Welcome to day one.
This newsletter is built for owners, operators, and investors who want execution, not Pinterest boards. Let’s get you dangerous fast.
🤓 BTW:
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Two‑Minute Takeaways
• R‑1 → R‑2 (hotel to multifamily apartments) is a real change of occupancy. That triggers different code, life‑safety, mechanical, and accessibility requirements. Translation: don’t touch a deal without a code path. Sources: ICC Digital Codes (IEBC/IBC) – https://codes.iccsafe.org National Fire Sprinkler Association – https://nfsa.org
• Not all conversions are equal. Extended‑stay reposition (stay R‑1) can cash‑flow with lighter capex; true apartments (R‑2) demand heavier capex and tougher approvals - but can command durable value.
• The basis is the boss. If your all‑in cost per created apartment is too close to new‑build or comps, walk.
• Public programs and C‑PACE can tip the scales, especially where rents alone don’t carry the capex. Sources: Better Buildings Solution Center – https://betterbuildingssolutioncenter.energy.gov Plante Moran C‑PACE insights – https://www.plantemoran.com Office of the Governor of California – https://www.gov.ca.gov California Housing & Community Development (Homekey) – https://www.hcd.ca.gov
1. Pick your lane early: Reposition vs Reclassify
Lane A - Extended‑Stay Reposition (stay R‑1): Add kitchenettes, tighten operations, reposition as extended‑stay.
Pros: fastest timeline, less code friction, zero unit loss.
Cons: you’re still “hospitality,” so NOI rides demand and management quality.
Lane B - True Apartments (become R‑2): Combine rooms, add full kitchens, re‑plan life safety, and change the certificate of occupancy. Pros: durable residential yield and refi options tied to apartments. Cons: heavier capex, deeper reviews (building, fire, planning), parking and site standards may bite. (R‑1 = hotels; R‑2 = apartments.) Sources: ICC Digital Codes – https://codes.iccsafe.org National Fire Sprinkler Association – https://nfsa.org
Reality check: A fast hotel refresh can be a great cash machine; a clean hotel‑to‑apartments conversion can be a great long‑term hold. The dog is the deal with a bad code path and a bloated basis.
2. Code Corner (no fluff, just the flags)
When you switch to residential, codes kick in - expect scrutiny of egress, fire protection, structural, accessibility, and mechanical/ventilation. Kitchens and ventilation often move you into a different mechanical and plumbing world. Get a code consultant and a 30‑minute read from your building official before you open your model spreadsheet.
Quick flags that kill deals early
• Exterior‑corridor buildings where the jurisdiction requires enclosed residential corridors.
• Window coverage that can’t satisfy light/ventilation for dwelling units.
• Parking and site standards that explode costs and the city won’t allow a variance (or trigger off‑site work you don’t control).
Here's a property I rezoned from motel to apartments (Click on Image)
3. The 10‑Minute Deal Screen (how I triage leads)
• Use path: Are extended‑stay assets allowed by right? Is R‑2 permitted or permitted with CUP? If it’s a rezoning, budget time and politics.
• Code path: One‑page plan covering means of egress, sprinklers, accessibility strategy, and how you’ll get light/air to every unit.
• Basis test: Back‑of‑napkin yield‑on‑cost ≥ 7% for a hotel conversion reposition; 8%+ for R‑2 without subsidy.
• Unit math: How many net apartments after combinations (and what’s the loss factor)?
• Ops thesis: Who’s managing? Tech stack? Ancillary revenue?
• Capital stack: Seller‑carry? Bridge? C‑PACE for HVAC/envelope? Any public dollars in play? Sources: Better Buildings Solution Center – https://betterbuildingssolutioncenter.energy.gov Plante Moran – https://www.plantemoran.com
4. The Conversion Math (illustrative, not advice)
Scenario A - Extended‑Stay Reposition (stay R‑1)
• 120 keys, occupancy 85%, ADR $95 → Annual revenue ≈ $3.54M.
• If you can run ~35% NOI margin, NOI ≈ $1.24M.
• All‑in at $70k per key (purchase + refresh) → $8.4M basis.
• Yield on cost ≈ 14.7%. That’s why many groups start here.
Scenario B - True Apartments (become R‑2)
• Convert 120 keys into 60 apartments (2 keys → 1 unit).
• $240k all‑in per apartment (example: $50k purchase/key + $70k capex/key) → $14.4M basis.
• If average rent is $1,600, 5% vacancy, 35% expense → NOI ≈ $711k → ~4.9% yield. Ouch.
• But if you drive down basis (e.g., $140k per apartment) the same NOI yields ~8.5% - now we’re talking.
Moral: Your basis and scope decide everything. “Cheap keys, clean code path” beats “sexy renderings” all day.
5. Capital Stack Cheat Sheet (mix and match)
• Seller financing: Keeps senior leverage sane; matches the real construction timeline; preserves flexibility for refi.
• Bridge + C‑PACE: Use C‑PACE to fund eligible energy/water/life‑safety upgrades at long terms (often 20–30 years) repaid via the tax bill; pair with a lower‑leverage bridge.
• Public programs: In certain markets, acquisition + rehab grants/loans can be material (e.g., California’s Homekey has backed thousands of rooms into housing). If you’re pursuing affordability set‑asides or supportive housing, learn the program first - then pick the building.
6. Entitlements & Approvals: the fast path, your first three calls, in order:
Planner: “Is R‑2/R‑1 extended‑stay permitted here? Any overlays or design standards I should know?”
Building official: “I’m contemplating a change of occupancy (R‑1 → R‑2). Can we review egress, sprinklers, accessibility counts, light/air, and kitchen ventilation expectations?”
Fire marshal: “Anything you’ll insist on beyond code given age/condition?”
Simple outreach script you can steal Subject: Feasibility check – [Hotel Name/Address] potential hotel → apartments conversion
Hi [Name], I’m evaluating a hotel at [address] for a residential conversion. Before we engage full design, could we sanity‑check: (1) whether R‑2 is permitted or conditionally permitted on this parcel; (2) anticipated parking/open space requirements; and (3) any policy memos you have on hotel‑to‑housing conversions? A 15‑minute call would be gold. Thanks — [Your Name], [Phone]
(Pro tip: many cities now keep public memos or web pages on commercial‑to‑residential conversions. If they have one, your odds just went up.)
7. Execution: 7 non‑negotiables that move NOI
• Unit standards that match the target tenancy (sound ratings, blackout, storage, in‑unit laundry where feasible).
• Kitchen & ventilation decisions early - exhaust and electrical rise fast if you ignore them.
• Digital ops: self‑guided touring, unified inbox, scripted AI chat, payments. • Housekeeping & maintenance cadence right‑sized to the model (R‑1 vs R‑2).
• Access control that works for both guests and residents (and your team). • Ancillary revenue: parking, storage, cleaning, laundry, pets, premium Wi‑Fi.
• Community standards: the rules you actually enforce - clearly posted, digitally acknowledged.
8. What markets are signaling “Yes”?
Cities with public guidance (or funding) for conversions and clear code processes are waving you in. California is the headline example (Homekey/Homekey+), but the pattern - policy + playbook - is spreading. Watch for municipal pages that explicitly call out hotel‑to‑housing; they save you quarters of calendar. Sources: California Housing Dept. – https://www.hcd.ca.gov Office of the Governor – https://www.gov.ca.gov
9. Your first action items this week
• Pull three targets you already know. Run the 10‑Minute Deal Screen above.
• Schedule two calls: planning + building. Ask for any city memos on conversions.
• Sketch the stack: If the deal needs efficiency upgrades anyway, price in C‑PACE and see what it does.
• Decide the lane (R‑1 extended‑stay vs R‑2 apartments) before you model rent.
Closing Truth
This niche rewards clarity and speed. If you keep your basis honest, your code path clean, and your operations tight, you’ll out‑execute bigger checkbooks. If you chase gloss over governance, the permitting office will body‑slam your timeline. Pick your lane. Do the math. Then move.
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Light Citations & Resources
• Occupancy change & code basics: International Existing Building Code (IEBC) Ch. 10; International Building Code (IBC) Ch. 3; Group R summary – https://codes.iccsafe.org
• National Fire Sprinkler Association – https://nfsa.org
• C‑PACE primers and retrofit/conversion use cases: Better Buildings Solution Center – https://betterbuildingssolutioncenter.energy.gov
• Plante Moran C‑PACE overview – https://www.plantemoran.com • California Homekey / Homekey+ program: California Housing & Community Development – https://www.hcd.ca.gov and the Governor’s Office – https://www.gov.ca.gov
General information only - not legal, tax, or investment advice. Verify local codes and programs before deploying capital.
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