Hotel to Multifamily Conversion?

Question

This seems unintuitive to convert a hotel to a multifamily, but from my underwriting it seems for the property I just got into contract (in the mid west) a multifamily conversion seems more lucrative than operation as a hotel. I am a multifamily investor, not in the hotel space, so I would like some feedback:

• -Typically hotel is considered "higher and best use" than multifamily, and maybe if I operated it as such it could be, but this property is poorly managed, and has no flag on it, and because I am a multifamily investor I look at it as a multifamily play and it is looking like a slam dunk IF the city approves the re-zoning. I have no interest in operating it as a hotel.
• -Will require re-zoning, talked to the city and a land use consultant seems like it is do-able in a 45-90 day period (kept contingencies on during this process with optional 30 day extension)
• -100+ rooms, Each room is 470sq ft approximately(so this will be studio or 1bed apartments), with some suites bigger 
• -Not sure what to do with conference hall and restaurant
• -Will be hiring a consultant to do the re-zoning (since I'm an out of state investor + this is my first time doing rezoning). Consultant has worked with Marriott before but has not done a hotel to multifamily re-zoning. 
•

Questions

Has anyone financed such a deal, even with low leverage? I assume I have to go hard money, but even such it seems like it would be a niche of hard money lenders who would lend on a deal like this.

I would like some input on how to shut down a hotel - do you refund those who have booked? What if there's a restaurant that has a lease/contract? Who do I need to hire to make sure this goes per plan?

Anything else I should be aware of?

Garrett Hawk · Answer

@Sri L. Hello! This is a business model we specialize in. I see this as a very viable opportunity to help solve the affordable housing crisis that we are approaching.

This is our basic buying criteria:

1. We purchase these in secondary/tertiary markets in the midwest. We look for markets where affordable housing is in need and the city is seeking outside investors for these conversions.

2. We purchase independent hotels that are currently run as "extended stay" hotels that are rented out weekly. We keep the extended stay function of the property active to keep income flowing in. If we can maintain 70% occupancy, then we are still cash flow positive with nice profits.

3. We finance these projects through seller financing on 3 year terms or through our local banks. Our typical leverage is 75-80%.

3. Our targeted rents are $625/month for a studio and $800/month for a 1 bedroom. That comes with all utilities including cable and internet and is furnished.

4. With these rents, we need to purchase the property at less than $30,000/door.

5. We also remodel all the rooms with water proof rigid core flooring, install kitchenettes with 110 electric cooktops, range hoods, and a mini fridge. (If they want a full size fridge, we up charge.) We GC our own projects and can finish our remodels for $2k/room.

6. Refinance options are available. We have not refinanced our projects yet, because we plan on bringing our units to a large non-recourse lender.

Let me know if I can help with any other questions!

Garrett Hawk · Answer

@Blake Dailey You are correct. You need to know your market and if these units will meet tenant criteria. Our tenants are lower income and are just looking for affordable housing. Since we include all utilities, it is a drawing factor for our units.

Shiv Patel · Answer

So we're in the hotel space. As others have mentioned, there are definitely some outdated assets more than 40 years old that should be torn down or converted, but it really comes down to the price you're willing to pay. I can give you a real life example, there was a 160 room hotel, 60 years old, but good quality construction. A buyer I know was acquiring it for $30,000 a room. Plus on top of this the renovation would be extensive, mainly due to the fact there are no kitchens in any unit. This means you need to run all new electrical wiring with higher wattage to accommodate the stove tops. In addition to this, he had to run separate plumbing lines for each room. For those of you that are contractors, you are aware this is a daunting task. In the end, it ended up costing an additional $25k per room. All in he was at $55k a door, so $8.8m. His occupancy hovered around 70% with a monthly rent of $700 (utilities included). Apartment occupancy in the market was running 95%+, but the reality is when you're only dealing with studios, not everyone wants to live there. So with the rent, he was doing a 40% NOI margin (remember utilities are covered by him). His full year NOI was around $375k. So around a 4.2% cap deal for him. The NOI as a hotel was around $400k. Therefore he added no value. A pretty bad investment.

This is a great strategy, but you have to have the ability to acquire assets at a very low basis in markets where they can hit a strong occupancy and rent. The reality of the above situation is that even if he achieved a 95% occupancy, he'd still be at a yield on cost of 5.8%. Not really an attractive deal for him. At that point, its better to just let these properties continuing operating as hotels.

Sri L. · Answer

I did close on a conversion deal late 2020. After months in escrow I was able to close with approved permits for the conversion, so work started day 1 after close. Demolition has begun and we are planning to renovate 15 units every month. More details on my FB page (link in my profile) on financing etc.

Greg Dickerson · Answer

This can be a great strategy design on the price, location type and condition of the property. Hotel is not always highest and best use especially right now. You have a few options, you can operate month to month or weekly as is if the property is in good condition. You renovate and create a nicer monthly rental property or operate as extended stay / STR for business travelers.

As for the dining hall and restaurant you can convert to amenities like a gym, common area, event space, co-working space etc.

You do not want to use hard money for something like this as it would be very punitive and expensive. Your best options are local commercial banks or private lenders. The banks will want to see a lot of equity, reserves and very strong financials.

Shutting down is straight forward and will depend on the reservation policy. Usually the Hotel can cancel anytime with notice and refund any deposits if any. Probably not an issue right now or in the near future.

You will need to honor the lease with the restaurant tenant so you need to review the lease to determine cancelation options although they may be more than happy to walk from it right now as they can't possible be doing any business.

Brandon Wells · Answer

I have seen this done 1st hand.  It is a big undertaking and requires you to wear a lot of hats throughout the transition but in the end it can produce some amazing results.

Sri L. · Answer

@Ryan Daigle My background is in multifamily BRRR and fix and flip. It is risky but it’s worth exploring if I can mitigate the largest risk while I’m in the DD/contingency period. I’m pretty confident this is do-able based on talking with the city. I’m lining up local boots on the ground, land use consultants and financing.

@Josh Stein - cool, glad to know. Any idea how they managed to wrap up hotel operations?

@Don Konipol - very cool, I love hearing about your experience. Good point about it not always being “highest and best use” especially the older ones. And appraisals being “off”. The key now is to line up the re-zoning and the financing. Will keep this thread updated as things progress.

Bryan Feil · Answer

Great! I am in Fresno, not too far away! Look forward to hearing more

Bryan Feil · Answer

How did it end up going @Sri L.? Did you pull the trigger?

Blake Dailey · Answer

I looked at a 150 unit in Austin that was a hotel conversion. One thing to consider is the size of a hotel room. Usually hotel guests come in, sleep, shower and leave so the units are much smaller. This place had very small units so potentially less attractive compared to normal studio or 1 bedroom units that are 600+ squarefeet in that market. If the units do not conform to the market that would concern me.

Hotel to Multifamily Conversion?

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