Shuttered Hotels, Motels Find New Life

Fresh ideas include tax incentives for converting vacant properties into much-needed housing, notes columnist Lew Sichelman.

Lew Sichelman

Developers interested in turning old space into apartments and other uses must be licking their chops over the news that Sears intends to sell 40 to 50 of its shuttered stores. But they shouldn’t overlook the hundreds of small hotels and motels that were forced to close during the pandemic and will never reopen.

The Counselors of Real Estate, an invitation-only group of commercial real estate professionals, has named adaptive reuse as one of its Top 10 Issues for 2021 and beyond because of the promise it holds in reconnecting communities, preventing blight and promoting diversity, equity and inclusionary policies.

“The trend from the preservation and enhancement of single, mostly historic assets in the core of our urban areas to a broader neighborhood approach is going to be accelerated in a post-pandemic environment as housing affordability pressures and remote work models disrupt the pre-COVID ‘experiential’ urban city model,” the National Association of Realtors affiliate said.

And noting the high level of vacancies in the hotel/motel sector, the 1.4 million member NAR itself is calling for a tax credit for developers who convert empty facilities into new housing units. The politically powerful group is the nation’s largest trade association.

But several housing related organizations, especially those which deal with affordable rentals, are ahead of that curve. And more are sure to follow, if those which participated in a series of webinars sponsored by the National Housing Conference (NHC) have anything to do with it.

New Opportunities 

“The pandemic has created an opportunity for many government agencies and private businesses to try new ideas to address the national shortage of affordable housing,” they stressed during one 90-minute session.

One such opportunity is the conversion of hotel and motel rooms into deeply affordable housing units, many for severely challenged populations. While many states and localities have leased space in these structures to provide shelter for the homeless, several groups, using a combination of federal, state and local resources, have purchased closed hotels and motels and turned them into permanent housing.

If these local housing agencies with scarce resources can do it, so can equity-rich private developers, especially those interested in building a portfolio of rental units that house the nation’s less fortunate.

As NHC President & CEO David Dworkin said in kicking off the online seminars, “This country will never be a great nation with people living on the street…We have to address (the needs of) more people who can’t afford to rent on their own.”

Too many people “get up in the morning, exit their cars, wash up in someone’s public bathroom and go to work everyday,” he said. “That’s just unacceptable.”

Converting shuttered motels and hotels is a plan that works, Dworkin added. “It’s efficient, effective and incredibly successful. It’s a short-term strategy that can be a long-term solution.”

But the process “must be local,” Dworkin went on. “It must start at the local level.”

State Actions

It certainly has worked in California, where a state-run program called HomeKey has enabled the purchase of a number of hotels and motels that are being converted into interim or permanent rental units. According to Sec. Lourdes Castro Ramirez of the California Business, Consumer Services and Housing Agency, the state has made funds available in 51 different jurisdictions.

To date, the state has awarded money for 94 projects totaling 6,000 units, enough to house 8,300 people. But that’s only a drop in the proverbial bucket in California, where Ramirez said local providers served nearly 250,000 homeless people last year. About 64 percent of them are individuals, 34 percent are women with children and 10 percent are unaccompanied youth, the state official said.

Perhaps even more striking, on any given night in January, nearly 162,000 Californians were homeless.

“It works, it really does work,” said Ramirez said of HomeKey, a program the state official believes could become a national model. But it wouldn’t have been successful with the support of state politicians, health care officials and emergency first responders, among others, she added. “We took a cross-collaborative approach. Even philanthropic groups pitched in.”

In March 2020, California embarked on its first conversion project, Project RoomKey, which  provided a “life saving option” for some 42,000 homeless people most at risk of COVID 19. Even as that program continues to provide interim housing—and building on its success—the state created HomeKey four months later.

HomeKey has responded to the pandemic by helping local jurisdictions purchase hotels, motels and other buildings and turn them into temporary and permanent housing. Within six months—and using federal and state funds as well as gifts and grants from private entities—awards were made to 51 jurisdictions covering 120 unique sites.

Those awards created some 6,000 units at an average cost of just under $130,000 —“under budget and on time,” Ramirez pointed out. And now, Gov. Gavin Newsom has proposed budgeting $12.4 billion to address homelessness, including $3.5 billion for HomeKey.

Two projects in San Diego, both former extended stay hotels, illustrate the program’s success. After reviewing 29 possible sites, the San Diego Housing Commission settled on a circa-1913 Marriott Residence Inn on the famed Hotel Circle in the central part of the city and another Residence Inn in Kearny Mesa in the Northwest.

The commission purchased the properties in November and began move-in the next month. Now, said President & CEO Richard Gentry, the buildings are 97 percent occupied. The Hotel Circle property, purchased for $67 million, has 190 units plus two units for staff; the Kearny Mesa building, purchased for $39.5 million, has 142 units plus two for staff.

Money from the state wasn’t the only financing used to buy the sites, “but it was the catalyst,” Gentry said. The properties “were not inexpensive,” he added, but they were much less expensive than purchasing an apartment community. And “they will be in use for years to come.” 

In Oregon, meanwhile, the state is attacking its homeless problem with Project Turnkey, which has a goal of adding 10,000 units. To date, 17 projects have been approved for a total of 800 units. The program has been a collaborative effort from the get-go, said Megan Loab of the Oregon Community Foundation, who made a point of saying real estate experts were retained “to make sure we would be good stewards.”

And in largely rural Vermont, the Champlain Community Trust has purchased six small motels and is about to buy two more. The first was a 59-unit property that still operates as a motel; the second, a 20-unit building now occupied by people who had been living on their own in the woods for the last decade, said the Trust’s CEO, Michael Monte.

The land trust also has converted a 113-room hotel into 68 apartments for the homeless and a 28-room suite hotel into a shelter for women suffering from domestic violence. And two more hotels are on the drawing board, including a 99-room suite property that will be turned into 78 apartment.

“They’re doors. That’s how we looked at these,” Monte said. “They were all willing sellers. Now sellers are finding us.”

During the second webinar, which covered financing hotel and motel conversions, speakers continued to talk about their successes. For example, Matt Vruggink of Ojala Holdings worked with Fort Worth Housing Solutions to turn a rundown 121-room hotel into 119 efficiency units.

Ojala is a private developer which describes itself as an opportunistic real estate that firm dedicated to identifying overlooked niche opportunities. FWHS is a government agency with a  portfolio of 40 properties containing almost 6,700 affordable units that are offered at reduced rents to eligible individuals.

Vruggink said his company looked at 150 properties “before zeroing in” on what was a Home Towne extended stay hotel but is what’s now known as Casa de Esperanza. The city used a Cares Act grant to purchase the property, and partnered with Ojala to make the extensive renovations, including new appliances and furniture, that were necessary.

The place opened 120 days after the work started and is now fully occupied.  “We didn’t depend on the government to get it done,” Vruggink said.

A leader in conversion efforts, the Community for Supportive Housing (CSH), is looking to create similar partnerships, according to Mercedes Brown, who is the manager of the group’s hotels to housing initiative.                                           

While CSH mostly provides research, programs, papers, data, profiles, cases and evaluations to “help local communities maximize their assets,”  Brown said her national organization also has the capacity to take on modest projects and wants to work with “serious, experienced developers that are also culturally responsive.”

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