Student Housing DSTs

Student housing rents beds, not apartments, and each bed is a separate lease with its own guarantor

The filed 10-K of a non-traded REIT that owned a student housing property describes the model in two sentences: the property was typically leased by the bed with fixed terms on an individual lease basis, often with parent guaranties, and substantially all leases coincided with the university's academic year, generally starting in August and ending in July (filing).

Leasing by the bed means a four-bedroom unit carries four leases. One roommate leaving does not put the others in default, and a parent guaranty stands behind each student's rent. It also means far more leases to sign, collect and enforce than in a conventional apartment of the same size.

Another filed REIT 10-K adds that student housing leases typically do not allow the owner to pass real estate taxes and other taxes through to residents (filing). A tax reassessment after a sale comes out of property income rather than being shared with tenants.

The whole building is re-leased in one short season, so the operator's leasing campaign sets the year

That second filing is direct about the calendar risk: student housing is subject to an annual leasing cycle, a short lease-up period and seasonal cash flows; each property must be entirely re-leased to residents each year; and properties are typically leased during a limited leasing season, making each one highly dependent on its property manager's marketing and leasing effort (filing).

A conventional apartment loses perhaps some of its residents in a year and re-lets units one at a time. A student property can open the fall semester with a large share of its beds unsigned if the spring and summer campaign falls short, and the shortfall lasts the whole academic year.

The filing also lists significant resident turnover as students graduate or leave the university, which brings make-ready costs on a compressed schedule between the July move-out and the August move-in.

Demand rests on one university's enrollment and housing rules, which the trust cannot influence

A student property has one source of demand. The filed 10-K says that if a university reduces admissions or requires a class of students, such as freshmen, to live on campus, demand for beds may fall and occupancy may decline; that universities may build new or updated housing with advantages in affordability and proximity to campus; and that rising tuition may push students toward cheaper alternatives (filing).

The same filing points to pandemics, when students could be kept out of housing for much of a school year, and to required campus crime reports that can generate negative publicity for nearby properties. Each of these is a university-level event, outside anything the trust or its master tenant controls.

Proximity to campus therefore matters more than finishes. A building across the street from the main quad competes differently from one that relies on a shuttle, and a sponsor's market study should show enrollment trend, on-campus bed supply and any announced university housing projects.

A DST can hold student housing only through a master lease, and the master tenant absorbs the leasing risk first

Rev. Rul. 2004-86 prohibits the trustee from renegotiating the lease or entering into leases with tenants other than the original tenant, except on that tenant's bankruptcy or insolvency. A trust that signed hundreds of individual bed leases every year would be conducting a business, so the trust leases the whole property to a single master tenant that does the bed-by-bed leasing.

The master tenant owes the trust a fixed rent whether the fall lease-up succeeds or not, and the trust distributes all available cash less reserves quarterly under the ruling. If occupancy stays low, the master tenant's guaranty and reserves decide whether that rent keeps coming; distributions can be reduced or suspended, and none is assured. The structure is explained at DST master lease risk.

The trustee may make only minor non-structural modifications, so a property that falls behind newer competitors cannot be repositioned inside the trust. On the tax side, section 168 recovers residential rental property over 27.5 years where 80% or more of gross rental income comes from dwelling units, and excludes units in an establishment where more than half the units are used on a transient basis; confirm the classification in the sponsor's tax disclosure with your CPA.

Before you subscribe, test the university, the lease-up history and the operator

Ask the sponsor for pre-leasing percentages for the coming academic year at the same date in prior years, the share of beds with parent guaranties, enrollment history at the university, and any university plans for new on-campus beds. Ask who the operator is, how many seasons it has leased this property, and what the master lease guaranty and reserve cover. The wider list is at the DST offering due diligence checklist.

If you are selling student housing you own, the seller-side questions are at 1031 exchange for student housing. For a broader view of how sectors with operating risk fit inside the ruling, see choosing DST asset classes and the conventional apartment version at multifamily DSTs.