What does "leased by the bed" actually mean and why does everyone say it like it's obvious

I own land and a couple of long-hold parcels and I've never touched a student deal, but one of the parcels I've been sitting on for nine years is about a mile from a university that's been growing, and a broker called me about a build-to-suit student project.

Before I can even think about it I need someone to explain the basics like I'm new, because I am.

What I think I understand: instead of renting a 4 bedroom apartment to one household for one rent, you rent each bedroom separately to a different student for a separate rent. Four leases, four rent checks.

What I don't understand:

Who's responsible if one of the four doesn't pay? In a normal lease with roommates they're usually all on the hook for the whole thing. Does that go away here?

What's a parental guarantee and is it actually worth anything when it comes to collecting?

Why does everyone talk about the academic year like it's a separate thing from a 12 month lease? Do these leases run nine months or twelve?

And the one I care most about as a land guy, if the demand ever falls apart, what is a purpose-built student building actually good for? Can you rent a 4 bed 4 bath unit to a normal family or is the layout dead weight?

I'm not close to a decision. I'd just rather ask now than nod along in a meeting.

Answer

0ehernandez74PO2BPRO5

@orchard covered the mechanics well. I'll take your last question, because for someone holding land it's the one that matters most.

A 4 bed 4 bath unit is genuinely hard to reuse. You've got four suites off a small common area, a kitchen sized for people who don't cook, and no real living space. Families don't want it. It converts to workforce housing badly and to anything else worse. So when people say campus selection is everything in student housing, part of what they mean is that your downside isn't a rent cut, it's an asset with no second buyer pool.

That's why the demographic question is worth your time before anything else. Births in the US peaked around 4.3 million in 2007 and are running closer to 3.6 million now, and those smaller cohorts start hitting college age over the next several years. Enrollment nationally is going to feel that. The catch is it won't be even. Flagships and growing schools will mostly hold or grow. Smaller and less selective schools will take the hit.

So the work in front of you, before you talk pro forma with anybody, is figuring out which kind of school yours is. Pull eight or ten years of their fall enrollment out of their common data set, look at whether applications are rising, look at whether they've been building or closing housing. If it's a growing flagship, the ground you own is worth listening about. If it's a regional school with flat applications and a shrinking feeder region, the building you'd put on your land outlives the demand for it.

You've held that parcel nine years. Another two months of enrollment reading isn't going to cost you anything.

2 replies

1karen_whitfieldPG4APRO7

On the joint and several question, that's the whole point of by-the-bed. Each resident is liable for their own bed only, so one non-payer doesn't put the other three in default. That's why students and their parents like it. It also means your bad debt shows up one bed at a time instead of one unit at a time, which is easier to absorb but harder to see coming.

Parental guarantee is a separate signature from someone with actual income and credit agreeing to cover the resident's obligation. It cuts your credit risk a lot because you're effectively underwriting a working adult instead of a 19 year old with no file. How enforceable it is and what you actually have to do to collect on one varies by state, so that's a question for a lawyer in whatever state the parcel sits in.

The lease term thing is the part people gloss over. Most purpose-built product runs 12 month leases even though the resident is only there nine or ten months, because the alternative is four empty months a year. Some markets run academic-year terms and price them higher per month. Your broker should be able to tell you which is standard around that campus. That single fact moves the pro forma more than almost anything else.