AHLA: Should I convert my hotel to housing?

EDMONTON — It’s a subject that’s topical in a province that was hit by adversity long before COVID reared its ugly head. Some hotels are considering repurposing their properties into affordable housing, such as seniors’ or low-income housing. In Red Deer, Alta., for example, City of Red Deer officials will be approaching their community partners to see if empty hotels can be purchased with federal dollars to create more affordable housing.

At the Alberta Hotel & Lodging Association (AHLA) Ascend Conference, held virtually on Sept. 21 and 22, three top financial real estate advisors shared strategies and opportunities in this area, and provided guidance for hoteliers interested in starting the process of conversion. Panel participants included Linda Cuppens, executive director, Capital Initiatives, Alberta Ministry of Seniors and Housing; Raymond Swonek, CEO, GEF Seniors Housing, the largest seniors’ not-for-profit in Alberta; and Shaun Jones, senior advisor, Western Canada, Altus Expert Group, Altus Group.

The panel discussion was timely: it took place just as the federal Liberals announced that they plan to spend $1 billion over the next six months so cities and housing providers can buy properties being sold because of the COVID-19 pandemic, including hotels, and use them to keep people from becoming homeless. The Liberals say the program will create 3,000 new affordable housing units across Canada, and want all the funds committed by the end of March 2021, when the federal fiscal year finishes. The timeline for the program means that it would be used for existing properties only.

There are a number of examples of conversions from hotels to residential both in Alberta and other provinces. The B.C. Housing Authority has purchased a number of hotels to house the homeless. Seventeen Toronto-area hotels being leased by the city to house the homeless. In Alberta’s Drayton Valley, Service Plus Encore hotel, a 46-unit extended stay property, has been purchased by Points West Life and will soon be converted to a seniors’ lodge.

The economic situation is particularly dire in Alberta. AHLA president and CEO Dave Kaiser pointed out that Alberta market demand last peaked in 2014, and simply put, since then demand fell by 20 per cent and room supply increased by 20 per cent. “Many hotels were already in financial crisis before the pandemic,” Kaiser said.

Altus’ Jones talked about Horizon Housing’s recent purchase of the Hotel Elan in Calgary. Jones explained that this situation is notable because the hotel was originally an apartment building, and was refurbished to become a boutique hotel. Now, it is being converted back into multi-family space, but even that has its challenges. The situation is also unique because a philanthropic donor contributed to the purchase.

Swonek of GEF Seniors Housing noted that Edmonton and Calgary need 5,000 seniors housing units each, and the wait list is continuous. “Building brand new takes too long. We need buildings with commercial kitchens and culinary facilities — and hotels have that.”

Cuppens, from the Alberta Ministry of Seniors and Housing, said that her ministry looks at the supply and demand of the market which differs among cities and in rural areas. “There are communities across the province where higher levels of care are needed — there’s a wait list for seniors who need some care. In rural areas, sometimes 10 or less units are required — all options are on the table.”

In larger markets, proximity to transit, services and social support are important, Jones noted. In Calgary, 44 per cent of hotels are in the airport area, where there are a lot of restrictions regarding building residential, and little proximity to transit and services. In rural areas, hotels are often on major highways, nowhere near the centre of town.

“Seniors want to age in their communities,” Swonek said. “If there’s a river down the middle of a community that’s a real barrier. And people living in the Northeast area of a city don’t want to move to the Southwest. Only 30 per cent of seniors drive. They need elevators, minimal steps and wide doorways.”

Sale, lease and other options

“The province is not interested in purchasing hotels,” said Cuppens. “We are interested in providing opportunities, paving the way and making connections to find opportunities. We are looking at all opportunities, and ways to provide clarity and guidance, without owning the asset.”

Swonek said his organization’s options are owning buildings, having long-term (60 to 100-year) leases, and having owners provide operating services with the hotel owner retaining ownership of the building.

Jones stressed the importance of getting an expert to determine the current value of your asset and potential capital costs. Altus looked at the feasibility and costs of converting a newer hotel (under 10 years old) and an older asset (25-plus years old). There are obvious changes that need to be made such as fitting kitchenettes into units; but less obvious ones such as mechanical/electrical updates, sprinkler requirements, and the condition of the roof. They found that for a newer hotel, the capital costs were close to $30,000 per room to convert. For an older hotel, where much of the equipment was at the end of its life, the cost could be as high as $150,000 per room — meaning the project wouldn’t be viable.

“Fewer lenders are willing to participate in this space,” said Jones. “Some lenders are very exposed, and in the next coming months will need to be making decisions on a lot of these assets and come up with a solution or a strategy. In a lot of cases [conversion] is very viable and something they will want to look at right now.”

Assisted living facilities are subject to different standards, said Swonek. Complying with the Supported Living Accommodation Standard and the Health Services Standards can be challenging and expensive. Facilities may fall under a different building code, as well.

On the other hand, depending on the type of housing and the organization, there may tax breaks. Cuppens noted that some municipalities are providing tax breaks for this type of project.

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