FINANCING OF STUDENT HOUSING

Housing for students at a college or university may be owned and operated by the educational institution (the “University”), may be privately owned and operated, or may be owned and operated by some combination of the University and a private organization. The purpose of this publication is to explain the various financing opportunities for the respective ownership and operation structures, several underwriting considerations and common points of negotiation. Attached hereto as Exhibit A is a closing checklist describing the various requirements and points of interest with respect to each ownership and operationalstructure. The checklist is lengthy, but is not necessarily comprehensive, as no two projects are identical and each will have project-specific requirements. Also attached in subsequent Exhibits are structure charts for several of the ownership and operational structures described below.

  1. University-Owned. If the student housing facility will be owned by the University and located on University property, the development may be funded with University funds, by way of traditional institutional mortgage lending, or municipal or tax-exempt financing, such as bonds. Depending on the nature and location of the development, status of the University as public or private, and financial strength of the University or its private foundation, any of these financing options may be available. The University may form a separate, single asset entity owned and/or controlled by the University to lease the underlying land from the University, construct, own and possibly operate the facility.
  2. University-Funded. Many Universities have private foundations (each, a “Foundation”) which are separately organized for purposes of raising private funds unrestricted by any state or federally imposed laws or mandates. This allows the University to participate in certain projects which would otherwise not be possible or which would be too cumbersome under applicable state or federal restrictions to which the University, but not the Foundation, may be subject. Even a private University may receive government funds which are conditioned on compliance with certain requirements. Student housing may be one of the special projects developed with the use of unrestricted dollars held by the Foundation. See Exhibit B for a sample structure chart for this financing structure.
  3. Institutional Lending. Like any organization, a University may accept a loan from a private institutional lender, subject to any bidding requirements or other conditionsdescribed in the University’s governing documents or statutory requirements. Institutional lenders will likely take a mortgage or security interest in the land, ground lease interest, if applicable, improvements and furniture, fixtures and equipment (“FF&E”). Depending on the University’s organizational structure, there may be requirements for guaranties from University affiliates and/or warm bodies. In order for the lender to have an enforceable mortgage lien on the development without encumbering additional land, the land may need to be subdivided in accordance with local subdivision laws in order to create a separate tract. In addition to the standard issues that arise with institutional mortgage lending, lending to a University requires heightened scrutiny of statutory requirements and restrictions in place under internal policies and governing document. Timing of board of directors or board of trustees meetings is also important, as approval or selection of bids, as applicable, changes in terms as the transaction evolves, or any departures from policy or standard operating procedure may be required prior to closing. See Exhibit C for a sample structure chart for University-owned institutional financing.
  4. Bonds. Depending on the bonding capacity of the University or a willing municipality or other issuer, issuance of bonds (revenue-based, tax exempt or otherwise) may be a source of financing for the project. Although upfront costs may be higher with bond financing, the long term interest rate or tax exempt nature of the financing may result in cost savings for the University. Depending on the statutory scheme governing the University, or its internal governing documents, there may be limitations on the ability of the University to implement structures required under certain types of bond financing. If the University will be issuing the bonds, a higher level of scrutiny is required to insure that the University has the bonding capacity and is not restricted from doing so under any agreements, internal documents, or statutes and regulations to which it is subject.
  5. Privately Owned. Privately developed student housing projects are increasingly popular. Under the right circumstances, they can be very profitable for the developer and the operator and they appeal to the University by adding to the quality and quantity of housing available to students, while not being on the books of the University. These projects can be completely privately owned, operated and marketed off-campus, or they can be the subject of affiliation agreements with the University both on and off campus, or they can be part of a public-private partnershipbetween the developer and the University.
  6. Owner/Operator Structure. Development by a private owner/operator may entail the same financing issues that any developer of a privately owned and operated residential apartment complex may face – debt service coverage requirements, loan to value requirements and guarantor liquidity requirements. See Exhibit D for a sample private development structure chart.
  7. Joint Venture. A popular private ownership structure involves a joint venture between the developer and a public or private investor. These structures can be beneficial to the developer by allowing for equity investment from a third party which allows the developer to develop more projects or possibly higherbudget projects than would otherwise be possible. Although the joint venture may provide that the equity investor gets a majority of the profits, the developer may also retain the operating lease or management of the project as a source of revenue. The downside for the developer in these joint venture structures often includes the investor’s right to remove the developer and/or terminate the operating lease or management agreement if the project does not perform as projected. Because of the number of players and moving parts, this structure may have additional upfront financing costs. These costs may be further increased due to the nature of the investor (e.g., a REIT, preferred equity or a mezzanine or “mezz” lender with its own set of rights and restrictions relating to control of the partnership (e.g., cash management requirements)) and the terms of the investment. These additional costs may be offset by better financing terms resulting from the additional equity brought to the project by the investor and, in some instances, by providing for a project that might otherwise not be possible.

The operating agreement for such a joint venture will likely include layers of protections for the investor entity and a shift of risk to the developer entity. For instance, pre-financing costs are borne by the developer entity until funding requirements have been met. After funding requirements are satisfied or waived, those costs are reconciled in accordance with the ownership allocation; however, the developer bears the risk if such requirements are not satisfied or waived. Likewise, the investor group is not required to fund any costs while the project is not “in balance”. The developer entity is typically required to fund all cost shortfalls. On the other hand, the operating agreement will likely contain indemnity provisions allowing for indemnification in accordance with ownership allocation, including indemnity of the developer entity under lender- required guaranties (e.g., non-recourse carve outs, environmental, construction completion, etc.). These indemnity obligations may not be applicable if the developer entity’s guaranty obligation arises as a result of cost overruns, or the developer entity’s fraud, gross negligenceor willful misconduct, or arisesfrom the developer’s breach of the operating agreement (including taking action without the investor’s consent where consent is required), or other so-called “triggerevents”. Additionally, the developer entity is typically responsible for day-to-day management, allowing the developer entity a direct link to the performance of the project, and entitling the investor entity to replace Developer entity in the event of poor performance or worse. This replacement rightis highly negotiated between lender and equity investor, as control of the project in the event of a downturn is critical. See Exhibit E for a sample joint venture structure chart.

  1. Public Private Partnerships. Public private partnerships (each a “PPP”)have experienced renewed popularity lately, with some states even passing special PPP statutes to address the partnership structure. The structure may be as simple as a governmental entity engaging a private entity to construct and operate a facility, or could be as complex as a tax increment financing structure. There are as many types of PPP financing models as there arePPP structures, some of which may be particularly tricky and others, fairly straightforward. Regardless, if the public entity can benefit from the expertise and efficiencies provided by the private sector and the private sector can benefit from development opportunities and possible financial benefits provided by a partnership with government, it can be a win-win situation.Although the public entity may not be able to guaranty debt or indemnify third parties and sometimes cannot commit to an expense that exceeds the then-current budget, these financing obstacles may be overcome with more stringent requirements on the private entity. See Exhibit F for a sample PPP structure chart.
  1. Underwriting Considerations.
  2. Union wages. If the University is a public institution, it may be required to use union labor and/or pay union wages for construction. This will have an impact on the construction budget for the project and may require a greater equity injection in order to satisfy standard loan to value requirements.
  3. Guaranties. Due to the nature of a University structure, whether the University is a public or private institution, there is typically no creditworthy individual or other “warm body”, available to guaranty debt. This may result in requirements for additional collateral, such as additional real property, deposit accounts, or pledges of other revenues or investment accounts. With respect to environmental indemnities, a lender may elect to require environmental insurance in lieu of such indemnity, if appropriate.
  4. Control. Lenders may find themselves negotiating with equity investors (as well as mezz lenders and preferred equity providers if involved) over rights to take over the project to “right the ship” in the event of sub-par performance of the developer and/or the project. The same types of negotiations may come into play regarding control over insurance proceeds and condemnation awards.
  5. Special amenities. If the student housing is intended for college athletes, there will be additional restrictions imposed by the NCAA if the University owns, operates or has any other affiliation with the project. This special purpose student housing may be more expensive as a result of the special FF&E that may be required (e.g., longer beds, taller showers, extra amenities), and may have higher administrative costs associated with the operator’s compliance with NCAA regulations. Despite the increased costs associated with special amenities, such amenities may be so specialized that there is little or no increase in appraised value to justify a corresponding increase in loan amount.

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EXHIBIT A

Financing Requirement / University Owned/Foundation Funded / University Owned/Bonds or Mortgage Loan / Privately Owned by Operator / Privately Owned by Joint Venture / Public/Private Partnership
Term Sheet / N/A / Yes / Yes / Yes / Yes
Commitment Letter / N/A / Yes / Yes / Yes / Yes
Fee Letter / N/A / Yes / Yes / Yes / Yes
Promissory Note/Bond / If applicable / Yes / Yes / Yes / Yes
Loan Agreement/Indenture / N/A / Yes; covenants may be limited based on statutory or governing documents restrictions / Yes / Yes; highly negotiated regarding ability of equity investor to remove developer, ability to recover insurance/condemnation proceeds / Yes; covenants may be limited based on statutory or governing document restrictions; may also be highly negotiated to allow for REIT private investor/developer
Mortgage / N/A / Yes / Yes / Yes / Yes
Guaranty Agreement(s) / N/A / May be limited based on statutory or governing documents restrictions / Yes (may or may not be limited to carve-outs) / Yes (may or may not be limited to carve-outs; likely limited to developer entity) / Yes (may be limited based on statutory or governing document restrictions; may or may not be limited to carve-outs; likely limited to developer entity)
-Payment / N/A / - / If applicable / If applicable / If applicable
-Completion / N/A / - / If applicable / If applicable / If applicable
Assignment of Rents and Leases / N/A / Yes / Yes / Yes / Yes
Environmental Indemnification Agreement / N/A / Yes; may be limited based on statutory or governing documents restrictions / Yes, with possible warm body indemnitor requirement / Yes, negotiation regarding “warm body”, and/or developer entity, but not investor entity / Yes; may be limited based on statutory or governing document restrictions; may require “warm body” indemnitor and/or developer entity
UCC-1 Financing Statements (State and County filings) / N/A / Yes / Yes / Yes / Yes
Borrower’s Affidavit / N/A / Yes / Yes / Yes / Yes
Certificate of Non-Foreign Status / N/A / Yes / Yes / Yes / Yes
Loan Closing Statement / N/A / Yes / Yes / Yes / Yes
Certificates and Consents (Engineer, Architect, GC, Developer) / N/A / Yes / Yes / Yes / Yes
Assignment of Contracts, Plans and Permits / N/A / Yes / Yes / Yes / Yes
Permanent Loan Commitment / N/A / If applicable / If applicable / If applicable / If applicable
Letter of Credit / N/A / If applicable / If applicable / If applicable / If applicable
Subordination Agreement (Management, Leasing, Development) / N/A / Yes / If applicable / If applicable / If applicable
Security Agreement / N/A / Yes / Yes / Yes / Yes
Cash Management Agreement / N/A / If applicable / If applicable / If applicable / If applicable
Deposit Account Control Agreement / N/A / If applicable / If applicable / If applicable / If applicable
Authorization to Debit Account for Pre-Arranged Payments / N/A / If applicable / If applicable / If applicable / If applicable
Post-Closing Agreement / N/A / If applicable / If applicable / If applicable / If applicable
Participation Agreement / N/A / If applicable / If applicable / If applicable / If applicable
Servicing Agreement / N/A / If applicable / If applicable / If applicable / If applicable
Collateral Assignment of Hedge / N/A / If applicable / If applicable / If applicable / If applicable
Organizational Chart / Yes / Yes / Yes / Yes / Yes
Owner/Borrower’s Certificate and Authority Documents / Yes / Yes / Yes / Yes / Yes
Incumbency Certificate / N/A / Yes / Yes / Yes / Yes
Articles of Organization/Incorporation / Yes / Yes / Yes / Yes / Yes
Operating Agreement/Bylaws / Yes / Yes / Yes / Yes / Yes
Certificate of Good Standing (State of Organization and Property State) / Yes / Yes / Yes / Yes / Yes
Resolutions/Consents / Yes / Yes / Yes / Yes / Yes
Fictitious Name Registration / If applicable / If applicable / If applicable / If applicable / If applicable
Managing Member Certificate and Authority Documents / If applicable / Yes / Yes / Yes / Yes
Incumbency Certificate / N/A / Yes / Yes / Yes / Yes
Articles of Organization/Incorporation / If applicable / Yes / Yes / Yes / Yes
Operating Agreement/Bylaws / If applicable / Yes / Yes / Yes / Yes
Certificate of Good Standing (State of Organization and Property State) / If applicable / Yes / Yes / Yes / Yes
Resolutions/Consents / If applicable / Yes / Yes / Yes / Yes
Fictitious Name Registration / If applicable / If applicable / If applicable / If applicable / If applicable
Member Certificate and Authority Documents / If applicable / Yes / If applicable / If applicable / Yes
Incumbency Certificate / N/A / Yes / If applicable / If applicable / Yes
Articles of Organization/Incorporation / If applicable / Yes / If applicable / If applicable / Yes
Operating Agreement/Bylaws / If applicable / Yes / If applicable / If applicable / Yes
Certificate of Good Standing (State of Organization and Property State) / If applicable / Yes / If applicable / If applicable / Yes
Resolutions/Consents / If applicable / Yes / If applicable / If applicable / Yes
Fictitious Name Registration / If applicable / If applicable / If applicable / If applicable / If applicable
Property Manager Certificate and Authority Documents / If applicable / Yes / Yes / Yes / Yes
Incumbency Certificate / N/A / Yes / Yes / Yes / Yes
Articles of Organization/Incorporation / If applicable / Yes / Yes / Yes / Yes
Operating Agreement/Bylaws / If applicable / Yes / Yes / Yes / Yes
Certificate of Good Standing (State of Organization and Property State) / If applicable / Yes / Yes / Yes / Yes
Resolutions/Consents / If applicable / Yes / Yes / Yes / Yes
Fictitious Name Registration / If applicable / If applicable / If applicable / If applicable / If applicable
Guarantor Certificate and Authority Documents / N/A / If applicable / If applicable / Yes / Yes
Incumbency Certificate / N/A / If applicable / If applicable / Yes / Yes
Articles of Organization/Incorporation / N/A / If applicable / If applicable / Yes / Yes
Operating Agreement/Bylaws / N/A / If applicable / If applicable / Yes / Yes
Certificate of Good Standing (State of Organization and Property State) / N/A / If applicable / If applicable / Yes / Yes
Resolutions/Consents / N/A / If applicable / If applicable / Yes / Yes
Fictitious Name Registration / N/A / If applicable / If applicable / If applicable / If applicable
Equity Owner Certificate and Authority Documents / N/A / N/A / N/A / Yes / Yes
Incumbency Certificate / N/A / N/A / N/A / Yes / Yes
Articles of Organization/Incorporation / N/A / N/A / N/A / Yes / Yes
Operating Agreement/Bylaws / N/A / N/A / N/A / Yes / Yes
Certificate of Good Standing (State of Organization and Property State) / N/A / N/A / N/A / Yes / Yes
Resolutions/Consents / N/A / N/A / N/A / Yes / Yes
Fictitious Name Registration / N/A / N/A / N/A / If applicable / If applicable
Title Commitment and Exception Documents, Vesting Deed / Yes / Yes / Yes / Yes / Yes
Title Objection Letter / Only if site acquisition necessary / Only if site acquisition necessary / Yes / Yes / Yes
Tax Certificates or property statements / Only if site acquisition necessary / Yes / Yes / Yes / Yes
Re-Insurance Agreement / If applicable / If applicable / If applicable / If applicable / If applicable
Title Policy / Yes / Yes / Yes / Yes / Yes
Closing Instruction Letter / N/A / Yes / Yes / Yes / Yes
Insured Closing Letter / Only if site acquisition necessary / Yes / Yes / Yes / Yes
UCC-11/Lien/Judgment/Bankruptcy Search Report / N/A / Yes / Yes / Yes / Yes
Survey / Yes / Yes / Yes / Yes / Yes
Form of Lease / Yes / Yes / Yes / Yes / Yes
Form of Management/Leasing Agreement / Yes / Yes / Yes / Yes / Yes
Subdivision Plat / If applicable / If applicable / If applicable / If applicable / If applicable
Insurance
-Builder’s Risk Fire and Extended Coverage/Property Insurance / Yes / Yes / Yes / Yes / Yes
-Owner’s General Liability Insurance / Yes / Yes / Yes / Yes / Yes
-Contractor’s General Liability Insurance / Yes / Yes / Yes / Yes / Yes
-Contractor’s Workmen’s Compensation Insurance / Yes / Yes / Yes / Yes / Yes
-Floor Insurance/Earthquake Coverage / If applicable / If applicable / If applicable / If applicable / If applicable
-Rent Loss/Business Interruption / N/A / Yes / If applicable / Yes / Yes
-Other (e.g., zoning, environmental) / If applicable / If applicable / If applicable / If applicable / If applicable
Flood Determination / Yes / Yes / Yes / Yes / Yes
Environmental Site Assessment / Yes / Yes / Yes / Yes / Yes
Soils Report / Yes / Yes / Yes / Yes / Yes
Wetlands Report / Yes / Yes / Yes / Yes / Yes
Engineer’s Contract / Yes / Yes / Yes / Yes / Yes
Architect’s Contract / Yes / Yes / Yes / Yes / Yes
Plans & Specs / Yes / Yes / Yes / Yes / Yes
Approved Site Plan / Yes / Yes / Yes / Yes / Yes
Construction Contract / Yes / Yes / Yes / Yes / Yes
-Schedule of Contracts / Yes / Yes / Yes / Yes / Yes
-Construction Schedule / Yes / Yes / Yes / Yes / Yes
Payment/Performance Bonds / If applicable / Yes / Yes / Yes / Yes
Evidence of Zoning / Yes / Yes / Yes / Yes / Yes
Evidence of Utilities / Yes / Yes / Yes / Yes / Yes
-Water / Yes / Yes / Yes / Yes / Yes
-Sewer / Yes / Yes / Yes / Yes / Yes
-Electricity / Yes / Yes / Yes / Yes / Yes
-Telephone/Internet / Yes / Yes / Yes / Yes / Yes
-Gas / Yes / Yes / Yes / Yes / Yes
-Cable / Yes / Yes / Yes / Yes / Yes
Permits
-Grading / Yes / Yes / Yes / Yes / Yes
-Building / Yes / Yes / Yes / Yes / Yes
-Storm Water Discharge / If applicable / If applicable / If applicable / If applicable / If applicable
-Other / If applicable / If applicable / If applicable / If applicable / If applicable
Development Agreement / N/A / If applicable / Yes / Yes / Yes
Property Management Agreement / If applicable / If applicable / Yes / Yes / Yes
Appraisal / N/A / Yes / Yes; any affiliation agreement should be taken into account for purposes of determining revenue / Yes; any affiliation agreement should be taken into account for purposes of determining revenue / Yes; any affiliation agreement should be taken into account for purposes of determining revenue
Construction Consultant’s Analysis / N/A / Yes / Yes / Yes / Yes
Land Acquisition Contract / If applicable / If applicable / Yes / Yes / Yes
Service/Operating Agreements / Yes / Yes / Yes / Yes / Yes
Financial Statements (Borrower, Guarantor) / N/A / Yes / Yes / Yes / Yes
Project Budget (Sources and Uses) / Yes / Yes / Yes / Yes / Yes
Evidence of Borrower’s Equity / N/A / Yes / Yes / Yes / Yes
SWAP or Interest Rate Cap Documentation / N/A / If applicable / If applicable / If applicable / If applicable

EXHIBIT B