The Luna Lodge once welcomed weary travelers making their way on old Route 66 through New Mexico.

One of the many motels that sprouted up along the famed highway in the 1950s, Luna was built at a time when families vacationed by car and stayed in mom-and-pop motels advertising cheap rates.

But as Route 66 was replaced by faster freeways, roadside businesses dwindled and fell into decline. Luna Lodge, which is listed on the National Register of Historic Places and cited as one of the best examples of the state’s old motor courts, lasted longer than most before sitting largely empty the past several years.

The motel and several others in New Mexico are being brought back to life as permanent affordable housing. The neon signs are flashing again at old motels around the country as well.

Fueled by the imagination of developers and financed largely with federal low-income housing tax credits (LIHTCs), these roadside ruins have been rescued and given a new mission.

“It’s neighborhood revitalization,” says John Bloomfield, executive director of NewLife Homes, the developer who recently transformed the Luna Lodge property into 30 apartments for low-­income residents and people with mental illness and other disabilities. “Route 66 has so many of these old motels. We want to share the knowledge. We like the problem solving. We like to demonstrate that this can be done.”

In November, the nonprofit organization also began turning the Sundowner, another Route 66 motel in Albuquerque, into 70 affordable housing units and an outdoor market area.

Both the $4.8 million Luna Lodge and the $9 million Sundowner are financed largely with LIHTCs awarded by the New Mexico Mortgage Finance Authority. Both developments also received funds from a city of Albuquerque general obligation bond and construction loans from the state’s Housing Trust Fund. The Luna Lodge also used federal historic tax credits.

About 65 miles away, in Santa Fe, the old Stage Coach Motor Inn has undergone a $12 million transformation into affordable homes for 60 low-­income families and people transitioning out of homelessness. Developed by The Housing Trust, the project is financed with about $10 million in equity from housing tax credits.

History lessons

Cohen-Esrey Real Estate Services has converted hotels into affordable housing in two small Kansas towns.

Famous guests at The Woodson Hotel in Yates Center include Teddy Roosevelt, Jesse James, and Wild Bill Hickok. Built in 1887, the building had been unoccupied in recent years.

Cohen-Esrey converted the facility into the Woodson Historic Residences, featuring nine affordable one-bedroom apartments. The firm spent $232,652 per unit and financed the project with LIHTCs, federal historic tax credits, and state historic tax credits. There is no permanent debt.

It also turned the Gold Dust Hotel, which was built in 1884 in Fredonia, into the nine-unit Gold Dust Historic Residences. A similar set of financing tools was used—LIHTCs and state and federal historic tax credits.

“Converting old hotels into affordable apartments in small towns is incredibly rewarding,” says R. Lee Harris, president and CEO of Cohen-Esrey. “Most of these buildings don’t stand a chance of being repurposed for any other use. Historic tax credits are helpful, but without LIHTCs, the economics simply don’t work.”

The challenges can be immense, including balancing the historic preservation requirements of the National Park Service with the practical aspects of converting the buildings into apartments, including elements of design and energy efficiency, explains Harris.

Generally, hotel rooms are not large enough to convert directly into apartments, so rooms have to be combined. At the same time, Park Service officials are particular about how much demolition is allowed.

The small Kansas buildings also did not allow for economies of scale. A third big challenge was the highly complex ­financing structure, including the stacking of tax credits and the use of a master lease structure involving the federal historic credit.

A master lease, also known as a pass-through, is used by developers of multifamily projects to maximize tax credit equity and distribute benefits among various investors. Typically, these leases permit a combination of investments by one or more investors under one or more tax credit programs.

Cohen-Esrey was able to make the deals work because it is vertically integrated, meaning it has its own construction company, tax credit syndication unit, and property management business.

Just as the challenges are large, so are the benefits. The work preserves classic structures with rich histories, and the financial structure eliminated the need for permanent debt, which allowed for lower rents to help residents.

“We were able to bring brand-new affordable apartments to a small rural market that hasn’t had any new multifamily housing for many years,” Harris says.

Community revitalization

In many cases, developers are turning around some of the biggest nuisance properties in their communities.

Mercy Housing California recently converted an infamous, 101-room motel into 37 studio and 37 one-bedroom permanent supportive housing apartments for disabled, formerly homeless individuals in Sacramento.

Built in the early 1960s, the former Budget Inn and its surrounding neighborhood fell on hard times when a new highway diverted traffic and the state fair relocated to another part of the city. In recent years, the motel had among the highest calls for police and fire service in all of Sacramento, says Stephan Daues, Mercy Housing’s regional director for housing development.

Working with the Sacramento Housing and Redevelopment Agency (SHRA), which had instituted a “motel reuse strategy” to address the neighborhood’s troubled properties, Mercy Housing acquired the Budget Inn site several years ago with plans to create a deeply affordable, service-rich housing development.

Rather than demolishing the two-story motor inn, the team decided to keep the building footprint and much of the framing in place while doing an extensive rehabilitation. “The existing building offered good bones to a project,” Daues says.

The team converted about a dozen motel rooms into office and community space. It also built a separate building to provide service space at the new Boulevard Court.

The developers considered breaking up the building but decided against the move because the shape of the motel allowed for the most secure site with a single entrance point.

Having one connected building, with everyone’s front door visible, was also a way to promote community. “In a supportive housing development, you want to find balance between privacy and peer pressure that residents create among themselves to keep everyone on track toward recovery,” Daues says.

The general compatibility of motel and apartment designs and the availability of these aging structures are among the reasons they are being transformed into housing.

Still, the challenges, including zoning changes, extensive rehabilitation, and ­financing, can be enormous.

Mercy Housing amassed the $23 million needed for Boulevard Court, including about $2.9 million worth of capitalized operating reserves, during the height of the economic downturn when investor demand for housing tax credits was sinking.

Using the Tax Credit Exchange Pro­gram that was established as part of the American Recovery and Reinvestment Act to help LIHTC developments during the recession, Mercy Housing turned a 2008 LIHTC award into $10.7 million.

The nonprofit also obtained a $7.8 million Tax Credit Assistance Program loan from the California Tax Credit Allocation Committee to “backstop” a state Multifamily Housing Program funding commitment and assembled additional financing.

Not far away, Jamboree Housing Corp. recently completed the approximately $26 million redevelopment of Hotel Berry.

Unlike the old roadside motels being readapted into permanent housing, Hotel Berry is a historic downtown building. Built in 1929, the six-story building was once one of Sacramento’s finer places to stay, but the shine faded, and by the 1980s it was mainly a residence for transients.

After another development team’s efforts failed to bring back the building, SHRA officials selected Irvine, Calif.–based Jamboree to revitalize the empty hotel.

Renamed The Studios at Hotel Berry, the development features 104 affordable studio apartments for residents earning between 30 percent and 45 percent of the area median income.

A number of other hotel and motel renovations are in the works in California.

Satellite Affordable Housing Assoc­iates (SAHA) is putting the finishing touches on The Savoy, the transformation of two adjacent hotels in Oakland into 101 units of affordable housing for formerly homeless households and others with special needs.

The seven-story Oaks Hotel was previously an 84-unit SRO with shared bathrooms and kitchens, and the six-­story Jefferson Inn operated as a 65-room, low-budget hotel.

SAHA acquired the Oaks through a foreclosure and bought the Jefferson from its previous owner. The development team then renovated the buildings, combining the lobbies to create a new space and allow the two buildings to operate as one, says Eve Stewart, SAHA’s director of housing development.

Adapting the century-old buildings into permanent housing came with a number of challenges, many of which can’t been seen from outside, says Stewart. For example, floors that were no longer level had to be fixed, building systems needed to be upgraded, and seismic improvements had to be made.

In nearby Alameda, Resources for Community Development has created a new workforce housing community out of the troubled Islander Motel.

The nonprofit transformed the 69-room motel into Park Alameda, a development with 62 apartments and rich with numerous green building features.

In Southern California, the East Los Angeles Community Corp. (ELACC) recently renovated the old Boyle Hotel, which had once been the jewel of its neighborhood and a base for the mariachi musicians who gathered in nearby Mariachi Plaza. In recent years, the building had served as apartments, but conditions were deplorable.

ELACC purchased the four-story building and rehabbed it to create 51 affordable apartments. The $24 million project also includes the Mariachi Cultural Center, a new space for area ­musicians to gather.

Also in Los Angeles, the famed Dunbar Hotel, a focal point for the African-Amer­ican community and historic jazz scene during the 1930s and 1940s, and two subsidized apartment buildings have been renovated into a new development called Dunbar Village by Thomas Safran & Associates. The hotel has been turned into 41 affordable seniors apartments. The firm was able to rescue and reuse light fixtures, original flooring, and other features to restore the building’s former glory.

This time, when people check into these hotels, they will be coming to stay.