Master lease agreements guarantee occupancy at student housing communities and build strong, lasting relationships with universities.
The Missouri University of Science and Technology is in the midst of a five-year project to replace and renovate its student housing. The school has had to take buildings out of service for renovation throughout the project, which could have put a squeeze on the campus’s housing inventory.
But in the years in which the university in central Missouri has had a deficit in bed capacity, it’s leased a large block of apartments from Collegiate Station, a student housing apartment community adjacent to the north side of campus managed by Collegiate Management Group. The arrangement allows the university to ensure adequate campus housing for its students while guaranteeing occupancy for the apartment community—a mutually beneficial relationship.
Missouri S&T’s agreement with Collegiate Station is known as a master lease, an arrangement in which a university leases a bulk number of beds at a property for a set period of time (often 12 months, but sometimes for several years). Master leases benefit apartment managers and developers because they reduce a community’s marketing costs and help build strong relationships with the local university that can lead to future referrals.
But master leases don’t make sense for every school or every apartment developer. Knowing all factors to consider when evaluating master lease arrangements—and learning the university’s perspective on working with apartment communities—can help student housing managers make the right decision for each of their communities.
Stable Solution
Collegiate Management Group often seeks master leases for its apartment owner or developer clients because of the stable, guaranteed occupancy these arrangements provide, says Christina Aclin, Vice President and Division Director for the Irving, Texas-based firm that operates six student housing communities.
“If we talk to a new owner of an existing property or a new development, their goal is a long-term, stable solution for their property,” Aclin says. “They always want to go to the university first to see if they want to lease the beds.”
Even after a master lease expires, students often still see the community as part of the university, creating the opportunity for sustained occupancy, Aclin says.
Master leases also can benefit student housing communities because they bring in the university as a partner, says Stacey Lecocke, Vice President of Operations for Dallas-based Phoenix Property Co., which owns and manages four student communities. It’s beneficial that universities have more “teeth” and are better able to step in and intervene if any student behavioral issues arise.
“It’s an extra layer of supervision,” Lecocke says. “When we’re not in a master lease, you’re dealing with the student and the guarantor, typically the parent. The university cares greatly about student activities. They’re willing to step in with any guidance.”
From a financial standpoint, master leases save apartment managers the cost of marketing the leased apartments. However, Lecocke notes that those savings can be offset by the loss of ancillary fees such as application or redecoration fees.
Campus Connection
For schools such as Missouri S&T, master leases provide a flexible off-campus solution for housing-supply shortages caused by renovations or demand spikes caused by fluctuating enrollment.
Depending on supply and demand in the local market, schools may be able to get a discount on the market rent rate by leasing in bulk. Depending on the lease agreement, the apartment community may be responsible for maintenance and upkeep so university staff doesn’t need to worry about those responsibilities or costs (although they may be passed along in the rent).
There are many situations where a master lease doesn’t make sense for the university. Master leases are less common in markets where the student housing apartments compete with dorm housing, for instance. And while schools may not be responsible for maintenance, they don’t have latitude to modify or change facilities as they would their own facilities, notes Jim Murphy, Assistant Vice Chancellor for Student Affairs at Missouri S&T.
That lack of flexibility is one reason why many schools are reluctant to sign long-term master leases, Murphy says. “If you can’t fill the building, then you still have an obligation to the owner,” he says. “Whereas, if you own your own building, you could convert the space to administrative overflow, conference facilities or graduate-student office space.”
For a university, the financial viability of a master lease depends on factors such as interest rates, indebtedness, construction costs and enrollment forecasts. They’re most attractive in a volatile enrollment situation, when a university may not be able to predict its housing needs, Murphy says. If a school is in growth mode or if interest rates are low, however, the school may find more value in building and controlling its own space.
Impact on University Credit Rating
Campus Apartments, a Philadelphia-based developer and manager with a portfolio of 26,000 student beds, is one of a handful of national development firms that specializes in structuring public-private partnerships (P3s) with colleges and universities. The firm typically seeks to creatively structure partnerships to avoid a master lease requirement, says Dan Bernstein, Campus Apartments’ Executive Vice President and Chief Investment Officer.
Even when master leases are attractive from an operational perspective, some universities will shy away from the master lease option due to its potential to negatively impact the institution’s credit rating, Bernstein says. “The rating agencies look at the master lease obligation as a liability for the dollar amount owed. Whether the P3 involves a student community that is being developed through a 501(c)3 structure or on our balance sheet, there are other ways to obtain an appropriate mitigation of risk without going the master lease route. We don’t rule it out, but we often explore other alternatives first.”
Still, a master lease may be appropriate in certain deals that carry higher risk profiles, Bernstein says. “In these cases, a master lease may be the only way to mitigate risk and get the developer or bondholders comfortable with the economic viability of a transaction.”
Campus Apartments sometimes encounters the need for a master lease in transactions that involve faculty and staff housing, Bernstein says. “Some universities, particularly in high-rent areas, are interested in providing faculty/staff housing to support their recruitment and retention efforts. However, these floor plans are often laid out to accommodate families and may not translate well to undergraduate housing should the demand from faculty and staff not be there. In these instances, the university may need to help us better understand the demand for that type of apartment or stand behind it in the form of a master lease.”
Working With Schools
Even if they’re looking for a master lease, student housing managers will be better received if they don’t go to the university and ask for their business right away, Aclin says. Instead, she says, “We introduce ourselves and say, ‘We’re right around the corner. Let us know if you need anything.’ ”
Collegiate Management Group’s communities put on events with student life or athletic groups, and the universities naturally gravitate to the community. That approach worked well at Collegiate Station, where Missouri S&T named the apartment community a preferred vendor. “They came to visit us several years before they started the project,” Murphy says. “They wanted to see what interest we had in partnering with them.”
The school signed a referral agreement with the community in which the school would send students with special needs to them that couldn’t be accommodated in dorm housing (such as transfer or grad students looking for an apartment-style home, or students with dietary restrictions who needed a facility with food preparation). That agreement blossomed into a master lease when Missouri S&T undertook its renovation program.
Evaluating the Agreement
To evaluate whether a master lease makes sense for their communities, student housing managers should weigh the financial implications, says Lecocke, who previously worked in student housing management for Greystar and JPI, where about 5 percent of the student housing portfolios used master leases.
“As long as financially it makes sense—where the university is taking a large number of beds and is willing to be involved in the community—we’ll enter into a master lease,” Lecocke says. If the school asks for a large reduction in rent or tries to negotiate a nine-month contract, however, the agreement may not always work. “That’s where the owners need to evaluate the deal based on the number of beds and the supply and demand for the market.”
Managers must weigh the pros and cons of pledging exclusivity to the university, particularly if a community is already fully occupied, Bernstein adds. “You also want to ensure that the master lease is a long enough tenure that you don’t have to completely ramp up your marketing again.”
In working with universities on a new development, the key is to remain flexible and understand the university’s ultimate goal, Bernstein says. Some schools may feel comfortable with a master lease as a necessary step to provide security for the developer or bondholders, while others may wish to avoid master leases at all costs.
At Franklin and Marshall College, for instance, Campus Apartments completed a deal on university land and signed a long-term ground lease to build 400 beds and 50,000 square feet of retail. The college’s main goal was to keep the development off of their credit rating. Campus Apartments was able to ensure its risk was mitigated, and the community has been 100 percent leased.
Finally, Bernstein cautions, it’s extremely important for investors looking to develop or acquire a student community to understand the institution’s future enrollment trends and make certain the community is a good fit for the market from a long-term perspective. “You’ll want to make sure that it can stand the test of time,” he says, “and will be marketable after the master lease comes to an end.”
Jeffrey Lee is NAA’s Manager of Communications. He can be reached at jeffreylee@naahq.org or call 703/797-0647.
Managing a Master Lease
Collegiate Station was an attractive partner for the Missouri University of Science and Technology because its programs, staff and facilities complemented the school’s goals, says Jim Murphy, Missouri S&T’s Assistant Vice Chancellor for Student Affairs.
The community has an in-house manager who lives on the premises and a handful of student residents that work in much the same way as resident assistants work in campus residence halls. Further, Collegiate Station was willing to work with Missouri S&T to incorporate the school’s policies in the community, Murphy says.
“They were very willing to talk about how our staff and theirs could mate in program objectives, and we did some shared training between their residence staff and ours,” he says. “The policies that govern behavior on campus govern the apartments we lease from them as well.”
Another beneficial factor in the relationship was that Collegiate Station was able to offer separate buildings within the community as part of the school’s master lease. Having distinct blocks of apartments gives the university more control over the units, Murphy says.
To create such positive relationships with the local university, Collegiate Management Group’s Vice President and Division Director Christina Aclin recommends student housing managers understand the university’s goals.
“The university wants to make sure students are safe and that they have the same quality of living that that would on campus,” Aclin says. Collegiate Management Group always has its resident assistants and community assistants train with the university’s student staff so that everyone is on the same page for conflict resolution or emergency procedures.
Communities also can allow universities to offer resident life events in their community just as they would on campus, or they can put on their own programming to fit within the university’s goals. If an admissions office wants higher graduation rates, for instance, Aclin says a community can bring academic advisors for an event to help juniors and seniors figure out what they need to graduate.
Most universities want to be very involved in resident life programming and participate in the training of a community’s staff, says Stacey Lecocke, Vice President of Operations for Phoenix Property Co. “The university wants to hear that we create an environment for learning, that we manage the community tightly, and that our community results in fewer parent calls to the university,” she says.
Operation Negotiation
Beyond resident life programming, student housing providers should be sure to negotiate operational details as part of the master lease agreement.
Campus Apartments Chief Investment Officer and Executive Vice President Dan Bernstein says that if a developer has equity in the community and is signing a master lease, the developer will typically control the budget and operation of the community. If the company is acting as a fee developer, on the other hand, the university will typically have more control. “It’s about making the university feel comfortable that we have day-to-day operational control, but it’s their students and they have a hand in the overall quality of the operations,” Bernstein says.
Managers must understand how the university wants the community to approach maintenance requests, Aclin says. Can the community’s technicians enter a student room? Can the community make physical changes to a unit?
Also be sure to negotiate who is responsible for damage and who handles turns, Lecocke recommends. Some communities may just sign a lease with the university, which will handle any damages and assign a damage charge to the student. In other cases, the students may sign a lease with the community so they are bound to the community’s rules and responsible to the community for damages.
Rent rates are another important factor in master lease negotiations. Universities typically receive one monthly rent bill for all of the units it leases, and the rate the university charges its students is not necessarily the same. Whether the university pays full market rent or a discounted rate typically depends on how strong apartment demand is in the local market, Lecocke says.
Depending on the agreement, rents can grow each year of the master lease on a set schedule, stay the same each year, or vary each year based on market conditions. Universities want to keep rent rates affordable for students, Aclin notes, so student housing managers should ensure their expenses are aligned with that goal.
By partnering with universities to help them achieve their goals, student housing managers can ensure they build strong relationships that form the basis for future business. –J.L.