Each year, 266,000 new apartment homes are needed, according to a study commissioned by the National Multifamily Housing Council and the National Apartment Association. The need of 4.3 million units by 2035 is pushing multifamily developers to get creative in their use of existing buildings, especially former hotels and inns. While complex in their infrastructure, the properties present opportunities for repurposing.
Conversion Through a Ground Lease
In Manhattan, the Hudson Hotel in Columbus Circle will soon be converted to a Class A rental property of 438 studio, one-, two-, and three-bedroom units with high-end finishes. The conversion has been made possible through Montgomery Street Partners (MSP), which utilized a 99-year ground lease structure to acquire the hotel and simultaneously lease it to an undisclosed ground tenant. MSP formed the Ground Lease REIT (GLR) to focus on the origination and acquisition of long-term, unsubordinated ground leases.
Most recently used at the Hudson Hotel, the property was under contract to purchase by the undisclosed client in December 2019 until it was assigned to GLR. The now competed sale and leasing will allow the tenant to develop the property into the luxury apartment building. “With apartment vacancies in New York near zero and rents at unprecedented levels, the developer recognized the highest and best use for the property was residential rental product that would help address the market’s supply-demand imbalance in the Columbus Circle submarket,” says Max Nipon, senior vice president at MSP.
“Our tenant partner utilized our ground lease capital and paired it with leasehold financing to gain control of the asset and reposition it. We are very excited to partner with them as they have an exceptional track record and have engaged a best-in-class team to realize the business plan.”
The REIT was advised by Danielle Ash, Morgan Stevens, and Jenna Imbrogno of Duval & Stachenfeld on the acquisition and ground lease. Parkview Financial provided $207 million in the form of leasehold construction financing for the conversion.
“Beyond all the nuances of the ground lease structure and associated tax issues, the deal also had various legal complexities associated with the hotel-to-apartment conversion. Working closely with our client under a quick 60-day timeline, we were able to navigate these challenges and make each party comfortable with moving forward with the deal,” says Ash.
Rezoning to Multifamily
After a successful rezoning to multifamily in Jacksonville, Florida, the 102-unit Hospitality Inn was recently sold by Park-Equities to California-based VIVO Living, an industry leader in hotel-to-residential conversions. The inn’s garden-style, low per-unit basis made for an ideal conversion.
Taylor Grant of Park-Equities says, "Hotel conversions are something I pivoted my focus to as I see the affordable housing crisis continue to grow in the United States. VIVO Living is paving the way in this newly born niche of commercial real estate and understands the complexities that come with these deals. They were a pleasure to work with from start to finish, and I look forward to sourcing them more conversion opportunities."
Hospitality Inn is Park-Equities’ fourth hotel sold as a multifamily opportunity since last year with closed deals in Austin, Texas, and Kansas City, Missouri.
Renovating for Affordability
Recently converted Park 79 in New York City once operated as an illegal hotel. Zoned for permanent residential use, the mayor’s Office of Special Enforcement (OSE) issued multiple violations in 2015 and 2016 to the previous owner before Fairstead acquired the property and began major renovations.
The purpose-driven, vertically integrated real estate company specializing in creating sustainable, high-quality housing renovated the building to include 77 studio units for seniors and formerly homeless New Yorkers who would otherwise be unable to afford the city’s rental prices. Fairstead partnered with the NYC Department of Housing Preservation & Development (HPD) and Project FIND to launch a housing lottery for the 77 residences. The 100% affordable housing development is reserved for seniors earning at or below 50% area median income, and 24 homes will be devoted to formerly homeless individuals.
"OSE strives to ensure building owners comply with city and state regulations designed to keep housing available and affordable for New Yorkers and is proud that its enforcement has once again turned an illegal hotel operation back into permanent housing," said OSE executive director Christian Klossner. "OSE applauds the efforts of HPD, Fairstead, and Project FIND in creating high-quality, affordable housing for everyday New Yorkers in need." The renovation included indoor and outdoor common areas, and space for Project FIND to provide on-site social services for seniors.
In San Antonio, Fairstead has also acquired Aurora Apartments. The 92-year-old building was once a luxury hotel and is listed on the National Register of Historic Places. Most recently, it has housed low-income senior residents and will continue to as Fairstead invests $15 million to rehabilitate the 11-story building.
While preserving its affordability and historic character, the renovations will modernize the interior homes with new kitchens, bathrooms, and HVAC units. The property will also be upgraded with a new emergency generator, a sprinkler system, two new elevators, new roofing, and more.
"Fairstead is proud to be stewards of historic properties across the country, and we are bringing our approach to preserving both history and affordability to the Aurora Apartments," says Allan Izzo, director of development at Fairstead. "By expanding our footprint in Texas, we can ensure that its critical affordable housing stock is not only protected but improved and modernized. Our plan to overhaul the homes at Aurora will ensure our senior residents can age in place with dignity—something we are committed to doing nationwide."
Fairstead is financing the rehabilitation in partnership with the Las Varas Public Facility Corp., a nonprofit managed by the San Antonio Housing Authority; the Texas Department of Housing and Community Affairs; Capital One; and Boston Financial.
Breaking Ground on Renovation
The largest supportive housing developer of New York, Breaking Ground, has announced the closing of 90 Sands St.’s construction loan and its plans to reposition the Brooklyn property. Formally a Jehovah’s Witnesses hotel operated by the Watchtower Bible and Tract Society, the building will become 491 units.
Located in DUMBO, one of the most expensive neighborhoods in the city, Breaking Ground acquired the hotel in 2018 and underwent the public approval process to reposition the building for affordable housing. The 30-story property will include a fitness room, a digital library, a multipurpose room for events and meetings, a 24-hour attended lobby, and plaza space for public use at the corner of Sands and Jay streets.
"The closing of financing for the Breaking Ground development at 90 Sands St. in DUMBO is welcomed news,” says NYC City Council member Stephen Levin. “This project will usher in 490 apartments of affordable and supportive housing, including housing for the formerly homeless. The problems our city has long faced have been even more pronounced as a result of the coronavirus pandemic. Now more than ever, we need to ensure that individuals and families have a place to live and can leave shelter for secure, stable, and affordable housing. Breaking Ground has embarked on this critical work and I look forward to welcoming our future neighbors to the community."
Of the 491 units, 185 will be affordable housing, 305 units will be for formerly homeless individuals, and one for the on-site building superintendent. Breaking Ground plans to be open for residents in early fall.