310 | Hotels Convert to Housing: Federal COVID-19-relief funds fuel transactions

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Ridgemont Hospitality in Oakland, California, in October sold its 22-unit motel, The Inn at Temescal, to the city which is working with a local consortium of non-profit organizations developing affordable housing for vulnerable populations. The Inn at Temescal is being converted into apartments for military veterans at risk of homelessness. It was one of two hotels the city acquired for $17.5 million as part of its affordable housing mission.

Housing developers pay top dollar for certain kinds of lodging assets good for conversion, says Arizona hotel broker

Dhruv Patel, president of Ridgemont Hospitality, shared a bittersweet moment with his parents, Pravin and Sima Patel, when their family business sold the first motel that Pravin had built from the ground up more than 30 years ago. But they rest assured knowing it was the right decision because the 22-room property is being converted into affordable housing for military veterans at risk of homelessness.

The transaction is among hundreds taking place across the U.S. as state and local governments work with non-profit agencies to create affordable housing solutions for vulnerable populations amid the COVID-19 pandemic.

Even before the coronavirus pandemic, organizations that serve low-income or homeless populations were buying and converting motels and hotels into stop-gap or permanent housing.

The spread of COVID-19 dramatically accelerated the trend as the federal Coronavirus Aid, Relief and Economic Security Act of 2020 earmarked $5 billion for state and local governments to provide temporary shelter for vulnerable populations during the pandemic.

Many states are taking it farther and parlaying public funds to acquire lodging assets and turn them into permanent affordable housing options for those at risk of homelessness.

For owners thinking of off-loading an underperforming hotel to such a cause, it’s important to realize that not every property qualifies as a long-term residence.

HOTELS TO HOUSING: People living in a homeless encampment on the sidewalk near the Los Angeles City Hall are among the targets of California’s Project Homekey, which is working to develop affordable housing solutions for homeless and at-risk populations amid the coronavirus pandemic. Episode 310 of Lodging Leaders podcast explores the trend of housing developers acquiring hotels and motels to convert to apartments for underserved populations. (Photo: Shutterstock/Robert V. Schwemmer)

Bittersweet Goodbye

Several years ago, Ridgemont Hospitality renovated the Inn at Temescal into a boutique motel to attract younger travelers to downtown Oakland.

Ridgemont Hospitality founders Pravin and Sima Patel built the hotel in the mid-1980s and called it the Regency Inn. It was their first ground-up development, said their son, Dhruv Patel, who is now president of the family business.

As was typical for many Indian American hoteliers at the time, the Patels lived in a two-bedroom manager’s unit at the motel. Dhruv and his sister grew up at the property. They also were part of the operating team. “I check in my first guest when I was 7,” Dhruv Patel said.

As Dhruv grew so did the family business and its investment strategy. Eventually, Ridgemont Hospitality outgrew the motel. As evidence of that, Ridgemont in 2019 opened a new eight-story concrete-and-steel build Hampton Inn next to Oakland’s convention center.

WATCH: OPENING DAY: Ridgemont Hospitality in October 2019 celebrated the opening of its eight-story, 121-unit Hampton Inn Oakland Downtown-City Center.

The hotel development is also significant because Bay Area is a high-barrier-to-entry market and the Hampton Inn was the first hotel to open in downtown Oakland in nearly 20 years.

“So from a 21-unit, two-story exterior corridor to just being down the street next to the convention center with 121 units, I think that really speaks to the growth that we’ve had and how far we’ve come,” said Dhruv Patel.

As Ridgemont was preparing to open the Hampton Inn, “the opportunity came to work with the state and the City of Oakland to look at acquiring the property. And it just all kind of made sense for us,” he said.

In October, the Patel family business said a bittersweet goodbye to the property when Ridgemont Hospitality sold it to Operation Dignity and Danco Group, non-profits that provide housing and jobs for people at risk of homelessness. The Oakland property is transitioning into apartments for disadvantaged military veterans.

The deal is part of Project Homekey, a California program that invests millions of dollars of public funds into housing solutions for low-income and homeless populations.

Project Homekey was in place before the coronavirus pandemic struck, but the public health crisis and $750 million in federal pandemic-relief funds sped up the project. California Gov. Gavin Newsome’s administration kicked in another $100 million and marshalled local governments to fill in the funding gaps. All to provide shelter for society’s most vulnerable during the COVID-19 outbreak.

Perfect Timing

Transitioning the Inn at Temescal into affordable housing was initially Dhruv’s idea. He got the ball rolling by going to city leaders. “I had actually went to them and said, ‘You know, this is a perfect project for some sort of transitional housing.’

“It’s right in the middle of a major transit hub. Across the street, you’ve got the BART station that’s the main transit station that connects Berkeley to Oakland to San Francisco. You’re about a 10-minute train ride from any of those major metros. So in terms of geography and being in a job center, you’re very close. There’s some great restaurants and things up and down the street, which would provide great jobs for people trying to get back into the workforce.

“As we got further in the conversation, we quickly found out that there was a nonprofit developer that wanted to partner with the city to do housing for veterans and that’s a concept close to our hearts.

“My parents will talk about all the time about the opportunity that this country has given our family. And we feel that people that serve this country and protect the American Dream certainly we should prioritize. So when we heard it was veterans, we were all in.”

The City of Oakland announced the deal in October, noting the state awarded the city $17.5 million to acquire the Inn at Temescal and another hotel, which has 82 rooms.

The Inn at Temescal was profitable before the pandemic struck and, thanks to the recent renovation it was in good condition. For those reasons, and the fact that Ridgemont was not seeking to get rich off the sale, Patel believes the hotel was an attractive deal. “They caught us at the perfect time,” he said. “Some owners are very unrealistic or are not quite serious about selling.”

BREAKING GROUND: An early drawing of the Hampton Inn Oakland Downtown-City Center was presented to the Oakland in 2016 as the Bay Area city deliberated on easing up on its strict hotel development stance. Ridgemont Hospitality opened the hotel in fall 2019. It is the first hotel to open in downtown Oakland in nearly 20 years.

What Developers Want

Ryan Bodine of NewGen Advisory in Phoenix, Arizona, is a hotel broker who is seeing an increase in transactions between owners of lodging assets and housing developers since the pandemic struck.

Like many cities in the U.S., Phoenix and other metro areas in Arizona were faced with affordable housing issues before the coronavirus pandemic. Over the past year, the state and local jurisdictions have been spending public funds to come up with solutions to protect the most vulnerable populations.

Phoenix in 2020 reportedly saw its homeless population grow by more than 2,300 or 18 percent over the year before. In response, the city has dedicated nearly $50 million toward creating housing solutions.

Other cities in Arizona such as Flagstaff and Tucson also earmarked federal pandemic relief money for housing.

Bodine has been in hotel sales for about seven years. Many of his clients these days are mostly private-housing developers in search of hotels they can quickly transition to multifamily facilities.

As a broker, Bodine said, he’s “been experiencing something new. Since March, I’ve been working with a wide range of buyers who have been focusing on positioning hotels through different uses, ranging from multifamily to affordable housing to homeless shelters.

“What we realized was that hotels are ideal for these conversions because they have a lot of characteristics that conversion buyers are looking for.”

AFFORDABLE CONVERSION: Vivo Investment Group, which specializes in converting hotels into affordable micro-apartments, plans to redevelop this Ramada Inn in Mesa, Arizona. Ryan Bodine of NewGen Advisory, a hotel broker in Phoenix, said transient hotels with large guest rooms such as Ramada Inns as well as extended-stay assets are attractive options for multifamily investors.

As with the Inn at Temescal, a property’s location is a selling point. Another attribute Bodine sees as a positive is a large footprint with a common area for community space. And most of all, he said, “Price per key is relatively low to compare to what was available pre-COVID.

Value Pricing

“Where hotels are struggling, these conversion buyers offer an opportunity for owners to sell their building at a price that’s higher than if they tried to sell it as a hotel. And when you couple the buyer’s interest in buying at a low price per key with the seller’s interest to sell at a value higher than what their business is currently worth, you start to see a lot of activity and that’s what we’re really experiencing today.”

While for-profit investors that were buying pre-pandemic continue to look for conversion opportunities during the crisis, Bodine is seeing more non-profit and public agencies seeking to convert lodging assets to housing as millions of dollars in federal and state funds are earmarked for such programs.

But multifamily developers continue to be the most active acquirer of hotels these days.

The investment thesis behind each deal involves cost-efficiency.

“For the apartment buyers specifically, the value add for them is if they can find the right property at the right price, they’ll be able to do all of the renovation necessary to change the hotel into an apartment building and still have a low enough basis where they’re able to own a stabilize asset at well below the cost,” Bodine said.

Bodine has also worked with real estate developers who want to work with non-profit agencies to transition a hotel or motel into affordable housing for at-risk residents. These real estate buyers actually prefer to acquire a hotel rather than an established apartment building.

“There are different levels of actors in affordable housing,” Bodine said. “For instance, a group will come in and they’ll buy a hotel and they’ll do a really bare-bones conversion.

“The requirement for the conversion buyer isn’t as heavy of a lift as if you were working with an apartment buyer. An apartment buyer is going to require a full-on renovation, full kitchen, full on utilities. But for the affordable housing [project], they may have some top burners, a microwave oven, a mini fridge. Because of the scaled-down version, the lift isn’t as heavy; you won’t need to put in the extra capital expenditures to run all of these appliances because it’s a lot more basic.”

Once the hotel-to-housing plan is completed, the new owners will seek out nonprofit agencies dedicated to placing families in affordable housing.

Types of Assets

Though the housing crisis is huge in many U.S. communities, not every hotel is a candidate for a conversion. Real estate buyers that want to convert hotels into housing seek certain types of buildings.

“The lowest hanging fruit are the extended stay hotels in general,” Bodine said, noting the first generation Residence Inns are popular candidates. “These are garden-style hotels that looked like an apartment complex. They have different room types and sizes, and will have kitchenettes in each room.

“Construction wise, they’re essentially turnkey. Buyers typically are paying more for these types because the cost to convert isn’t nearly as heavy.”

The second type of property Bodine sees conversion buyers are favoring these days are two-story exterior-corridor hotels with swimming pools and a restaurant on site. Think Ramada Inns. “These types of buildings, the rooms are slightly larger than a hotel room, so they’ll be able to rent them out as mini studios or micro apartments,” Bodine said.

The full-restaurant kitchen is a strong selling point because that signals the building’s infrastructure can handle the heavy utility demands of multifamily housing. Robust electrical power, HVAC systems and fire-retardant sprinkler systems are usually in place. As for using the actual restaurant space, Bodine has seen developers convert it into community rooms or storage areas for residents.

The third tier of lodging assets Bodine is brokering to housing developers are 150-room or larger limited-service hotels. “These hotels have standard-size hotel rooms without a commercial kitchen on site,” he said. “This type of building will have the heaviest lift because more electrical power will be required, sprinkler systems will have to be installed throughout and rooms will have to be consolidated so the room sizes can be equal in size with the apartments that they’ll essentially be competing against.”

If a hotel owner has a property that fits the various developer criteria another step to consider is whether the municipality has zoned the site for residential projects. If the property is in a planned community, it’s smart to check whether it has covenants, conditions and restrictions or CC&Rs regarding land use.

“Zoning codes typically dictate how many resident residential units are allowed per acre.

It’s what we call zoning density,” Bodine said. “For instance, if a 200-room hotel sits on five acres and the zoning density for a multifamily conversion is only 20 units per acre, then the building is only allowed to have 100 total units.

“Knowing the amount of units allowed under the existing zoning is the very first step for the buyer to understand.”

Often, the developer can request and be granted a zoning waiver, but the process can take up to a year.

“If zoning is in alignment, the second major issue that needs to be addressed are the CC&Rs,” he said. “If there is a restriction in the CCNRs that will restrict the hotel from being turned into a residential use, the buyer will need plenty of time to work on getting an amendment passed by the [homeowners] association.

As we reported in January, the pace of hotel transactions dramatically slowed in 2020. But Bodine is seeing an active seller’s market of hotel and motel owners looking to unload an asset that either no longer fits their post-pandemic business strategy or is costing them money to hold on to.

For several reasons, transitioning lodging assets into housing might not be a negative outcome of the coronavirus crisis.

“Owners are selling now because they’re able to get a price that they may not be able to get if they were to sell it as a hotel for the next few years,” Bodine said.

“There’s obviously a lot of uncertainty on what our industry is going to look like and to what extent we’re going to recover. Having an offer at a strong price that’s typically more than what your hotel is worth now is a strong incentive.”

And, it’s financeable, he added, as lenders are underwriting housing deals while shelving underwriting on lodging transactions.

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