There has been a lot of buzz about the student housing marketthis week, in particular at the NMHC2011 Student Housing Conference & Expo. Throughoutthe conference, I’ve heard many positive trends about thisalive-and-well sector; about 25% of projects are new developments,and distressed assets are being purchased and revitalized. Institutional investors are excited about this multifamily niche,which proved to be resilient during the recession.

So what do investors need to consider about due diligence forstudent housing properties?

As with other multi-family markets, FannieMae and Freddie Mac are still the predominant lender. Fannie and Freddie have very specific requirements for environmental and engineeringdue diligence, so borrowers needs to make sure they hire acompany that is knowledgeable with these scopes of work (andsampling requirements). Also, there is a lot of talk abouthow Fannie and Freddie tend to shy away from new constructionbecause rents can be artificially inflated due tonewness.

Phase 1 Environmental on Student Housing

With a Phase1 Environmental Site Assessment on existing or proposed studenthousing sites, a few environmental concerns are particularlyimportant to watch out for. As with other multifamilyproperties, many lenders and investors rightly have a lower risktolerance with potential health concerns:

• Hazardous BuildingMaterials – Many building materials are suspect ofcontaining asbestos and leadpaint, and not just in older buildings. These substancescontinue to be manufactured and used in certain products. Asbestos and lead paint are typically screened for visually duringthe Phase 1 ESA process, but actual sampling is necessary todetermine whether you’ve got a problem. If you have suspectmaterials, sampling should be done prior to any renovations orother destructive activities. Fannie and Freddie also mayrequire sampling if there are any damaged suspect materials in abuilding, even if no renovation is proposed.

• Indoor AirQuality – Mold, radon gas or vaporintrusion (harmful vapors migrating into a building fromcontamination) can also pose health risks to buildingoccupants. These are also usually screened for in a Phase 1ESA, but again sampling or further inspection is required to besure (except for in obvious mold cases).

Property Condition Report on Student Housing

There are also a few distinctions with PropertyCondition Reports on student housing, which is an evaluation ofthe building and all improvements at a property and their short andlong term maintenance costs. Everything is looked at on a perbed basis (versus number of units), and a lot of times theseproperties will include fixtures, furnishings and equipment (FFE).In addition, these properties have many high end amenities incommon areas (internet cafes, lazy rivers, movie theatres, etc).This, in conjunction with the type of tenant, often leads to ahigher reserve number than you would see in a conventionalmulti-family property.