As millions and millions of people sheltered in place to try to curb the surge of COVID-19 cases across the country in 2020, the most vulnerable had nowhere to go. The pandemic forced homeless shelters to close their doors or reduce the number of people they could house each night. A health emergency was crashing head on with a housing crisis.
People who were homeless needed to move into housing as quickly as possible, not just for their own health but for the safety of others. They could not wait for new affordable housing to be built the traditional way, which usually takes years and years of overcoming red tape, assembling financing, and then construction itself.
With a faster solution needed, one answer was found in the country’s hotels and motels that were suddenly vacant as travel and tourism came to a standstill in 2020.
While adaptive reuse has long been a strategy to produce affordable housing while rehabbing older properties, it has become even more important in the past two years.
And, it isn’t just affordable housing developers digging into adaptive-reuse projects. Conversions have become a big deal in the overall multifamily market. A record number of more than 20,100 units in offices, hotels, and other buildings were on pace to become apartments in 2021, more than double the number of apartments converted the previous two years combined, reported RentCafe.
Vermont’s Quick Response
When the pandemic hit, nonprofit affordable housing providers and others in Vermont lobbied state officials to use a portion of their federal Coronavirus Relief Fund (CRF) dollars to acquire and rehabilitate hotels into permanent supportive housing for the state’s homeless population, which typically hovered around 1,100 but was quickly rising.
“The size of our problem of Vermonters experiencing homelessness was more than twice what we had ever measured before,” says Gus Seelig, executive director of the Vermont Housing & Conservation Board (VHCB). “At the same time, the pandemic brought to us a heightened real estate market.”
People were moving to the state, and these “COVID refugees” were buying homes at high prices, which had the effect of reducing the housing stock and making it more expensive.Responding to the advocacy efforts and the escalating needs in Vermont, the state Legislature provided nearly $33 million in relief funds to VHCB to allocate to nonprofits to create new housing opportunities. Vermont leaders later continued to support the work with resources from the American Rescue Plan Act.
VHCB has funded 12 projects, including eight involving motel conversions into permanent housing and four into shelters. In all, the projects will result in 456 apartments or beds. In addition, CRF was used to make key improvement at existing congregate shelters such as adding ventilation systems and bathrooms, buying mobile homes, and completing a tiny home demonstration.
“The opportunity to create housing really quickly made this strategy attractive,” Seelig says. “And, the costs quite frankly have been less expensive than what new construction would be by a lot, probably more than one-third, while also becoming operational much more quickly than new construction, which usually takes more than a year.”
Most important, the motel conversions gave people who were homeless a place to stay during the pandemic as well as Vermont’s long winter freezes. Did it save lives? “I’m sure it has,” Seelig says.
The Champlain Housing Trust (CHT), one of the early advocates for using CRF for affordable housing, had experience with motel conversions prior to the pandemic so its team knew the model could work.
With the help of the new funding, CHT purchased the Baymont Inn & Suites in Essex Junction and turned the 113 hotel rooms into Susan’s Place, a permanent housing development with 68 apartments for families and individuals who were formerly homeless.
The inn was still in operation, but the owner was looking to move on when CHT bought the property in mid-2020. The development was a good candidate to be turned into affordable housing because it had been built with an eye toward potentially becoming a senior housing community later on, so the rooms ranged from approximately 500- to 800-square-foot suites with kitchenettes. In some cases, CHT combined rooms to create even larger residential units. “We didn’t waste any space,” says CEO Michael Monte.
In addition, the property had several conference rooms that could be adapted into spaces for resident services. As a result, less rehab was needed compared with many other adaptive-reuse projects. However, CHT had to pay close attention to local zoning codes. The change in use meant reducing the density to 68 rental units. The team could have gone through the process of seeking an increase in the unit count but decided not to delay the project, according to Monte.
Residents, all who had been homeless, moved into the furnished apartments at Susan’s Place about six months after being purchased by CHT. They are supported by rental assistance, so they pay just 30% of their income. The development is named after longtime CHT social worker Susan Ainsworth-Daniels, who died in 2020. Residents have given the property name their own spin, calling it “Susan’s Palace.”
The development provides permanent housing, so there is no limit on how long residents can stay, but these apartments may be a first step for many. CHT operates another 2,400 apartments in the region, which can be offered to residents to provide mobility and other opportunities.
The approximately $12.8 million project was funded entirely by CRF and did not assume any debt. The absence of debt enables CHT to essentially put money into services, according to Monte.
Looking ahead, CHT has several more motel conversions on the horizon.
California’s Big Push
In the age of COVID-19, several other states also have been aggressive about flipping buildings into housing, perhaps none more than California. The state’s Homekey program was created as an opportunity for local public agencies to purchase and rehabilitate motels and other properties to increase their communities’ capacity to respond to the pandemic.
The program targets individuals and families who are experiencing homelessness or at risk of homelessness. By focusing on this population, the Homekey program serves those with heightened risk for severe illness from COVID-19.
Since its launch in June 2020, Homekey has helped bring about 6,000 units of housing online in under six months. The 94 projects involved not only motels but also a few office conversions as well as the creation of some modular or manufactured housing
developments. When all conversions are complete, about 90% of the total units created will be permanent housing. Approximately 580 units are intended to remain interim housing, reported the Department of Housing and Community Development, the state agency that administers the program.
Homekey was initially supported by $750 million in CRF, $50 million in state general funds, and $46 million in philanthropic money, totaling $846 million.
The program has worked to bring units online quickly. State leaders and their development partners were under an accelerated timeline because there was an initial requirement to spend the federal CRF dollars by Dec. 30, 2020. Although that date was later extended by Congress, the first group of Homekey projects managed to close on their financing.
Homekey funds created units at $129,254 on average. That does not include additional match funds that may have been required nor does it include additional rehab work that may have been funded by other sources. Still, it looks like the conversions will be less expensive than the cost of new construction, which can be $500,000 per unit or more.
California is doubling down on the strategy. Faced with a homeless population of 161,500, the most of any state, Gov. Gavin Newsom announced Homekey 2.0 in September 2021, committing $2.75 billion over the next two years, with the goal of creating an additional 14,000 units. Hotels will remain a target for conversion, with commercial property conversion and vacant site developments also expected to play a significant role. Eight percent of funding is set aside to support projects serving homeless youth or youth at risk of homelessness, and 5% of funding is set aside to support Tribal entities.
Homekey projects can be found across the state, but a big chunk has been in Los Angeles County, where roughly 63,700 people are experiencing homelessness on a given night, according to the 2020 point-in-time count.
The Housing Authority of the City of Los Angeles (HACLA) has been central to the efforts there, deploying approximately $120.5 million in first-round Homekey funds to 20 projects with more than 1,040 units. “Our role was to find the properties, run the due diligence, and do the acquisitions,” says Jenny Scanlin, chief development officer at HACLA.
Five properties were acquired for HACLA’s own portfolio, including three hotel or motel sites. The other 15 were acquired on behalf of the city of Los Angeles, which then used a competitive process to select affordable housing owners and operators with a track record of successfully addressing the needs of the targeted population to partner with on the properties. HACLA’s five sites offered permanent housing with the use of project-based vouchers to assist in subsidizing rent since the units were targeted to populations at or below 30% of the area median income. The city’s sites were all planned as interim housing for the first five years. Within those five years, the city will work with the providers on a conversion process, with a majority converting to permanent housing. Five are scheduled to convert in the next two years.
“The ability to have this state resource to cover this initial acquisition cost opened up a floodgate for us and allowed us access to an approach that was not part of the curriculum of how we build affordable housing,” Scanlin says.
Homekey has been a new tool to deliver housing quickly without using the usual affordable housing funding sources such as low-income housing tax credits (LIHTCs), which involve a rigorous competition and take extensive time.
As important as the state program has been, it often is still not enough on its own. The total costs to get through the acquisition stage has been about $244 million, with the balance coming from HACLA and the city, according to officials.
The housing authority recently completed the $21 million acquisition and conversion of a Best Western inn built in 2019 into the NoHo Apartments, featuring 65 studio and five one-bedroom apartments, says Tina Booth, HACLA’s director of asset management.
Only a few years old, the property was in good shape, but improvements were still required, including adding kitchenettes to each apartment and increasing the number of units accessible to people with special needs. The conversion costs came to about $56,000 per unit, with the project being ready for residents in just 11 months in the midst of a pandemic, says Booth.
HACLA is looking to do more Homekey projects and is applying for additional funding in round two.
For others exploring a building conversion, one takeaway is to dig into how code requirements may change with a shift in use. For example, apartments often have stricter standards for accessibility as well as fire and life-safety systems, Booth says.
Developers should also think hard about a property’s community space, especially in permanent supportive housing projects that will require offices and rooms to provide case management, classes, and other services.
A Home in Texas
In Texas, Fort Worth Housing Solutions (FWHS) and development partner Ojala Partners also used the hotel-to-permanent-housing strategy to create Casa de Esperanza, the largest permanent supportive housing community in North Texas with 119 units.
Local officials urged the team to look at hotels near transit corridors, which resulted in a list of more than 100 properties that were then screened for their proximity to transit, ability to house on-site services, and other factors. Ultimately, a 122-unit HomeTown Studios was selected and acquired with nearly $9.3 million in CARES Act funds from the city.
Unlike California’s formal Homekey program, the Fort Worth effort was a one-off to get people into housing quickly during the first year of the pandemic.
FWHS closed on the property Oct. 1, 2020, leaving roughly eight weeks for the Ojala team to renovate the development before the then-Dec. 31, 2020, deadline for utilizing the CARES Act funds.
The city helped by fast-tracking the zoning, permitting, and building inspections process and assisting with needed waivers.
Fortunately, units at the extended-stay hotel came with kitchenettes, making the conversion a little easier. However, the team still had about $1.5 million in renovation work to do, including repainting the apartments, replacing furniture and appliances, and creating needed community space. Several units on the main floor were demolished and turned into an office space and a clubhouse.
The team also provided financial assistance to residents who had been living at the hotel to help them relocate.
“The key to success is working proactively with all of your public and nonprofit partners,” says Daniel Smith, managing director at Ojala Partners, a Texas-based firm that specializes in developing Class A mixed-income housing. “It’s important to understand their goals and restrictions and then comprehensively incorporating that in a business plan is the only way projects like this get done.”
For example, the Casa de Esperanza team surpassed goals around hiring women- and minority-owned enterprises as part of the development effort.
The development is now home to residents who have been homeless for 12 or more consecutive months, are disabled, and either 65 years or older or who have health conditions making them vulnerable to COVID-19. Referred from a list managed by the Tarrant County Homeless Coalition, about half of the residents came from homeless encampments and the other half from shelters.
The majority of residents are older than 62 and considered “COVID vulnerable,” according to Smith.
Ira Lee Brown, 63, is among the first residents to move into Casa de Esperanza.
“I tell you, it really means the world to me from where I came from,” he says. “I treasure it. I try to do the best I can. With this, it ought to make things clearer in my life.”
Before moving into his apartment, Brown had spent time living in his car, and trouble with his legs landed him in a hospital. “I don’t know if you’ve ever been in a place where you can’t really do anything but look up,” he says. “I was in one of those places, a dark place.”
Now, he says he’s moving in the right direction with the help of his case manager and the other staff and volunteers at Casa de Esperanza. A former cook, Brown takes part in different programs and activities offered at the development, including cooking classes.His apartment has given him a fresh start and a place to shelter from COVID-19 and the cold. “I will do anything in my power not to go back to that dark place again.”
It was essential that FWHS provided the development with project-based housing vouchers for all of the apartments. The vouchers keep rents low for residents but also help the owners with the operating expenses.
The city of Fort Worth is also contributing funds for five full-time case managers, which works out to about one manager for about every 25 residents.
Presbyterian Night Shelter offers case management for all residents, and My Health My Resources of Tarrant County delivers case management for residents with mental health and substance abuse issues. In addition, JPS Health Network connects residents with specialty clinics or at-home medical care, according to officials.
Before undertaking a motel conversion, developers need to be aware of several points. ”The first is the actual physical real estate and understanding the original design and how it was built, including the electrical wiring and plumbing,” Smith says. “Developers then need to work with the city to figure out what building codes the property will have to comply with as it changes use from a hotel to an apartment.”
Big Apple Opportunities
And, then there’s New York City. Across the country, the situation has been much different than in California, with advocates and even a recent article in The New York Times wondering if the opportunity for hotel conversions has passed the city by as real estate prices start to rise again.
According to the Times in December, there have been zero hotel-to-permanent-affordable-housing projects during the pandemic as zoning and other regulatory obstacles thwart developers. These projects just haven’t received the lift they have in California or Vermont during the past two years.
There’s hope that with some more help that will change in the new year. New mayor Eric Adams called for turning shuttered hotels rooms into affordable housing while seeking the city’s top office last year.
Even with the recent headwinds confronting developers, two notable hotel conversions that were in the pipeline before the pandemic have managed to move forward.
Fairstead, a leading affordable housing company, is transforming the 110-room historic Park 79 Hotel into 77 affordable housing units for seniors in Manhattan.
In a neighborhood known for luxury condos, the building’s long-term future will be as affordable housing. Under an agreement with the New York City Department of Housing Preservation and Development (HPD), the property will remain affordable for at least 60 years.
“It’s an affluent area and what we consider a high-opportunity area, where we need to create or preserve as much affordable housing possible so that we can maintain a diverse community,” says Brett Meringoff, managing partner, development, at Fairstead.
It would have been difficult to construct a new project in such a prime location, just steps from Central Park.
Fairstead was ahead of the recent wave of hotel conversions spurred by the pandemic. No COVID-related funds are being used at Park 79 Hotel. However, the project is still backed by public and private partners, including Merchants Capital and Boston Financial Investment Management, who are providing essential funding for the $59 million project, including 9% LIHTCs.
In addition to reconfiguring the seven-story building into apartments, the project involves adding new elevator service and creating an indoor/outdoor community room and meeting rooms. Fairstead is also restoring the building’s historic façade to help maintain the integrity of the architecture.
The firm’s nonprofit partner, Project FIND, will provide two full-time case managers and offer key services to the residents when the project opens in 2022.
Eyes are also on nonprofit Breaking Ground as it repositions a former Jehovah’s Witnesses residential hotel into 491 affordable and supportive housing units.
Launched in 1990, the organization has a history of transforming hotels in the city into supportive housing to give individuals struggling with homelessness a place to call home. Breaking Ground has evolved into building notable new construction projects, but it’s returning to its roots for its latest effort.
90 Sands Street was previously a residential hotel operated by the Watchtower Bible and Tract Society until August 2017. A developer had purchased it with plans to make it into a luxury hotel. However, when those plans didn’t work out, Breaking Ground stepped in to acquire the property for $170 million in 2018.
The project is unique because of its large size. Of the 491 apartments at 90 Sands, 185 will be affordable to a wide range of New Yorkers, from extremely low-income to moderate-income households, and 305 units will be home to formerly homeless individuals.
Much of the renovation at the 30-story building will involve creating office and common spaces for residents, including a multipurpose room for community events and meetings, a digital library, a fitness room, and a medical suite. Plans call for the top floor, which is known as the observatory for its spectacular views, to be used for resident programs as well as space for nonprofits and others in the community to use.
The Center for Urban Community Services will provide on-site social services to residents.The development is also unique for its location in downtown Brooklyn, where there is very little affordable and supportive housing, says Brenda Rosen, Breaking Ground president and CEO.
“This presented us an opportunity that there was no way we were going to pass up,” she says.
Like many other hotel conversions, the project needed to obtain a zoning change. Much of the funding is also coming from the city.
For the acquisition of 90 Sands, Breaking Ground received $2 million from the New York City Council, a $155 million loan from HPD, and a $10 million grant from Enterprise Community Partners. Breaking Ground provided a $6.7 million sponsor loan to finance acquisition and pre-construction costs. The Leviticus Fund also provided $1.5 million in pre-construction financing.
The renovation and repositioning of the building as supportive and affordable housing will be financed by 501c3 and taxable bonds totaling more than $70.4 million issued by the New York City Housing Development Corp. (HDC). HDC provided an additional $6 million in capital subsidy. JPMorgan Chase is providing a construction letter of credit.
Breaking Ground has its sights on a possible fifth hotel conversion that could potentially bring another 500 SRO-style supportive housing units to Midtown.
Others also will continue to watch for opportunities.
“With the new administration coming, we’re excited by Eric Adams and his ideas around affordable housing,” says Fairstead’s Meringoff. “Even though we certainly hope the pandemic is starting to be in the rearview mirror and the hotel industry is recovering, studies have shown that there will still be a number of hotels that don’t recover and don’t make it back to the market. We would love to work with elected officials and the public sector and other developers in the private sector to come up with innovative new ideas around the potential lost hotel stock and try to convert it into affordable housing. We know affordable housing is one of the largest crises in the country.”