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CMHC’s Student Housing Program: Is It Right For You?

By Andy Schwartze

By Peter Cook and Robert Fleet

If you haven’t considered student housing as part of your portfolio in the past, this may be the right time to get involved. CMHC has updated their multi-unit student housing insurance program after a short absence from insuring this asset class.

Why CMHC Insurance Is Critical For Student Housing

During this absence lenders were reluctant to loan conventional funds for this purpose leaving potential borrowers unable to obtain financing options at competitive rates. This circumstance created stagnation in this asset class. Investors didn’t buy and many would-be sellers were forced to hold on to their properties. Furthermore, those looking to unlock equity by refinancing were unable to do so.

In January of 2010 CMHC announced a new program that could make participation in student housing a much more attractive investment. Many of the same benefits that CMHC currently offers to apartment owners are now available for student housing.

This Is A Growing Market

It’s estimated that approximately 800,000 students are currently enrolled in Canadian universities and these numbers are growing. As a general trend, not only are more students registering for university but they’re taking more courses and staying longer.  Also, during recessionary times university enrollment increases and there is a tendency for students to remain in school until the job market improves.  

Potential For More Cash Flow

The greatest appeal to prospective investors is the potential for accelerated cash flow. When it comes to accommodation for schooling, students and parents are willing to pay more for well managed, quality housing especially if it’s only a short walk from the university.  If you compare the revenue per square foot between a 50-unit apartment building with 75 tenants versus a 50-unit apartment building housing 200 students it’s hard not to get excited about the income potential.  To accommodate the temporary tenancy of students, suites are often furnished.  Despite the added costs many investors appreciate the cash flow benefits of student housing.

About The Program

The new program will not benefit all borrowers as there are some restrictions. We have heard many concerns from student housing investors about limitations and grey areas in the program. We were able to contact Mark McInnis, Vice-President Insurance Underwriting, Servicing and Policy with CMHC to get clarification on some key issues.  

We asked Mr. McInnis why is CMHC is offering this program now?

His reply shed some light on the need for such a program in Canada. Here’s what he had to say, “On January 20, 2010 CMHC announced its mortgage loan insurance policies to facilitate the financing of student housing projects. These are properties that support the housing needs of publicly funded educational institutions, such as universities and colleges.”

“CMHC Multi-Unit Student Housing will enable borrowers to obtain loans of up to 85% of the property’s value for the construction, purchase or refinancing of housing specifically built for students. With CMHC Mortgage Loan Insurance, developers and borrowers for this type of housing will also be able to access competitive interest rates for the life of the mortgage and lower renewal risk.”  

“This announcement is timely given that student housing needs are on the rise and currently exceeds supply in most university/college cities in Canada. The demand for this type of housing is expected to continue to increase given demographics, forecasted enrollment figures and continued growth in international students.”

CMHC Qualifying Conditions

Commensurate with the added risks and unique requirements of student housing, CMHC has more stringent qualifying conditions for student housing than those of residential multi-family dwellings.  Below is a summary of the guidelines presented by CMHC at the time of writing:

What Do Investors Think About This Program?

We spoke to a number of our professional student housing clients to see what they think of the program.  Investors are very supportive of CMHC’s decision to offer mortgage insurance for student housing, however they were quick to point out some of the shortcomings. For instance, two of the qualifiers are off-campus units must be three bedrooms or less and unfurnished in order to qualify for the program.  With such a large majority of existing, off-campus student facilities containing four or more units, many of which are furnished, this excludes the majority of otherwise well qualified buildings.  

We asked Mr. McInnis about the rational behind this decision. Here is his response; “Atypical units, defined as four or more bedrooms or units that are not self-contained, are eligible only if located on campus. These types of units are not readily convertible to conventional multi-family housing and they run the risk of becoming obsolete in favour of smaller, more private units.”

Despite CMHC’s position on this issue, many of our clients are hopeful this program will eventually evolve to include greater than three bedroom units or that CMHC may consider insuring some projects on an exception basis.  

Additionally, several investors pointed out that they would find CMHC’s program more appealing if the amortization limit was greater than 25 years. Others suggested that CMHC provide a well defined template to use as a standardized guide to collect data for the required feasibility study.

It is our opinion that, although this program has its limitations and is more expensive than multi-residential mortgage insurance, it will now make financing available to many investors. If you are considering purchasing a new student housing property, look for buildings that are unfurnished and contain three bedroom suites or less. This may be good advice to eventually accommodate an exit strategy. You will be able to easily and economically convert the suites to rental apartments if the demand for student housing decreases. If you are planning to invest in student housing we encourage you to carefully investigate the details of CMHC’s program and give us a call if you have questions. 

New Student Housing Insurance Details

• Loan-to-Value Ratio: Up to 85% of the lending value, as determined by CMHC.
• On a new structure, loan may be advanced up to the lesser of 75% of value or cost during construction. Increases to the lesser of 85% of lending value or 100% of agreed costs when rents are stabilized.
• Minimum DCR of 1.40 (term less than 10 years)
• Minimum DCR of 1.30 (term 10 years or more)
• Interest Rate: Fixed interest rate, or floating (with ceiling rate)
• Amortization Up to 25 years. A longer amortization will be considered if the educational institution is the direct borrower or if it provides 100% guarantee for the full duration of the loan.
• Market Assessment: A market demand study will be required to support the long term financing of the student housing project.
• Project must be located on campus or within walking distance from campus
• Must be purpose built student housing projects
• Units that are not self-contained or 4+ bedrooms are eligible only if located on campus
• Only units that are self-contained and 3 bedrooms or less will be considered off campus
• Furnished suites will only be considered if located on-campus and a replacement reserve will be required
• Property Management Experience - Borrower must have a minimum of 5 years experience in operating similar types of projects.
• Borrower Net Worth – In addition to standard requirements on borrower net worth for construction loan(s), the borrower must have the financial capacity to sustain one full year of debt @ 100% vacancy if project is not ready at beginning of school year.
• Cash Flow: Revenues will be assessed using rent per bedroom.
• It is the lender’s responsibility to ensure the cash flow is adequately secured through, for example, pre-paid leases, parental guarantee or leases signed on a joint and several basis by all students.

Insurance Premiums

Peter Cook and Robert Fleet are “Apartment Financing Specialists” with First National Financial LP.  Together they have originated over $3 Billion of mortgages.  Their combined 32 years experience with mortgage financing has lead to frequent speaking engagements across the country. If you have questions, Peter and Robert may be reached by phone or email. Peter Cook—(416) 593-2913 pcook@firstnational.ca; Robert Fleet—(905) 301-3449 robert.fleet@firstnational.ca.