Motel to Apartment Conversion

[Daniel S.]

My wife and I are located on the north Oregon Coast (think Astoria/Seaside), and are relatively new to real estate investing. We have done a condo remodel from studs to rental, and are currently doing a live-in remodel on our main house w/ ADU, but are very interested in scaling up in the next few years to do this full time. We are specifically looking to take on 8+ unit opportunities. Given the massive shortage of housing in our area, we want to help expand housing by specializing in adaptive reuse projects. Generally speaking, I think this will be a great niche for the coming decades, and we really like the idea of providing value to the community through our investments.

With this in mind, we came across a motel/inn in the area that seems like the perfect opportunity for an apartment conversion.  It is a 25-unit property with all units either 1BD or 2BD and full size kitchens in each.  The cost to "convert" is  therefore quite low when compared to a typical conversion deal, therefore most of the reno $ will be spent on exterior remodel (façade, roof, security fence, etc.) and more superficial upgrades.  The business itself currently runs weekly/monthly rentals (and many tenants have been there for years).  We recently did a walkthrough with the current owner, who was very open with us about the business and what she's looking for.

While all that sounds great, here are the main hurdles I'm seeing:

1- Asking price ($3M):  We met with the seller and she is looking to list the property at $3M this spring.  We do have a good connection with her and may be able to do some partial seller financing, but the price seems a bit steep for what we'd be getting.  This price includes $50K for a vacant building (used to be restaurant, I would like to convert it to storage units and potentially lease front portion for retail (i.e. coffee shop)) and $200K a few vacant acres behind the motel.  Some of this land can be developed, but the majority is for septic (the whole city is on septic unfortunately).

2- Financing: While the property is older (1950) and definitely needs upgrades, is there enough value-add opportunity to entice a private or hard money lender? It currently rents pretty well (5% vacancy) and the NOI is around $270K-$300K. I think we can reasonably push that over $340K (with 7% both cap rate and CoC), but I'm not sure if the juice is worth the squeeze with a 20% down payment of over $600K. I know hard money is typically avoided for these type of deals, but I was wondering if the cost to renovate is near the cash the Owner is looking for (say, for a down payment on her new house), if it would make sense to do hard money loan (e.g. $300K) and carry rest of the note with the Owner? Then refinance once it's converted to an apartment.

We've spoken with the city, and we may be able to use the current zoning or at most will apply for conditional use.  Given the incentive to provide housing, I don't see this as a major issue.  One area we have left to explore is whether or not Oregon has any grant programs to incentivize these kinds of conversions to provide longer term housing.  I have reached out to several local conventional lenders who have all said a) this hotel is a great candidate for this project but b) their bank may not take on the project (not a hard 'no', more of a "we'd be more interested once its stable apartment rentals").

Anyway, I know that's a lot of information but I'm curious to know if anyone here has done a deal like this, and if there's something major we are missing?  Though we are willing to walk away from the deal, I'd hate to give up without even putting together an offer just to see what is possible.  I have a lot more information I can provide if needed, just let me know!

[Zach Smith]

Hi Daniel. I am a private/hard money lender through our family business Cetan Funds in Eugene. We have our own private equity fund and do a lot of business with multi-family rehabs, developments and hospitality. We only lend in Oregon. Our background prior to starting the fund was in commercial lending and commercial development. I can tell you we'd be very interested, and it sounds like you may be working with some preconceptions on loan structure. I just did a multi-family deal at 95% loan-to-cost because there was enough up-side and we had solid trust with the developers. Would love to connect and talk more. I'll send you a message. 

[Dustin Le]

Hey neighbor, I'm from Oregon too (Portland metro)! I love your mission and intention of repurposing buildings into housing to fill the housing shortage. I don't have experience with a deal like this, but I'd love to connect with you and chat about your experience. I may also be able to introduce you to my brother who has experience with multifamily and apartment syndications. Send me a message if you're open to it! 

[Dan Heuschele]

Have you looked into the use of bridge financing? Typically bridge loans have better terms than HML, but at that price point it will not be significantly better than HML. Bridge financing terms improve with size of loan.

Good luck

[Bob Willis]

@Daniel S. - any update on where this went?

[Zach Smith]

Hi Bob, I do have an update!
Dan (the original poster) and I connected and went through the property together. After he passed on it, I and my business partner got the property under contract. We are still in DD phase, but have already received conditional use approval from the city to official convert to multifamily use. We'll be negotiating some necessary repairs and then looking to close in September. We're excited about this project. Should hopefully be a great investment for us and our investors once stabilized. 

[Bob Willis]

Quote from @Zach Smith:

Hi Bob, I do have an update!
Dan (the original poster) and I connected and went through the property together. After he passed on it, I and my business partner got the property under contract. We are still in DD phase, but have already received conditional use approval from the city to official convert to multifamily use. We'll be negotiating some necessary repairs and then looking to close in September. We're excited about this project. Should hopefully be a great investment for us and our investors once stabilized. 

Any reasons you can share around why you pursued this opportunity while Dan dropped?

[Zach Smith]

I should clarify: Dan decided not to place an offer because at that time he had found a different investment opportunity that was a better fit for him. He said we could offer on it instead. After we got it under contract, we stayed connected with Dan and we all plan to work together on the project. Dan will be helping us out with some extra boots on the ground (he lives very close-by). 

[Amin Akhmadi]

@Daniel S.

Shitcan the deal. 120 grand a unit for a pre renovation place? You kidding?

Tell the seller that the price is too high and you can't get financing.

If they offer seller financing, get the financials of the place, and you'll see that debt would NOT cover the payments.

You may squeeze a 0% interest out of them this way, but it still too much, and would be problem when financing renovation and upon exit.

Good luck

[Eamon Keating]

Zach Smith can you post updates about the property as the timeline progresses. I think this is a great idea (conversion). I live currently in Vancouver, Washington but regularly visit the Oregon Coast. It might be fun to drive by sometime and see the progress. My only other suggestion or question would be any thought to AirBNB/Short Term Rental a few units? 

[Quentin Jivery]

Quote from @Zach Smith:

Hi Daniel. I am a private/hard money lender through our family business Cetan Funds in Eugene. We have our own private equity fund and do a lot of business with multi-family rehabs, developments and hospitality. We only lend in Oregon. Our background prior to starting the fund was in commercial lending and commercial development. I can tell you we'd be very interested, and it sounds like you may be working with some preconceptions on loan structure. I just did a multi-family deal at 95% loan-to-cost because there was enough up-side and we had solid trust with the developers. Would love to connect and talk more. I'll send you a message. 

I’m curious to know if any of you have had success in single family rehab and Refis in oregon and if so curious where. Thank you! 

[Zach Smith]

UPDATE:

Well what’s the saying? Don’t count your chickens before the eggs hatch?

Minutes before closing we got an email from the county saying they could not approve the multifamily use based on the existing septic capacity. Gearhart is all septic. No city sewer available. The city gave us the impression they had county authorization when they approved the multifamily use. Good thing we checked because that was not true.

We found a solution though. We pulled in the state’s best wastewater system engineer to help us get authorization from the county. Just had to pull together the data showing the historic use as apartments and that the current system was adequate, document it and we’re off. We m got positive feedback from both the county and state dept. of environmental quality. We just needed about a month to follow their process and we’d be good to go.

We asked the seller for an extension to get that done. She refused. Her rationale does not make sense. She’s not selling it. She’s not running it apartments. Not as a true motel either. I guess she wants to continue being a slumlord with a non-conforming motel/apartment complex that needs a new roof and tons of other work. Oh well. We stick with what we can control. And we can’t control a completely irrational seller. We’ll ping her every now and then to see if she changes her mind. We’ll see. I’ll post another update if that ever happens.

[Zach Smith]

@Eamon Keating

Great question! We did entertain short term rental of the two new units we were putting in, but the city was not to keen on that idea as they are so desperate for long term housing.

[Zach Smith]

@Amin Akhmadi

You were dead wrong about this deal. It was a great deal. While it did not come together for other reasons out of our control (described above), your basic assumptions were wrong. Appraisal was in. Over $600k equity on day 1, as-is. We projected 25% cash on cash return to us and our partners as complete. And trust me, we know what we’re doing.

I recommend you only chime in on deals you understand if you’re going to jump to the conclusion that something is a “shitcan” deal and tell a potential buyer to pass on an opportunity. Keep an open mind. Would be a damn shame if you found an opportunity like this one and didn’t look twice at it because you had a closed mind and couldn’t see the upside.

[AJ Wong]

Quote from @Zach Smith:

UPDATE:

Well what’s the saying? Don’t count your chickens before the eggs hatch?

Minutes before closing we got an email from the county saying they could not approve the multifamily use based on the existing septic capacity. Gearhart is all septic. No city sewer available. The city gave us the impression they had county authorization when they approved the multifamily use. Good thing we checked because that was not true.

We found a solution though. We pulled in the state’s best wastewater system engineer to help us get authorization from the county. Just had to pull together the data showing the historic use as apartments and that the current system was adequate, document it and we’re off. We m got positive feedback from both the county and state dept. of environmental quality. We just needed about a month to follow their process and we’d be good to go.

We asked the seller for an extension to get that done. She refused. Her rationale does not make sense. She’s not selling it. She’s not running it apartments. Not as a true motel either. I guess she wants to continue being a slumlord with a non-conforming motel/apartment complex that needs a new roof and tons of other work. Oh well. We stick with what we can control. And we can’t control a completely irrational seller. We’ll ping her every now and then to see if she changes her mind. We’ll see. I’ll post another update if that ever happens.

 Zach this forum is exactly what Bigger Pockets is all about. Like minded entrepreneurs supporting and working with the information exchanged. Great job would love to see this property for reference and inspiration sometime. Great job! Happy Hunting.