Conversion of Hotel to Apartments - who did it?

Question

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!

Rob K. · Answer

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.

Christopher Telles · Answer

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.

Jay Hinrichs · Answer

@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

Tiger M. · Answer

@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.

Serge S. · Answer

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

Brian Burke · Answer

@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.

Steve Shafer · Answer

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

Cody Barrett · Answer

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!

Steve Shafer · Answer

@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.

Joel Owens · Answer

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.

Conversion of Hotel to Apartments - who did it?

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