With the current downturn in the hospitality industry, there has been a move by some investors to buy underperforming hotels for a bargain and convert them to apartments. This idea is not new, but conditions are favorable now with hotels underperforming, rental rates being relatively robust, and deals penciling out.
Speed to market may be the most important factor in whether to proceed with a deal. Here are a few factors that impact how quickly you can do a conversion and start revenue coming in.
Entitlements – Does the underlying zoning of your project supports the conversion from a hotel to multifamily? These are similar land uses, but most jurisdictions do separate them into different zones that come along with different standards. If multifamily is by-right for use in your zoning district, you may be okay, but it is very important to call the zoning office or local officials and find out as much as you can. And you want them to embrace what you are doing in case you need waivers from code compliance. If the zoning does not support multifamily you will need rezoning or variance, both of which take a few months to approve.
Code Compliance – There are aspects of code compliance that impact conversions: land use regulations and building code regulations. The first falls out from your zoning. Different land uses have different requirements for parking, signage, access, setbacks, densities and some life safe requirements. Even if the use is by-right you may need to meet the different conditions of that use. Make sure that your building can meet the requirements, or you will need to prepare to request waivers. Building codes must be met for any project, but in a conversion, you will lose “occupancy” and have to apply for a new certificate of occupancy. This could trigger additional regulatory scrutiny for electric, plumbing, HVAC, and ADA compatibility.
Renovation Duration and Costs – Not all hotels are built the same. We looked at one project that was able to convert for $12,000 per room. If you are combining rooms, expanding kitchens, or reconfiguring other spaces, cost will go up. Engage an architect, project manager, or estimator so you can plan your capital costs.
General Contractor – The slow down in traditional hotel renovation work means that general contractors are available and hungry. If you work your way through the entitlement, code, and design you should be able to hit the actual renovation work pretty hard. Zelham, Inc., a national hospitality GC shows a 90-day renovation for a recent conversion project they worked on.