San Diego pursues hotels for homeless housing approaching … – The San Diego Union-Tribune

When the San Diego Housing Commission agreed last month to pursue the purchase of three hotels that would cost on average $383,000 a room to house the homeless, some people balked at the price as excessively high. The city, they said, needs to think outside the box and explore more inexpensive options like tiny homes or maybe shipping containers.
Or simply strike a deal for less-pricey hotels.
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Buddy Bohrer, vice president of real estate finance and acquisitions for the Housing Commission, is quick to defend the agency’s strategy. The criticism, he says, is misplaced.
“Most of the talk about pricing has been pricing as a hotel, and we’re not buying these as a hotel,” he said of the city’s plan to use the hotels — complete with kitchenettes — to create more than 400 permanent homes for homeless people. “We’re buying these as a home. And when you consider the cost of a new residence, this is a screaming deal.”
The hunt for permanent housing for the hundreds of individuals living on downtown San Diego streets, sleeping in cars and spending the night in makeshift tents grows more urgent each month as their numbers continue to reach record highs. A decade ago, the monthly homeless count for downtown alone was in the 500s; it has now soared to nearly 2,000.
While Housing Commission officials insist that hotel acquisitions are the most expedient, cost-effective way of providing permanent housing for the unsheltered, the question of how much is too much for taxpayers to pay continues to dog the agency.
The Housing Commission is now well on its way to consummating deals for four hotels totaling 475 rooms that together could cost as much as $169.5 million, not including rehab costs. Add in extra expenses for kitchen facilities and other construction expenses, and the potential price tag is more than $394,000 a room.
In April, the commission agreed to consider purchasing three Extended Stay America hotels ranging in price from $40.7 million to $65.2 million. If everything checks out, commissioners next month plan to apply for state Project Homekey funds, which are intended to create housing for homeless people in a relatively short time.
It is also eyeing a fourth hotel — a 63-room Ramada Inn on Midway Drive. At its May 12 meeting, the board agreed to apply for $18 million in Project Homekey funds to purchase the hotel. The money would go toward the $11.8 million purchase of the hotel.
The ultimate cost for that property, though, would be significantly higher than the Extended Stay hotels because the existing Ramada has no kitchen facilities. After adding in rehab costs that the commission says would be about $14 million — including the installation of kitchenettes and related water, sewer and electrical upgrades — plus other expenses for architecture, engineering and permits, the initial per-room acquisition cost would more than double: from $181,609 to $469,000.
Still-pending appraisals will determine the final purchase prices for all four hotels, and the ultimate acquisitions will depend on the award of Homekey funding. The appraisals have not been completed yet for the Extended Stay hotels, but there is an appraisal for the Ramada. The commission declined to make it available, citing a provision in the California Public Records Act that allows public agencies to withhold such records until an acquisition is complete.
County Supervisor Jim Desmond, who has made no secret of his distaste for spending taxpayer funds on hotel purchases, continued to push back last week when the Board of Supervisors was asked to kick in $32 million in loans toward the purchase of four properties, including three of the hotels and an apartment building in Ocean Beach that would be built by the nonprofit Wakeland Housing and Development Corp.
“As a county entity, I think we should really be focusing our money on treatment and services, not on taxpayer hotels as homeless housing that do not require treatment,” Desmond said in advance of the vote.
Longtime San Diego County hotel owner and operator Robert Rauch says he is dumbfounded by the per room prices the commission is proposing to pay for what he describes as very basic extended stay-style properties that have few amenities other than kitchen facilities.
He was especially taken aback by the proposed purchase of the Ramada.
“My reaction, other than they are nuts, is that I would love to be the owner of that hotel who got overpaid to begin with and on top of that, the contractor who is going to do the work on that.”
Over the years, Rauch says he has developed hotels of his own, in addition to consulting on close to a couple dozen hotel projects in California. Taking into account today’s high land costs, he still believes that new hotels with kitchenettes could be developed for about $200,000 to $250,000 a room. And to retrofit purchased hotels without kitchen facilities should cost no more than $35,000 a room.
Still, it is something of a complicated calculus when deciphering whether a hotel is fetching a fair price, especially when taking into consideration the ultimate use for the property. Longtime hotel broker Alan Reay is of two minds when it comes to the planned acquisition of the three Extended Stay hotels.
Looking at them strictly as straight-up hotel purchases, the proposed maximum prices are way too high, he says. But if their ultimate function is to provide housing — and not just temporary shelter — they’re something of a steal, he says.
“There is no question that the Housing Commission through Project Homekey is paying more for hotels than private investors would, but they’re doing it because it makes economic sense,” said Reay, president of Orange County-based Atlas Hospitality Group, which tracks hotel sales up and down the state. “For the use the housing authority is using them for it’s not a bad price because it would cost them way more to develop it. And you also may have someone not interested in selling, so to motivate me to sell, you have to give me something that’s an attractive price.”
That was very much the case with the Housing Commission, which says few of the 75 hotel owners it — or third parties — contacted had actually listed their properties for sale, presumably giving the hotels more leverage in their asking prices.
Among those the commission considered were older properties without kitchenettes that would have cost from the low $200,000s to $300,000 per room for acquisition, said Scott Marshall, Housing Commission Vice President of Communications and Government Relationships. For the suite hotels that the commission looked at, the asking prices were higher, ranging up to a maximum of $441,176 per unit.
Local housing officials are now motivated to move quickly, given the financial boost provided by Project Homekey, which was conceived during the pandemic to create housing for homeless people. Under the state’s rules, a housing project must be fully occupied within 15 months of receiving the award.
That relatively quick turnaround means there are limited options for creating homes, which can take several years to build from the ground up.
There are other choices, however. Under the state’s Project Homekey guidelines, the money can be used to purchase or rehabilitate hotels, motels, hostels, single-family homes, multifamily apartments, adult residential facilities, manufactured housing and commercial properties.
The list would allow the Housing Commission to pursue homes that could be created from shipping containers for between $64,000 and $128,000 (excluding delivery, labor and utilities), tiny homes that could cost just $40,000 each (not including land) or motels that likely would cost less than extended-stay hotels.
“I would say they were all on our radar, all being discussed,” Bohrer, said. “Hotels were what we kept defaulting back to because it fit the system best.”
The Housing Commission isn’t alone in its thinking.
A list of Project Homekey grants awarded in 2021 and 2022 shows that more than half of the 116 local jurisdictions up and down the state used their grant money to buy hotels, although others did buy motels, apartment complexes and commercial buildings, or built new housing.
The city of Los Angeles has acquired a number of motels and hotels for both interim and permanent homeless housing, relying, in part, on Project Homekey funding. Like San Diego, it has faced similar pricing challenges but has found that acquisition of hotels is a less costly proposition than new construction or even older apartment buildings, says Jenny Scanlin, chief development officer of the Housing Authority for the city of Los Angeles.
Between 2020 and 2022, the city acquired 22 hotels and motels accounting for more than 1,570 rooms, Scanlin said.
“Once you add kitchens (to motels or hotels), you’re still coming out at less than $400,000 a unit, and when we’re looking at new construction projects from the ground up, the pricing is much higher than that,” she explained. “It’s very hard in California to deliver on new construction units for less than $500,000, and right now it’s running on average $600,000 or $700,000 a unit.
“I don’t think we are paying too much for these units. We know every community needs to build more affordable housing in the market. If you were to take a wholly new construction approach, you’ll still pay a higher price per unit and your delivery schedule is years, not months. The intent of the Homekey program is to bring something online faster.”
While arguing that hotel purchases prove to be the best choice among several housing options, Bohrer said few are perfect fits.
The extended-stay hotels the commission hopes to purchase last changed hands in 2021 when Blackstone and Starwood Capital Group purchased the Extended Stay America portfolio of 650 properties across the country, from Arkansas and Alabama to California, for $6 billion, or $95,000 a room.
For the San Diego County properties, the average price per room at that time was more than $145,000, according to Atlas Hospitality Group. The hospitality landscape, though, has changed considerably since then, when hotels were just starting to rebound from the first year of the pandemic. Hotels, at least in terms of leisure business, are now easily exceeding pre-pandemic levels.
A little less than a year ago, the city of Los Angeles purchased four extended-stay hotels that ranged in price from $338,000 a room to $353,000, Atlas Hospitality reported. The figures are not that dissimilar from what San Diego is planning to pay.
Bohrer said the Housing Commission looks for properties that are in good shape, have kitchenettes and ideally are near transit stations, grocery stores, pharmacies, libraries and health care services.
“It was not an easy task to find properties and a willing seller,” Bohrer said. “None of these were listed. It wasn’t a situation where we went on multiple listing services and said, ‘Hey, look at that.’”
Bohrer said the search involved contacting properties and asking if they would be willing to sell, which usually resulted in a no as a first response.
“You’re looking at owners that weren’t necessary sellers, so they’d throw out numbers to see if you’d bite,” Bohrer said. “We saw some that were well into $400,000 a door, and that was unacceptable.”
Properties were rejected for a variety of reasons, he said. Some didn’t meet the amenity requirements of the Project Homekey program and some were not in good locations. Others were rejected because an owner declined to sell but offered to lease the property, he said.
“There’s no way we could reproduce this type of product from a new development perspective at a lower cost or with a quicker time frame, and those are two really important parts of the Homekey process and also addressing the crisis we’re having now,” Bohrer said. “And for those two reasons alone, I think this is an outstanding opportunity.”
Gregg Colburn, co-author of “Homelessness is a Housing Problem,” said he supports increasing housing capacity incrementally through hotel purchases, but also sees price as a factor to consider.
In their research, Colburn and co-author Clayton Aldern found high housing costs are a leading cause of homelessness throughout the nation, and more affordable housing is needed to solve homelessness.
Comparing homeless populations on a per-capita basis, the researchers found the largest homeless populations were in cities with the highest costs of living while poorer cities with more affordable housing had the smallest per-capita homeless populations.
“I think the question becomes, is it the most cost-efficient way to create capacity?” Colburn said about buying hotels for housing. “I think that’s all a function of the price you’re paying for those units and the price it takes to renovate them so they can serve as permanent housing.”
Colburn said $400,000 for a unit is a lot of money on the surface, but building new housing likely would cost more and take longer.
“There are two variables,” he said. “One is the cost and one is the time. If it’s going to take you three years to get housing and you can get hotels at the stroke of a pen, that’s pretty compelling.”
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