States Look to Convert Hotels, Motels and Commercial Properties for Shelter and Permanent Low-Income Housing

8 min read

As the housing crisis deepens and the pandemic continues to affect the hospitality industry and commercial properties, an increasing number of states are seeking to convert hotels, motels and other commercial properties into housing for low-income residents and those experiencing homelessness. Housing leaders see the programs as serving the dual purposes of building affordable housing stock while offering relief to distressed property owners.

A handful of states have passed legislation to provide funding for such adaptive reuse projects and to streamline the process for purchasing and rehabbing potential distressed properties. New York is one of the states that recently passed a law that paves the way for nonprofits to develop these projects.

“This is an exciting opportunity to take what is operated as a distressed hotel or commercial property and bring that into affordable housing stock,” says Meghan Altidor, a New York-based attorney with Nixon Peabody who advises nonprofit entities looking to do such conversions. “We’ve definitely seen a lot of interest from nonprofits (in the program).”

New York
In August, New York enacted a law to incentivize the adaptive reuse of hotels, motels and other commercial properties. The Housing Our Neighbors with Dignity Act, or HONDA, appropriated funding available to nonprofit organizations to purchase, convert and operate permanently affordable or supportive housing. The $100 million in program funds are intended to be supplemented by subsidies, vouchers, commercial rents or other sources of income. New York State Homes and Community Renewal is administering the program. Only nonprofit organizations may apply for the funds.

“New York State Homes and Community Renewal is working closely with nonprofits and housing stakeholders to establish the HONDA program, consistent with the legislation that directs how the $100 million in funds can be spent to repurpose distressed hotels and commercial office buildings underutilized as a result of the pandemic to provide much needed safe, quality, affordable and supportive housing,” says RuthAnne Visnauskas, commissioner and CEO of NYS Homes and Community Renewal (HCR). “Program terms are in development and will be released as soon as they are finalized, at which time HCR will promote the program.”

As designed by the New York legislature, HONDA appropriations must be spent on properties in New York City. Since the cost of acquisition and rehabilitation will be significant, there may be a programmatic need for non-state resources. HCR already has met with nonprofit developers to better understand how they could deploy this funding.

Altidor says nonprofits looking to purchase properties will want to look for properties that require minimal renovation and minimal-to-no changes in zoning or building code requirements.

The HONDA program outlines specific requirements for the nonprofits and the properties. The nonprofits must have a primary purpose of providing housing to low-income families or offering services or housing for people experiencing homelessness. The act also outlines the amenities required in the units, such as kitchenettes, and other requirements around wages and collective bargaining of employees. The units must be permanently affordable with at least half of the units set aside for those experiencing homelessness. Using income averaging, the properties must be at or below 50 percent of the area median income (AMI) with residents’ eligibility capped at a maximum of 80 percent of AMI.

Oregon’s Project Turnkey
In November 2020, after devastating fires destroyed more than 4,000 homes, which led to an increase in homelessness, the Oregon legislature approved the allocation of $65 million to launch and provide funding for Project Turnkey. Similar to the HONDA program, Project Turnkey funds the conversion of hotels and motels into housing for low-income people and those experiencing homelessness. The program was administered by the Oregon Community Foundation (OCF).

“Project Turnkey was a solution born out of a crisis,” says Megan Loeb, an OCF program officer. “We had a broken housing market worsened by the pandemic and gutted by the fires of 2020 in Oregon.”

Under Project Turnkey, nonprofits are empowered and funded to develop and run the housing projects, as they are in New York. Since Oregon is a statewide program (the New York conversion must be in New York City), OCF leaders sought community-based programs to own and operate the properties because they believe they best know how to meet the needs of local populations. Applicants were required to demonstrate community support, adequate operational funding and detailed plans for wraparound services to help move shelter guests from crisis to stability. Grantees also were required to pledge to prioritize people needing COVID-19 isolation and communities disproportionately affected by the fires, pandemic and homelessness.

Within seven months of its launch, Project Turnkey created 19 new shelters in 13 counties and increased the state’s supply of shelter beds by 20 percent, bringing 865 new housing units online. According to OCF, the Project Turnkey sites were developed for less than half of the typical cost for affordable housing. In Oregon, the average cost per unit of affordable housing is $226,000. The average unit cost for Project Turnkey properties was $87,700.

Loeb says the “first and foremost” goal of the program is to provide shelter, but “the intention for long-term conversion is there.”

OCF used a competitive application process for the funding and sought local community based organizations familiar with the needs of their communities. Some of the projects that target specific populations include a property on the south coast of Oregon supporting veterans, a property for domestic violence survivors in the Willamette Valley and another property for seasonal and migrant farm workers in western Oregon.

“These acquisitions are building resilient communities,” says Loeb.

Selecting the right properties to pursue can be tricky, Loeb adds. Land-use and zoning plans need to fit the use and applicants need to ensure that each property is well-suited for the short-term use for shelter and conversion to the longer-term use of affordable housing. Candidate properties need to be at the right price point, not require a large amount of renovation and be close to amenities.

OCF worked with two real estate developers with the expertise to lead applicants through the complex acquisition process, helping them perform due diligence.

“Having them as partners in this work allowed us to acquire buildings for communities within a six-to-eight-week period,” says Loeb.

Tom Kemper and Bruce Wood, of KemperCo, LLC, in Portland, worked with OCF and applicants to perform due diligence on the properties and shepherd projects through the process.

“Most nonprofits don’t have the expertise to evaluate and purchase a commercial property,” says Kemper. “You need experts to take it through the process.”

Wood says some properties came with zoning challenges.

“We would walk (applicants) through the challenges and facilitate meetings with local jurisdictions,” says Wood.

OCF was required to disperse all the funds by June 30, 2021. (The legislature had added another $9.7 million to the initial funding.)

“All of the acquisitions occurred before June 20,” says Kemper.

California Project Homekey
California was the first state in the nation to launch a statewide adaptive reuse program focusing on hotels and motels. The amount of funding the state is investing is massive: $5.8 billion in two rounds.

In 2020, Gov. Gavin Newsom’s administration launched Project Homekey, which like Oregon and New York, seeks to convert hotels and motels into permanent long-term housing units for people experiencing homelessness. But California’s program also seeks to convert vacant apartment buildings and tiny homes. Homekey makes competitive grants available to local governments across the state.

The San Diego Housing Commission (SDHC) converted two hotels under the first release of funding, providing housing to 400 people. The commission had done similar conversions using different funding streams.

“I think this is a useful tool to have in the toolchest for any locale,” says Richard Gentry, president and CEO of SDHC. “This is one of many tools that are needed.”

Gentry says SDHC focused on extended stay hotels requiring little rehab. SDHC is a multi-functional agency.

It issues housing vouchers and also loans using city sources of funds. It also issues bonds on behalf of the city. Its varied functions allow for projects to have multi-streams of funding.

The total cost for the two apartment complexes under Project Homekey was $120 million. SDHC was awarded $37.7 million from the state, borrowed $50 million from Chase Bank and put up the remaining funding from the City of San Diego and its own coffers. Housing vouchers of the residents service the debt.

“This year, we are looking toward a partnership with the private sector to bring these deals as well,” says Gentry.

All told, Project Homekey seeks to create 14,000 units of new affordable housing aimed at people experiencing homelessness.

“California is moving with unprecedented speed to house people experiencing homelessness…,” Gov. Newsom (D) says of Project Homekey in a press release online. “We are going all in on solutions that work…”

Pamela Martineau is a freelance writer based in Portland, ME. She writes primarily about housing, local government, technology and education.