Conversion of Hotel to Apartments - who did it?

17 Replies

I took a week off to satisfy Patrisha's desire to remodel our house (see the pictures here). But, a deal came across my desk. This is a 50+ room hospitality asset. It can be bought at rather low per door basis, even after immediate CapEx. The idea would be to re-zone and convert it to apartments.

The numbers can work on this. However, this needs to be a cash purchase (which we can do0, but it needs to be quick, and there's no way to make this this contingent on a feasibility study. The dynamics of re-zoning and re-purposing scare the crap out of me...

Has anyone done this? How do municipalities view this? Do the make it difficult...?

Thanks for your input!

Ben,

I know of two that went in the other direction - apartment building to a "hotel" (executive long-term suites) ... this was entirely due to their location and a research campus which blossomed next door.

There are always the motels which transgress into week-to-week rooming houses, but I'm sure you are not that bored.

I'm also curious about the concept.  I presume you would be collapsing 3-4 hotel rooms into single units?  Unless the place is already set-up as suites.

@Roy N.

I am pretty skeptical of this one based on macro dynamics. But, these are set up as a blend of one-bed suites and efficiency suites. All rooms have kitchens. The conversion process, from what I understand right now, would not be construction-intensive - more of a management. Utilities are, however, master-metered, and I am not sure if there is an cost-effective solution. This is a mid-nineties structure. I can see $250k CapEx just from the pics. The demographics are really what concerns me, as well as dealing with locals trying to facilitate conversion...

Lots of reasons to look the other way, but...

Originally posted by @Ben Leybovich :

I took a week off to satisfy Patrisha's desire to remodel our house (see the pictures here). But, a deal came across my desk. This is a 50+ room hospitality asset. It can be bought at rather low per door basis, even after immediate CapEx. The idea would be to re-zone and convert it to apartments.

The numbers can work on this. However, this needs to be a cash purchase (which we can do0, but it needs to be quick, and there's no way to make this this contingent on a feasibility study. The dynamics of re-zoning and re-purposing scare the crap out of me...

Has anyone done this? How do municipalities view this? Do the make it difficult...?

Thanks for your input!

 I do not have experience in this type of conversion, so I'll reserve comment on whether it is or is not a good investment opportunity. However, I have had to make some quick decisions on whether to take down properties that would be subject to rezoning where time was extremely limited for any type of due diligence.

You might head over to the planning department of the city/county that has jurisdiction over the property (you can't normally do this over the phone) and ask the planning director for his input as to whether it is likely a rezoning for this property would be approved. Of course you request should be peppered with the message that you understand they wouldn't be giving you an approval rather only providing guidance to you as to whether it would be feasible for them to issue a rezoning on the property. 

You'll get a dance around the edges answer of yes, no, it depends. If yes or it depends then ask the question what might be required of the property owner to get that approval. Then sit back and let them talk.

In about an hours worth of time you're likely to know a lot more than you do now about the prospects of getting a zoning change for the property, and that information can then help guide your decision. 

Ben,

If the electrical is like what I have seen in most hotels, there is no cost effective way to sub-meter/isolate individual rooms.  There is usually trunk lines from the main entrance to 1, or a handful, of breaker panels on each floor where each panel would service several rooms.

You might be able to pull-off an executive suites, mid-long term furnished rental, with little zoning issues ... perhaps under the existing zoning for hospitality.  Around here you would likely still be stuck with the hospitality tax, but that would be a question for the local planning/zoning team.  Of course, the bigger question would be does the location support that nature of a business?

@Ben Leybovich

  go to planning department or read on line... KNow the exact zoning designator  IE R 1  RS M3 what ever it is.

then look that up in the zoning codes.. It will give you uses that are approved out right ( nothing needs to be done at planning) it will give you uses for a minor use permit ( basically over the counter) and uses that would require a major use permit and public hearings etc.  And uses that are never allowed in the zone.

Once you have those.. talk with an independent land planner in your area they will have the pulse of the planning commish and can help you with your application and if your project is feasible.

AS for timing... If your tying to build one single home on Tiburon Island in SF bay it can take 20 years plus and never get it done.

If your in Parts of Texas it happens over night.

Every jurisdiction is radically different.. so to ask this question on this forum you will not get any concrete answers unless you Divulge the exact location.. and there happens to be some developers who work that area and have local knowledge.

However if public hearings are required those have statutory notification requirements etc so they can only go so fast .

Good luck with it... I suspect 40 studio type units if they are not in a resort area or college area are going to be pretty low end .. your version of a Multi PIG

I have a 12 unit WW II era motor-court "motel" that I operate as apartments.

I agree that it is critical to understand the municipality and retain a local architect type who knows the municipality personnel and the requirements.

In my case, a change in zoning was out of the question as municipalities tend not to want to set precedent in changing zoning. A local ordinance permitted "non-transient" housing though for my area even with the motel zoning and that is the way I went. So it is still zoned as a motel, but legal to operate as apartments. Understanding how your intended use may fit into the local municipal code is key.

I did have to redo electric so I got the units metered separately and got the post office to approve a mailbox for separate mail delivery for the tenants. I even have the old motel manager unit rented out as a separate unit.

@Ben Leybovich interesting project. Often times older hotels in declining cities are better served as multifamily. This is the case here. Let me shed some more light on this project as I am looking at it with Ben.

This is a 1987 strong C complex and located in a military city. One trick pony military city with limited other employment and infrastructure. The city and the base are in decline and never recovered from the recession or sequestration. The base will not be closed but there is no reason to believe a major uptick is likely. Perhaps if Trump is elected President but I digress. 

The complex was originally built as a residential rental/multifamily. All units have full real kitchens and a small bedroom, average is 600 sq feet. It has had over $400k in capex over the last 36 months including all new furniture, appliances, televisions and unit remodels. It is operating as a hotel and vacancy and payroll are just too much to operate at the low 15-20% occupancy. It is owned by an out of state absentee owner that ran into health issues and cannot and has not managed the property. It has fabulous reviews on all the travel sites. Utilities are master metered with wall hotel style ACs. 

As a multifamily, I figure average rent would be $595-$650 inclusive of utilities. Utilities average $140 per door all in every month. With RUBS in place it would be $495 base rent plus billback. VRBO or furnished executive rental to tourists and military personal would be $45-$59 per night depending on season. Don't have enough info on how strong that demand is at the moment.

This is an offmarket distressed sale. Short sale, previous owner purchased for $1.4M in 2012. We should be able to close at $640k-$680k cash, no financing.

@Brandon Hall

@elizabethcolegrove I believe you have some experience with this type of asset class?

@Brian Burke I know hospitality is not your favorite but what do you think here? 

@Joel Owens any of your multifamily clients jumping into hospitality conversions?

@Jay Hinrichs   good advice. From what I have gathered so far, this is similar @Rob K. where the city will be fine and legal to operate as apartments. I should be able to get a soft confirmation in advance of closing. Issue is that we are not ready or willing to run a hotel at this point if push comes to shove. I don't see how to keep occupancy as a hotel high enough to have any NOI. Current owner has been bleeding cash and yes it can be run better but a job is not what I am looking for. The city simply has an overabundance of hotels and the population decline and on base housing has decimated both the hospitality and residential rental business.

I think there might be something here, no risk no reward.

@Serge S. , I worked the RE biz for almost 20 years and built up quite a good net worth, and almost lost it all on a hospitality property during the modern-day Great Depression.  Thankfully the collapse was also the best thing to ever happen to my business model and I recovered like I never would have imagined. 

So it's fair to say that I have a (perhaps unfair) bias against the asset class. Bearing that in mind, I don't blame you for looking at this as a Multifamily conversion.  In the market this property is located in I think that the highest and best use for that property is either Multifamily or vacant land. Which one may be a coin toss. This could double your money rather quickly or result in a 90% loss (more if you feed it to hang on too long if it's moving against you).

Another consideration is that the class D apartments in that market seem to be 100% vacant. Class C is hit and miss. Class B is littered with either foreclosures or owners that have such high basis that they will likely be foreclosures in the future which will allow them to reset their rents and pull all of the remaining class C tenants to the cheaper class B units.  So the question is, how will you measure up and will you be able to effectively compete with an inferior product in an oversupplied market?

I don't say all of this to dog the deal, there may be a real opportunity here.  But it will come with not only elevated risk but unusual risk, some of which may be difficult to mitigate. As an alternative, you could go to Vegas and put $680K on black.  Similar odds but least you would either win or lose quickly and not stress over it for long.  And you would get a huge adrenaline high for about five minutes.

On the humorous side, I can't wait to hear what @Ben Leybovich says about pigs, Waldo's, and sub-$30K houses after landlording a converted motel in a one-horse town with an all-bills-paid tenant base!  I vote that he resident-manages it so we can have more great stories to read on the BP blog.

Originally posted by :@Brian Burke As an alternative, you could go to Vegas and put $680K on black.  Similar odds but least you would either win or lose quickly and not stress over it for long.  And you would get a huge adrenaline high for about five minutes.

On the humorous side, I can't wait to hear what @Ben Leybovich says about pigs, Waldo's, and sub-$30K houses after landlording a converted motel in a one-horse town with an all-bills-paid tenant base!  I vote that he resident-manages it so we can have more great stories to read on the BP blog.

Hahaha thats great. I think I might just go the Vegas route:) All or nothing, thats how I like to roll in multifamily.

Just pretend you are in Las Vegas for 5 years. I have worked on these or something similar. If the current zoning does not include the conversion use its likely to take years to get a final decision on it. If you care to park your money for a while without knowing if you will ever have a chance to grow it you can try it but better to find an empty city lot already zoned for what you want and go all new construction. 

I see and know of allot of buildings standing with what today would cost over $600K of materials alone being offered to around $100K and that does not include the labor it would cost to simply get the skeleton of these buildings up. 

I might try it if  the location involved was where I had established relationships with city officials and already involved with the development or redevelopment department(s). 

I might also try it if the building's existing use would work out for me financially by renovating it and then allow me to take time to try to get the conversion approved but, to risk a total crap shoot? I don't know. Maybe I am just getting too old for such visions and prefer to take the tried and proven route now.

Maybe you have one of those dynamic personalities that can sell ice to Eskimos.

In all fairness I will also say that these types of projects get approved all around the country all the time and there are those that actually specialize in this sort of conversion. I will even admit I am one of those that is actually looking for one such opportunity. 

One of your biggest costs will be the individual plumbing and electrical in every single unit so if you found a hotel that already had kitchenettes and separate utilities set up I would maybe proceed aggressively to get an approval and purchase such a property with the thought in mind that if I could not get the approval for the conversion I would make sure the building could still be made to make money for me and/or my associates.

@Brian Burke

Just cause you loose money, doesn't mean we will. @Serge S. and I, unlike some people, know what the hell we are doing...

Besides, this Waldo isn't just a pig. No - this is a pig farm with extensive genetic modification in place. There's mama pigs, papa pigs, and little piglets with 2 tails, 3 eyes, and 5 legs running around. And Serge and I could be in charge of all that...wow!

You sure you don't want to jump in? There's free internet...! And flat screens in every room!

I can't believe you, of all people, don't see the gem in all this...

Serge I haven't had any clients going after this type of product.

Right now I am doing a lot of retail properties. Hasn't been much yield in MF the last few years. All the brokers or sellers are trying to sell 5% annual rental increases as the norm into the future to justify their pricing.

With multifamily inevitably people get into the smaller deals 1 to 2 million and find something wrong and the deal falls apart. I would rather list and sell a larger MF for 10,20 million.

I know James Wise on here had a similar project in his area he was selling in marketplace but so far no biters from what I can see. The conversion wouldn't scare me as much if the county or city was on board it is all the other things for the area Brian has mentioned.

I saw a similar thing with rents happen in Whitfield county in GA. Dalton is called the "carpet capital of the world" and was hit hard by the last downturn as construction housing industry halted. There was a mass exodus for the town and those who stayed the landlords cannibalized each other when occupancy went from 90% to 70% in a matter of months. The rents dropped and the owners had such a high mortgage into the property they were going into the red each month.

Someone would come in for cash and buy a short sale or foreclosure and then offer really low rent to take away renters from other buildings and then leave them with the trash tenants. The town with construction coming back eventually recovered YEARS later. For the locals to grind it out to eventually bare fruit it might have been worth it to portfolio average their holdings concentrated there. 

These types of properties just seem really risky to me from a time and return perspective. Serge I would assume you are more interested today in equity growth then cash flow. Cash flow of course is important but once you hit certain cash you do not need the money so the view on the investment changes somewhat. A town like this sounds like a cash flow play only if you get it turned around. I do not see strong rent growth or cap compression in those depressed towns for the future.  

If you have 1 million per say cash  do you want to plop it down onto one project or do you want to go after smaller development plays such as retail outparcels etc.??

Some banks I have talked to are bullish on the single tenant user outparcel developments. They are not as much on the retail strip centers especially if they are mom and pop type lease up environments.

So instead of building houses essentially you are doing development for credit single user tenants and making the spread. Have an all in at a 9 cap or better cost and sell at a 6.5 etc.      

Any type of new development or turn around type projects the speed is the name of the game. Large projects tend to take longer which gives more risk to the cycle environment. You can have the best plans ever with  a property and the market changes on you. I have seen larger projects where a developer started a shopping center and 3 years in the market changed. They treaded water and finally now that the market is back they can exit with a profit after working on the deal for 7 to 8 years.

This versus building single tenant stuff on a smaller scale. Not making millions per deal but smaller chunks and spreading out risk. The market changes you can hold for cash flow until the next cycle or get out without being too encumbered with larger development properties. This is just what I saw from the last cycle. People had some success and made millions and then became overextended in value add deals to turn around or new development.

I am all about risk aversion and staying fluid in the marketplace so you can exit quickly with little to no damage and hold cash flow for wherever the market is moving. 

Forgot to mention with these apartment type deals on a conversion in these types of towns many who work in factories or other jobs you will need to collect the rent weekly or it will be spent on booze and other things. 60 to 65% costs of expected gross annually standard due to extra collection costs, turnover, bookkeeping etc.    

@Ben Leybovich @Serge S.   I noticed a mention of being mainly military town. May want to keep an eye on the 40,000 military reduction being discussed in DC in case your base is eroded further. 

@Ben Leybovich Just came across this thread—did the project ever go through? I'm evaluating a similar project and trying to wrap my head around the potential conversions and associated costs/headaches therein.

Steven, I am going to assume this deal did not go through.  lol. Great read for me on how detailed the pros get though, thanks guys! 

@Cody Barrett ha, good call, and same here—definitely sets a high bar for true experience and expertise.

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