Today, new construction debt is challenging to secure. For co-living deals, the challenges are even greater—but that doesn’t mean that they aren’t getting done. ELK Development recently secured $14.1 million to build an 86-unit co-living property in a Hollywood opportunity zone area.
Co-living properties need to meet a few specifics to attract lender interest. “It is still limited and it is a tough asset class to get done right now,” Shahin Yazdi, principal and managing director, at George Smith Partners, tells GlobeSt.com. “People do not know what the future holds in this space; however, there are still lenders interested in the asset class with the right dynamics at play. At this point, co-living deals have to have their bathroom for each bedroom at the very least. The more limited the contact is, the more a lender can feel comfortable.”
Yazdi secured the financing on behalf of the developer. The construction loan has a fixed 4.75% interest rate with a 65% loan-to-cost of total project cost and a 24-month term. The mini-perm loan is fixed at 4.5% and has a five-year term.
Along with private bathrooms, the ELK Development also has kitchenettes in every bedroom, helping to solidify lender interest. “On our deal, each bedroom also included a kitchenette, so we had the notion that these were micro-units. Every bedroom is almost its own independent unit,” says Yazdi. “Even though it is going to be operated as a co-living property, we really felt like we were financing a bunch of micro-units, and that made the lender even more comfortable. As they started to understand the property, the rents really did pencil.”
In addition to the layout configuration, lenders also want the deals to pencil as an apartment deal, which isn’t a major divergence from lender requirements prior to the pandemic. “Lenders still want the deal to pencil as an apartment, which poses its own challenge,” says Yazdi. “It is difficult to comp a three-bedroom/three-bath apartment or a four-bedroom/four-bath apartment. That isn’t a standard in the apartment market, but it is still doable.”
Lenders also want to see that the value of the co-living model in the property. Usually, this entails below-market rents for a comparable market-rate unit. “You still need to be under market for what someone could get in a studio, otherwise, why would they pay to live in a co-living property,” says Yazdi. “At the end of the day, it comes down to the numbers. The economics need to make sense. That is really important.”