things. The primary distinction between independent living and other senior housing (like assisted living) is the amount of care that residents receive. In general, independent living facilities are designed for and friendly towards older adults. In addition, residents typically live in private units. Some examples of independent living facilities are retirement homes, retirement communities, senior housing, and senior apartments.
An independent living facility does not offer assistance with daily activities, such as dressing, bathing, eating, and taking medication. However, they do provide services such as transportation, social programs, and activities. At the same time, fully independent living facilities do not offer in-house nursing care. Although, in some facilities, third-party home health services may be available.
When it comes to financing, independent living communities are generally treated much like conventional apartments. However, this is not the case for most other types of seniors housing.
An assisted living facility is a licensed community that provides assistance with daily living activities. On-site medical personnel assist residents with medications, getting dressed, bathing, and social activities. Different facilities often offer various levels of care, usually in the same facility according to residents’ needs. On the spectrum of types of senior living communities, assisted living is the closest to independent living; while there is a medical staff, and some residents may need help with shower and daily activities, there’s also a certain level of independence allowed. Some residents may still have cars, and some might live privately in their own apartments.
Assisted living facilities generally cannot be financed with conventional multifamily loans and typically need specialized financing. Fannie Mae and Freddie Mac multifamily both offer specialized seniors housing loans, as does HUD with its 232 and 232/223(f) loan programs. In some cases, CMBS loans may be available for assisted living facilities, but this is usually only the case if the property owner is leasing out the property to a creditworthy tenant who is operating the facility, or if the facility is part of a larger deal with multiple properties.
While the term “nursing home” and “assisted living facility” are often used interchangeably, in reality, these facilities are generally quite different. In contrast to assisted living facilities, nursing homes focus on providing significantly more care to residents. Many individuals staying in a nursing home may have serious medical conditions and need round-the-clock checkups with nurses and medical assistants to ensure that they remain healthy. Many nursing home residents may also have trouble eating, using the restroom, or walking independently. Therefore, these facilities often focus on providing post-operative, post-injury, or post-illness short-term care for rehabilitation and/or physical therapy. Unlike assisted living, nursing home patients generally cannot independently leave the facility and usually live in smaller rooms or shared apartments.
Just like assisted living facilities, nursing homes generally cannot qualify for traditional multifamily financing and may want to look into a Fannie Mae, Freddie Mac, or HUD multifamily loan product.