Some of the cautiousness creeping into the market is also coming from operations. Most student housing companies were able to get an incremental average rent increase headed into the new school year, but it was spotty across geographies. Some markets absorbed rent increases without missing a beat, but other markets necessitated incentives or even price concessions. While there’s a management philosophy alive in the market that executives will never know what kind of rent growth they can achieve without asking for it, many apartment executives conceded that rents were pushed too far in certain markets, and their companies paid for it in terms of velocity and occupancy rates.
“At the end of the day, it’s better to get the renewal and get the certainty than the two to three percent rent growth,” said Miles Orth, executive vice president and COO for Campus Apartments. “We pushed too much and have tried to back off."
Despite tactics to secure deposits, initial rent and parental guarantees early in the leasing cycle, executives were concerned about the combination of higher education costs and a weak economy contributing to more students being unable to afford their rents or just bailing on their leases altogether, leaving the companies out both money and tenants.
Julie Bonnin, COO of Asset Campus Housing, added she has seen an uptick in bad debt, which is causing the company to struggle a bit with collections. “We also saw a higher no-show factor, so we’re chasing a lot of rent,” she said.
With even incremental rent increases benefitting companies’ top lines, executives said they remained focused on controlling costs to boost profitability. When asked what specific line items were the biggest concerns, David J. Adelman, president and CEO of Campus Apartments, said, “Taxes. Every municipality is a jigsaw puzzle. It’s really frustrating. Followed by utilities.”
Eddie Tantoco, director at WTP Advisors and CFO of Carmil Energy, reiterated much of that sentiment in a breakout session on taxes, utilities and insurance. “The more you learn about property taxes, the more you feel like an idiot,” he said. “It’s all about valuation. And what’s value? That can be a nebulous word.”
However, beyond the quest for transparency and consistency in property tax valuations, industry executives were also beginning to prepare for some potentially large-scale changes to the tax code, which could cause many private student housing owners to begin to pay significantly more in income, payroll and health care taxes annually starting in 2013.
The nation’s spiraling debt and deficit levels are unsustainable against the backdrop of a weaker-than-expected economic recovery. As the nation inches nearer to a so-called “fiscal cliff,” a number of key tax provisions and extenders set to either expire or kick in at the end of the year could be enough to send the nation’s balance sheet over the edge and the economy into a backslide. To prevent such a disaster, Congress is looking to enact comprehensive tax reform to not only simplify the code but also close supposed loopholes and generate much-needed revenue.
Beyond the possibility of the mortgage interest deduction and charitable deductions disappearing to some extent or another, tax reform could result in an overhaul of the individual tax code. Because most multifamily companies, including student housing firms, are structured as “flow-through” entities (LLCs, S corporations, etc.), where owners pay company taxes through the individual tax code, a reconfiguration could result in a dramatic increase in their taxes. Higher taxes mean fewer available dollars for reinvestment in student housing businesses.
NMHC continues to advocate on behalf of the student housing and multifamily industries as discussions continue on tax reform. More specifically, NMHC aims to ensure that tax reform encompasses both the individual and corporate sides of the code so that changes remain in balance and do not unfairly disadvantage real estate companies. In addition, NMHC hopes to retain current tax treatment of carried interest and allow for full deductibility of business interest as well as maintain current estate tax rules and protect the Low-Income Housing Tax Credit (LIHTC). For more information, please check out NMHC Vice President of Tax Matthew Berger’s presentation.