By Andrew McIntyre

Law360 (September 14, 2020, 12:33 PM EDT) -- Colleges and universities have scrambled to determine how best to use their student housing space in a situation that is still in flux as institutions cautiously monitor COVID-19 infection rates, and lawyers say the pandemic continues to have a profound and wide-ranging impact on the student housing sector.

For one, colleges and universities could run into trouble with their development partners as they refund dorm fees to students, and schools also could face liability if a student gets sick.

Developers of off-campus properties, meanwhile, are seeing a surge in demand as students are fleeing crowded on-campus dorms, experts say.

Here, Law360 looks at three ways the COVID-19 pandemic is continuing to shape the student housing sector.

Universities Could Run Into Trouble With Development Partners

Student housing developers often enter into ground leases with universities to build housing on campus, which is a way for universities to bring in a partner that has development expertise while not selling the precious land, but the pandemic is now straining some of those relationships, lawyers say.

That relationship was often all well and good before the pandemic, but now with universities offering refunds to students who opt not to come to dorms, that could complicate those relationships, since the developers had banked on having revenue from full or nearly full spaces.  

But just which party is on the hook depends on how the agreement is written. Force majeure could help one party get out of its obligation.

"From a transactional lawyer's perspective, [force majeure disputes] are dependent on the language of the contract. We work through these pre-litigation. As [disputes come up] between partners ... it really depends on the language in the contract," said Grace Winters, a partner at Manatt Phelps & Phillips LLP.

The key questions, Winters said, include whether a pandemic provides force majeure protection, whether a government shutdown applies and whether supply-chain disruption allows a party to get out of an obligation. There, again, which party is responsible depends on how the agreements are written.  

Igor Pleskov, an associate at Saul Ewing Arnstein & Lehr LLP, expects disputes to arise this fall as more schools offer refunds.

And there will be a lot of "creative lawyering" to help answer these questions, Winters said.

Off-Campus Developers Have Benefited

While developers of on-campus properties have been working with schools to de-densify crowded dorms as schools scramble to figure out how to provide safe housing, off-campus developers have seen an uptick in demand as students seek to get away from on-campus dorms.

Eric Greenfield, a shareholder at Polsinelli, said he's seen lease rental rates in the 90th percentile for such properties.

"Leasing has been incredibly high. Because of that, banks are lending. We've been busy closing deals that were put on pause," Greenfield said, speaking of purchases of land his clients have been making. "Universities have had to relax their live-in requirements, which has helped a lot of the private sector. The rub of it is a lot of these … have been leased up."

"We have way more kids in the buildings now than I think anyone … would have guessed we would have had," Greenfield added.

Greenfield said that he has recently closed or is in the process of closing more than a dozen land purchase deals for clients in North America and Europe.

Part of the allure of off-campus housing is that such developers have in many cases been able to more quickly move to alter their properties to fit the bill for what students are seeking amid the pandemic.

Greenfield said he's seeing off-campus properties being altered to include touchless keypads and touchless elevators. And air duct systems being replaced with newer versions that circulate air more frequently.

And layouts are changing too, in attempts to give more students their own bathroom and even their own kitchen, and many off-campus developers have been able to more quickly move to make changes there, or at least offer less-dense alternatives to school dorms.

"Many of our clients are actually leased up a lot better than they were last year … at this time," said Jesse Nichols, a principal at Polsinelli, speaking about developers of off-campus properties.

Universities Face Various Other Challenges

While schools face potential problems regarding their partnerships with developers, the list of issues for schools doesn't end there.

For one, if a student were to get sick, the school could face major liability if the student successfully made the case that the school should have done more amid the pandemic to create a safe living environment, experts say.

"We do anticipate there are going to be liability issues as folks get sick," Pleskov said. "We're keeping an eye on that. … Liability is going to be the biggest issue."

Of course, the futures for so many schools depend on revenue from student housing, and no one knows what the new normal will be following the pandemic.

Refunding a semester's worth of housing fees is a major hit, but the bigger question is what the longer-term financial impact will be.

"It's a major challenge for higher education institutions. Student housing revenue is a big part of how they make their budgets work," Winters said. "I think the university and higher ed space is seeing a major disruption here. We're going to see closures of schools that aren't able to make their cash flow and budgets work without student housing and big sporting events. … We'll also see schools that thrive in this new environment."

And when the dust settles, it may be that some schools find they have to monetize some of their student housing space by selling it, likely at reduced prices. Experts say many real estate companies that specialize in purchasing so-called distressed assets are waiting on the sidelines for opportunities.

"I think that there will be great opportunity in distress shortly," Nichols said. "There were some fundamentals that were struggling pre-COVID[-19]. COVID[-19] has accelerated that trend. With [few] international students coming in, there's going to be distress."

--Editing by Alyssa Miller.

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