The rise of privately-owned student accommodation developments in recent years raises a number of practical points for both developers and operators of such projects. The documents governing the development and ongoing management of the project must be carefully negotiated. In this article we summarise some of the key points for consideration on a project of this nature.
1. Location and planning
In order to maximise the chances of achieving a fully-let development, the location of the proposed development site is key, and will need to be in relatively close proximity to an appropriate educational establishment. Given that some of the most reputable universities are located in cities which are already highly populated and, in certain cases, subject to strict development restrictions due to the nature of the surrounding buildings (Oxford and Cambridge to name the most obvious), the local planning authority will take a keen interest in any proposed scheme and a developer will need to show that there is a real need for further accommodation in such a location (which will need to outweigh the concerns that will inevitably be raised by interested parties), and that the proposed design of the development is sympathetic to its surroundings.
2. VAT Treatment
A developer of student accommodation will want to ensure that the development is zero-rated for VAT purposes, as this enables the developer to recover VAT that it incurs both on the costs of acquiring the relevant property, and on carrying out the development. In order to obtain a zero-rating, the development will need to be classified as a "dwelling" by HMRC or, if this is not achievable, will need to satisfy the "relevant residential purpose" test applied by HMRC, which is more onerous than the "dwellings" test.
The more traditional style of student accommodation, which comprised private bedrooms but with bathrooms and kitchens being shared by a number of occupants, did not satisfy the "dwellings" test, because this style of living arrangement did not constitute "self-contained living accommodation", as required by the VAT legislation. However, as design has evolved and student accommodation has moved towards self-contained studios which have their own facilities, HMRC has similarly evolved, and has ruled that accommodation in this more modern design can qualify as dwellings for VAT purposes.
As such, it is essential to ensure that, where possible, the design for the development in question brings the project within the realms of a "dwelling" and that appropriate advice is sought on the VAT treatment of the development from the commencement of the project.
3. Provisions for development and management of the property
The agreement governing the development (and potentially the funding of the development) will need to include detailed provisions around both the timing of the delivery of the completed project, to ensure that it is delivered in time for the targeted academic year in which occupation is to commence, and you may want to consider financial penalties, such as delayed delivery costs, if that timing isn't achieved by the development manager and the building contractor. The delayed delivery costs should also extend to the costs that might arise in having to find alternative accommodation for the students if the development isn't completed in time for them to take occupation before their studies begin.
Similarly, detailed drafting will be needed to govern the ongoing management of the property with regards to lettings and achieving the target rents which are needed in order for the development to be profitable. This might include an obligation on the property manager to operate a marketing suite at the property, and to be sensible in setting rents that mean that the property is fully occupied, rather than by setting the highest market rent that could conceivably be charged for each unit.
4. Adoption of Code for Operating Student Accommodation
In order to attract students to the development, you may wish to consider adopting the National Code of Standards for Larger Developments for Student Accommodation. This is a voluntary code monitored by the National Code Committee of Management, which enables property owners, managers and their tenants to agree a set of undertakings about how they wish to transact with each other. There are different codes to govern developments which are controlled by providers which are educational establishments, and those which are not, but both cover matters such as the marketing of the property prior to letting, the obligations of the property manager during the tenancies and the process for dealing with disputes which may arise. From a developer and operator's point of view, adoption of the code should enhance the business reputation of those that choose to comply with it, and should make the development a more attractive prospect to potential tenants.