The Strategy That Turns Struggling Hotels Into Multifamily Goldmines | Ep. 1012

Episode Summary

Jigar “Jay” Desai, a second-generation hotelier and broker at NewGen Advisory, joins Kevin Bupp to explain how to tell when a struggling hotel needs better management and capital, and when it should become something else entirely. Jay grew up working in his family’s Route 66 motel in Arizona, spent a decade in banking and lending at Wells Fargo, turned around the Flamingo Hotel in Tucson, and has since transacted on more than 150 hotel properties as a broker.

Using a 272-room Tucson hotel sold to a multifamily developer as the base case, Jay walks through the four factors that decide whether a hotel-to-multifamily conversion works: room size of at least 300 square feet, enough rooms to combine units, the ability to rezone, and the cost of required fire and life-safety upgrades. He also covers parking ratios, neighborhood meetings, and why a conversion buyer values a property differently than a hotel buyer, whose price depends on trailing revenue, NOI, lending standards, competition, branding, and property improvement plans (PIPs).

The conversation also covers the hotel brand lifecycle, value-add repositioning into boutique soft brands, when third-party management makes sense, and why rising operating costs are creating distressed opportunities among hotels bought in 2022 through 2024. The episode is built for real estate investors evaluating hotels, conversion projects, or distressed hospitality assets.

Key Takeaways

– Screen conversion candidates on four factors first: rooms of at least 300 square feet, enough rooms to combine units, a realistic path to rezoning, and the cost of required fire and life-safety upgrades.

– A conversion buyer values a property on its future use rather than the hotel’s operating history, so a hotel losing money can still command a higher price from a multifamily developer.

– Involve zoning attorneys and the municipality from day one; approval can take a few weeks or close to a year depending on the city and local housing need.

– Before committing to an expensive PIP to keep a premium flag, weigh new competing supply against the lower revenue and lower operating costs of a downgraded brand.

– Rising payroll, insurance, and tax costs are pressuring owners who bought between 2022 and 2024, creating distressed opportunities for buyers who have capital on hand and can close quickly.

Key Topics Covered

– Hotel-to-multifamily conversions

– Minimum room size and combining units

– Rezoning and municipal approval

– Fire sprinkler and life-safety upgrade requirements

– Parking ratios, mailboxes, and transit access

– Neighborhood meetings for conversion projects

– Hotel valuation versus multifamily valuation

– Hotel lending and underwriting standards

– Property improvement plans (PIPs) and brand standards

– Hotel brand lifecycle and flag downgrades

– Value-add repositioning into boutique soft brands

– Third-party hotel management versus self-management

– Distressed hotel assets and lender workouts

– Transitional housing and behavioral health conversions

– Using a 1031 exchange to acquire a hotel

– Family-run motel operations

Episode Chapters

00:00 Intro

Kevin introduces Jay Desai, a second-generation hotelier and broker at NewGen Advisory, and previews the discussion on hotel turnarounds and hotel-to-multifamily conversions.

01:32 Learning the Family Business

Jay describes his parents buying a 24-room Route 66 motel in Arizona in 1998 and learning operations and maintenance as a nine-year-old, followed by a real estate and finance degree and 10 years at Wells Fargo.

10:22 Buying the “Flamingo” Hotel

After the city acquired the family motel, Jay used a 1031 exchange to buy the 80-unit Flamingo Hotel and turned it around with a 30-60-90 day renovation plan. He then moved into hotel brokerage, transacting on more than 150 properties.

15:11 Jay’s Business Model

Jay explains how retaining staff and setting procedures lets him run his hotels in a few hours a week, including a 100-unit interior-corridor property bought with a friends-and-family group in 2022.

17:48 Hotel Conversion Case Studies

Jay walks through a 272-room Tucson hotel sold to a multifamily developer, covering rezoning, fire and life-safety upgrades, parking ratios, neighborhood meetings, and an all-in basis of about $80,000 per unit.

23:10 4 Biggest Conversion Dealbreakers

Jay lays out the four factors that decide a conversion: room size of at least 300 square feet, room count for combining units, rezoning feasibility, and life-safety costs. He also explains how municipal approval timelines vary.

27:58 How Hotels Are Valued

Jay compares hotel and multifamily valuation, covering deferred maintenance, occupancy, competition, branding options, trailing revenue and NOI, and today’s stricter hotel lending.

31:50 The Hotel “Lifecycle”

Kevin and Jay discuss how hotels move down brand tiers over time, the cost of soft and heavy PIPs, and when an owner should renovate, downgrade a flag, or sell.

35:49 Value-Add Opportunities

Jay shares two examples: a 100-unit property repositioned into a Marriott soft brand now generating close to $3 million in revenue, and a condemned 120-unit hotel being converted into a Choice Hotels soft-brand boutique.

41:31 Using Third-Party Management

Jay explains when major brands require an approved third-party management company, how owners stay involved, and when experienced operators can run hotels themselves.

45:10 Finding Hotel Deals in 2026

Jay explains why rising operating costs and 2022 to 2024 acquisitions are producing distressed hotels, and what buyers of transitional housing, behavioral health, and conversion projects are looking for.

48:47 Connect with Jay

Jay shares how to reach him through LinkedIn, the NewGen Advisory website, Instagram, email, and phone.

Full Transcript

Jay Desai: I walked out to the property, I met with them, and I saw that, man, these guys have big rooms. They have kitchenettes and wet bars in a lot of the units. This is the perfect property for maybe another use, such as a multifamily. My guys that went in, you know, were able to buy the place for less than $50,000 a unit, dumping maybe another $30,000 into it. Once they got the properties fully stabilized, you know, that property’s worth easily close to $120,000 to $150,000 per unit as a multifamily development plan.

Kevin Bupp: Sometimes the biggest mistake an owner can make is assuming that a struggling property just needs more capital. Because there comes a point in time where the real question isn’t, how do I fix this asset? It’s more about, should this asset even be used this way anymore? Welcome back to the Real Estate Investing for Cash Flow podcast. I’m Kevin Bupp. Today, I’m joined by Jay Desai, second generation hotelier and broker at NewGen Advisory. And what I really wanted to understand is how his background and experience shapes the way he evaluates a property today. Okay. In this conversation, we get into how growing up in a family-run motel shaped the way that Jay thinks about ownership and risk, why two struggling hotels can require completely opposite decisions, and we also get into the realities behind hotel to multifamily conversions and some of the details that can kill what looks like a great deal on paper.

There’s a lot that applies well beyond hotels. Jay, welcome to the show, my friend. I’ve really been looking forward to this conversation and having you on here with us.

Jay Desai: Appreciate it. Thanks for having me.

Kevin Bupp: So, you know, I’ve, yeah, no, no, excited, buddy, to have this call. And, you know, you’ve had quite the unique perspective on the hotel business. I know that you and your family, you grew up operating hotels. You’ve also spent nearly a decade in banking. And then today in your business at the present time, you advise hotel owners through acquisitions and dispositions. And so, yeah. There’s a great deal that I’d like to unpack with you here today. So let’s just dive into it. And I’d really like to set the backstory a little bit and get a little bit more of a perspective of kind of your upbringing and ultimately how you got your foot in the door of this business, which I knew was from a family side.

So again, you didn’t… You know, like like maybe some folks today that are in the business, you didn’t learn you didn’t learn the industry, you know, from a textbook or going through, you know, college classes, university classes, things like that. I mean, you grew up in it. You lived and breathed it day in, day out. And so I guess maybe take us back a little bit. Take us back to your, you know, your family getting into that that first motel, which I believe was in Arizona. And, you know, what your childhood actually looked like.

Jay Desai: Sure, sure. No, I make my parents came to the United States from India back in 1986. And when they got here, you know, they’re like, what do we need to do to get, you know, follow the American dream? How do we settle ourselves? We’re going to grow our family out here. We have, you know, other family out here. What do we do? So when we got out here, my cousins were in the convenience store business and some of them were working labor jobs in factories and whatnot. So my mother, she got a job in a cup company. It was called Sweetheart at that time. And it’s called Solo, the cups that they that were making.

So she was in quality care, you know, working on the traditional factory belts back in the day. And my dad started working underneath my uncle. He used to own a couple of 7-Elevens in downtown Baltimore. And, you know, he learned the business, he learned, you know, he’s working the register, mopping the floors, you know, all the traditional items. And it got to the point where the locations kind of started getting worse. And, you know, they had me in, you know, three years later. And my dad was still working at the store. And due to the location and area, he got robbed about four times. And that’s when my mom was like, you know what, this is enough.

You know, it’s not going to be good for our kids. We’re going to need to find out what we’re going to do next. They started exploring, you know, the educational route, you know, should we go back to school? But then the question is, where are we going to get the money from? Or, you know, should we look at other jobs? So then my dad started working, you know, other like labor jobs here and there. And then one day, my uncle called my mom up and from Arizona, another uncle of mine, and goes, Hey, why don’t you guys get into the hotel business? My uncle was a chemist by trade.

And on the side, he bought this little 13 room motel and he was living on site, you know, doing the day to day work nine to five. And he was operating the property, you know, living on living there. So he was saving money on rent, you know, and he was cleaning the rooms. He was doing the maintenance on the weekends whenever needed. So my parents like, hey, we never explored this. Why don’t we look at it? Right. We don’t know anything about it. Flew out to Arizona. And my uncle showed them this 24 room little motel roadside little Route 66 motor lodge. And they came out here.

They’re like in the middle of the desert. Like, what is this? Where are we going to get ourselves into? And after they saw my uncle do the day to day for about a week, they say, let’s give it a shot. So we moved out here in Arizona in 1998. And my parents bought their first little roadside Route 66 historical motel. And we moved in and we had like an office in the front and a big manager’s apartment in the back where there was like a living room, a kitchen, a couple of bedrooms. So I took a room, my sister took a room, my parents had a room, and we were just living on site.

And thereafter, my parents kind of figured out how to run the hotel. They had no experience. You know, they started doing the front desk 24 hours a day. Whenever a guest would come, you know, they would come out of the manager’s apartment and, you know, assist the guests. At nighttime, they would just wake up whenever people needed to check in and assist them. And I started school at that time. And, you know, while I was going to school, after I would get out, I would help them, you know, run the front desk with them. On the weekends, I would help them do the housekeeping. And then my dad kind of learned maintenance himself as well.

And I would just be with my dad walking around the property. And I learned how to do drywall. I learned how to do plumbing, toilet issues, fixing showers, you know, doing roofs, you know, landscaping around the property. And I was nine years old at that time. And, you know, that’s how I kind of, you know, got my experience in the hotel business. Um, we, we held that property for almost, uh, 25 years. We were living on site, running it. And it got to the point where we, you know, slowly renovated the whole property, kept the historical charm. We had like this cool, you know, long pool with like, that looked like a bean shaped.

Um, I mean, I mean, it was, it was great. And when my parents over the years just built a great book of business where we just kept getting a return guests over the years. And we would have guests that would come every single year. We would stay in the same exact room for 15 years. And it got to the point where, you know, I started going to school. I graduated and I went to college at the University of Arizona. And we were still owning and operating that hotel. Um, when I graduated, I graduated with a degree in real estate and finance. And my passion was like, you know, I was trying to figure out what to do.

Uh, my parents like go, you know, the traditional parents, you know, they’re like, Oh, go become a doctor, go become engineer, go become a lawyer. And I’m like, I don’t want to do any of these things. I want to do something in the hospitality business. That’s what I was growing up in. My dad’s like, you know, there’s a lot of hard work. You’re not going to make much money. And I say, you know what? But that’s my passion. I’ll figure it out. So my dad’s like, look, you have the hotel as your background. You’re living here. You’re helping us operate. Why don’t you go use your degree?

So I started working for Wells Fargo Bank, Inc. for 10 years. And, you know, I started as a part time teller back in college. And then I worked my way up, got into personal banker, business banking, gotten from management roles. I also did a little bit of commercial. lending, business banking. So it was great. Those 10 years, I learned a lot of experience, got to meet a lot of people. And I’m able to use that in my day to day. And especially when it comes to the lending aspect of it, I kind of understood what underwriting looks like, how tax returns need to be kept, how books are important, what’s required in the lending requirement to get a clean loan done.

So I was able to utilize a lot of those things afterwards. When I was going to college, we also ran into some issue because. When 2018 was a rough patch for us in the sense that, you know, since we were living there, you know, the hotel had a lot of sentimental value for us. The street that we were on was getting bought out by the city and the county. They wanted our property and they wanted it to expand the college that was right next to us. So what they started doing was. you know, politics, the government started coming in and started harassing a lot of the owners on our street.

And they said, look, you guys are in, you know, violation of codes. Your hotels are old. You guys need to upgrade this, that. And we were looking at thousands of dollars to upgrade a lot of these items to bring it back up to newer modern day items with, you know, electrical upgrades, gas upgrades, things like that. Because these hotels were built in the 1940s and 50s, right? Yeah. completely brick building. So some of the guys, you know, on our street kind of just gave up and then just handed their keys over and just kind of took whatever they offered and just moved on. And I think a lot of that had to do with their old age.

You know, they just didn’t want it anymore. The kids were well settled. And they’re just like, all right, we’re at this point, I guess, call it retirement. For us, it was like, look, my parents are young. I still had a young sister and myself, you know, I was I still had a lot of things that I wanted to get done. And I’m like, you know what? I’m not I’m going to fight back. So it started fighting back with the city. And that’s when I got them to come out to the property and gave them my whole story that I just gave you. And they saw like what we were doing on a day to day.

And that’s when they kind of pushed back a little bit and said, all right, you know what? This is their home. This is where they live. This is their only livelihood. This is their only income. We got to work with these guys. And, you know, lo and behold, I told him, I said, look, I will give you my property. It’s going to a great use. It’s going for the students. It’s going to the college. You guys are going to make a new hospitality program out of this, maybe using and utilizing my hotel as another use. Right. They weren’t thinking about turning it down. They wanted to maybe bring a hospitality program in there.

you know, get the kids in there and show them how a hotel runs and show them how housekeeping departments are run and all these things. Right. So I said, great. So you got to give me some time. So that’s when it came down to like, all right, what do we do next? I can’t just stop. We got to grow. And that’s when I kind of figured I’m like, you know what, I’m working. This is my path of getting into the hospitality business that I really wanted to. So I started looking at other hotels in town that I can 1031 exchange my parents funds into. And there were a couple opportunities that I found.

And we found this 80 unit motel right up the street from where we were at. And it was a it’s called the Flamingo Hotel, and it had a lot of historical feel to it. You know, John Wayne used to stay there. Elvis Presley stayed there. They had a lot of old Tucson like movies taking and taking place there. And they had the old historical Flamingo sign. And, you know, it was owned by guys out of California. They were, you know, not operating correctly, mismanaged. They had a lot of drugs, prostitution. I mean, a lot of just issues at the property. And I said, you know what?

I’m going to turn this place around. So called the owner up and, you know, great guy. We sat down and gave him a whole story. And he said, you know what? Let’s do a deal. I need to get out. This is perfect for you. Let’s shake on it. So we shook on it. Ended up buying the hotel. I ended up giving our old property back to the city so they can do whatever they needed to do with it and got in. And I started, you know, the first 90 days, like, what did I get myself into? Right. The roof’s completely like done. The walkways needed issues.

I mean, there was a lot of like drugs, prostitution going on. The staff was stealing. And the first two weeks, I just let it run. I got in there, you know, I quit my job, I got in there and it was just like I was kind of watching everything that was going on. And some of the guys I’d get a need to be there, the staff started leaving on me. I started kind of figuring out what I needed to do to renovate the place. Right. So I took it at a 30, 60, 90 day roll. I was like, we need to get the roof done.

We need to get these renovation items done. We need to get the parking lot done. So I started getting bids out from a lot of my connections that we had through where we were living at the time. And I was able to start and renovate the hotel. And, you know, I was able to bring new staff in and, you know, just turn the place around. Right. I mean, we did solar on the property. I got the neon sign back up. I got all the rooms renovated. I got, you know, a lot of the guests that were following us in the old hotel start following us to the new place.

And lo and behold, you know, after two years, you know, it was history. During that time, I got into brokerage as well. You know, again, I was trying to figure out where I wanted to get into management or operations or figure what I wanted to do. I just didn’t know. So I was very involved in the Asian American Hotel Owners Association organization as well. And my buddy, Dan, who is one of the owners of NewGen Advisory. you know, reached out and he goes, Jay, like, what are you doing? I, you know, you’re running the hotel, you’re doing this. You’re always connecting me with people, right?

You know, a lot of people, you’re always connecting me with people that needed help with, you know, buying hotels, selling hotels. So I know you really want to do something and you had your real estate license. I had my license since I was 18, but I never did anything with it. It was just sitting there. But I knew how to all the rules and regulations behind it. I knew how to transact. Right. So he goes, why don’t you come work with me? Run your hotel, do whatever you need to. But you don’t need to spend a lot of time in this. Like do part time.

Try it out. So I went in and while I was, you know, operating the hotel and renovating, I started getting into brokerage. And, you know, I got my first listing, you know, within two months and I was able to transact on it within the four, you know, within four months after that. And after that, I was like, you know, I really like this. And the first transaction was very important to me because I was able to bring a buyer out of New Mexico who was, you know, having issues with this property out there and he wanted to do something for himself. So I was able to kind of and he had two young daughters and he wanted to get into a bigger city, you know, make sure that their education was great.

They had a good city to live in where there was no crime. And I was able to, you know, kind of secure that and find him a hotel that worked out well for them. And, you know, just seeing that success and, you know, that buyer, you know, transact on that property and now him having two, three other hotels, his kids already graduated from college. And, you know, that transaction kind of led from, you know, being a good client of mine to a family friend now. Right. So that’s what also got me into brokerage. And I was able to utilize a lot of the things that I did from an operational point, renovation point, lending point, and give that guidance and consulting advice to a lot of my clients where, you know, I’ve been in brokerage for almost 10 years and I’ve transacted almost over, you know, 150 hotel properties during my time using a lot of the things that I’ve learned since I was, you know, nine years old.

Kevin Bupp: Yeah, there’s a lot to unpack there, my friend. So why don’t we talk about, I guess, maybe what your business looks like today. I know you’re a broker, so I know that you help on the advisory side and help connect buyers and sellers together. But ultimately, you’re also involved at a more granular level, right? Like you’re in the operational side of things, you have a number of your own properties, things of that nature. And so why don’t we start there? Just give us a little bit of a background of business. The hands-on that you’re involved in today, what your business model looks like, what you’re looking for in the marketplace, what’s a good fit, and maybe just expand upon that if you would.

Jay Desai: Yeah, certainly. So, you know, with the hotels that I own, when I got in, it took me two years to get everything up and running, right? In terms of putting the correct staff in, GMs in, front desk staff, maintenance staff and housekeepers, right? I will tell you, like, since 2018 till now, majority of my staff has been with me from day one. And not only that, it’s because, you know, I created a… procedure and process and then relationships with a lot of my staff where I keep them like family. I help them out from a day to day when there’s issues or they need assistance or anything like that.

I’m there, you know, pay them well, give them good benefits. Right. So when it comes to the operations staff, when a lot of people say, you know, I’m having issues with staffing and whatnot. Yeah, I get that. But, you know, a lot of that comes down to, you know, a lot of these other items as well, too. So I was able to set those, you know, items up in place where I’m able to kind of expand on what I’m able to do now. My thing was like, I don’t want to stick with one hotel. After I did that with one property, I went in and then I created a group between friends and family.

As things were getting more expensive, we picked up another hotel in 2022. And same situation. It was a 100 unit property interior corridor, had a lot of issues run by guys out of state and they needed to get out. Um, and I, and I saw the vision. I said, you know what? This is going to be a long term of play, but I think if we put the money in, run it right, I think there’s money to be made here. Um, so I was able to put a group together. We raised the money, got in. Um, one of my good buddies is a great operation guy and he was able to find a good GM staff, everything like that.

We were able to put in place and I took over the full renovations. I got my guys that renovated my first property. I brought them all over there and we redid everything. office, common areas, things like that. And again, that took about six months of my time. But once I put the procedures and items in place, you know, I barely, you know, I spend maybe a few hours a week managing that and that’s it. And I’m able to focus majority of my time full time on brokerage because of the items that I have in place.

Kevin Bupp: I want to unpack that a little bit, Jay, if we could. So, um, So you’ve seen hotels now as you grew up in it, you’ve seen it as a, you know, from an operator lens, a lender, a broker. And so I guess curious to know, like when you look at, you know, some of these opportunities that you’re looking at, some of the things that you’ve acquired, or even if it’s just on the advisory side, when you’re looking at a struggling hotel today, what’s going on? I guess, how do you determine whether it simply needs better management? It’s a management challenge and just a little bit of capital or whether the maybe the economics of the actual hotel itself has have changed enough to where maybe it just shouldn’t be even a hotel anymore.

Maybe there’s a better use for it. So how do you how do you decipher those two things?

Jay Desai: Yeah, certainly. I’ll give you a good example. I transacted a property back about five years ago. It was a 272 room hotel. One of my clients reached out and said, Jay, my family is running and operating this hotel. We have 50 plus people working here. I have a full service bar and restaurant. I have an Olympic sized pool. It sits on 11 acres of land and it was just way too much for these guys to handle. And they were just putting money in month by month, month by one, just in deferred maintenance. Property was old. I mean, it just got to the point where they just couldn’t keep up anymore.

And that’s when they kind of had to figure out like, hey, do we just keep weathering the storm? What can we do here? I walked out to the property. I met with them and I saw that, man, these guys have big rooms. They have kitchenettes and wet bars in a lot of the units. They have a big playground, volleyball court on site, Olympic sized pool, a gym, restaurant, common areas and ton of land. And I and I’m like, you know what? This is the perfect property for maybe another use, such as a multifamily. The property was located right in downtown Tucson where it was growing.

There was a lot of need for housing at that time. There was not a lot of multifamily properties out there. And I say, you know what? I have a couple of clients that may be able to take this down, that may be able to pay you top dollar. Then what a hotel is going to be worth? The revenues that they were doing and the net income that they were bringing in, which were losses, would not have been able to support the valuation that another use would have. So I got them connected with one of my multifamily developers and they came out and they looked at the property and they said, man, we can get high rents in this area.

You know, we don’t even care what the hotel is doing. We don’t care about the numbers that it’s doing because it’s going to be completely different than our performers and projections we’re going to be playing here. And when they came out, they said that, look, a lot of these units we can convert into one bed, two bed, three bed and four bedroom apartments. And they were able to get rents as low as $1,000 to maybe $3,500 a month in those areas. And their thing was, you know, we’re going to turn this into market rate apartments right in downtown. They came in and the process took almost a year.

You know, we walked the property. But there was a lot of things that I learned from that first transaction because we had to get zoning attorneys involved. The property was zoned as a hotel. They had to reconvert the zoning into multifamily, which could take eight months to a year. The other problem was life safety and security. As a hotel, you know, they usually just have like fire extinguishers around the property. They may not have sprinklers in the rooms. They may, you know, just have a traditional fire panel. But these guys, you know, when the city came in, they said, look, now since there’s going to be people living here, we’re going to have to do full fire sprinkler upgrades.

We’re going to have to have fire hydrants somewhere on the property. We’re going to have to do life safety, you know, equipment around the property, which added… costs that the buyer had to pay. The other items that they looked at was parking ratios. Multi-family would require at least one-to-one parking ratio, one person to or one bedroom to one parking. So they had to figure out adding additional parking on the 11 acres of land, which there was plenty of space, but we just had to figure it out. Mailboxes for all the units, where are we going to put those? Transit access for buses and. what is it called?

Neighborhood meetings were very important too, because a lot of the neighbors didn’t expect because they thought they were going to be housing and they didn’t want to make sure that there weren’t going to be low-income housing people or Section 8 housing people were just kind of tear up the area. They wanted to make sure what kind of people are going to be living here. How’s the access going to be? How is, you know, people are going to be getting in and out from this one-way street. So there was numerous… neighborhood meetings that took place. And, you know, my guys that went in, you know, were able to buy the place for less than 50,000 a unit, dumping maybe another 30 into it.

So they were at 80,000 a unit by the time they were done. Right now, once they got the properties fully stabilized, you know, that property is worth easily close to 120 to 150,000 a unit currently as a multifamily development plan. The sellers were struggling. They were able to get out with these guys coming in and they were able to downsize into more of a higher end property like a Hampton Marriott that they picked up in Dallas, Texas. And that was more of their forte in terms of operations than buying this resort and running it. And, you know, one of their goals that they wanted to do in life.

But after they started doing it, they just ended up starting losing money on it. So it worked out for both the buyer and seller in that transaction.

Kevin Bupp: Yeah. Now, let’s unpack that one a little bit. So it sounds like that one, that particular property had all the right ingredients, right? In order for it to be, you’ll have a higher and better use, be an ideal conversion candidate. Obviously, it had large rooms. It had some additional, well, it had a lot of acreage there so you could, you know, adjust to the parking ratios necessary and make some modifications so that you could have, you know, transit lines come in and just, you know, basically satisfy the needs of zoning in order to convert it over to a multifamily use, I guess what, what, what, what would have, um, you know, if, if it, what are some of the ingredients if it didn’t have would have ultimately changed that perspective to where it wouldn’t have been a good candidate, um, you know, for a conversion?

What would have been if it, you know, if it had smaller rooms or if each rooms didn’t have kitchenettes in them, you know, but had everything else, would it not have been a great candidate? Or if it didn’t have that, you know, the 11 acres, if it was on eight acres and more dense, would it not have been a good candidate? I guess, what’s the process of elimination here? And I want to use this as the base case so that, you know, as we talk about this conversion process, you know, folks that are listening, they might be considering this as a business model. Hey, like, as we know, like there’s a number of hotels out there that probably are struggling, maybe in some sort of distress that are in great locations.

But, you know, from the outside looking in, one might say, hey, this is pretty easy. Let’s just convert these rooms over to multifamily use and, you know. there will be a winner, right? But it’s not that easy, right? It’s not that black and white. So what are some of the aspects that would have made this not work or be a good candidate?

Jay Desai: I think the first thing is the room sizes, right? Making sure that the room sizes are at least hitting that minimum 300 square feet. Because if they’re able to hit that 300 square feet, there’s kitchenette units that a lot of these conversion guys can purchase. And they just tie into the existing plumbing with the bathrooms or the existing walls and sinks and stuff like that are there. If it’s smaller than that, then it’s going to be too hard to fit in like a combined like kitchenette, living space and bathrooms and whatnot in those rooms, right? Secondly is the number of rooms. If the rooms are small, that might be okay.

But if there’s a lot of rooms that are available, maybe 200, 300 rooms, then they can maybe get into the idea of combining some of the units without losing the additional rents that they can get, right? Especially if they’re picking it up for such low price per key. Right. I think that’s the second thing. The third thing is zoning, you know, making sure that the property can be rezoned to a multifamily use or a change of use. Right. Without that, a lot of these conversion guys are going to shut the property down. If there’s a possibility of that, we get zoning attorneys involved or get the cities involved right away from day one.

As long as first two checks out, room sizes are great. Maybe we can combine units. All right, let’s go reach out to the city. Is zoning going to be available? Is there a housing shortage? Are you guys going to prove this? If that checks out, then perfect. Then that goes to the next steps of like, OK, what’s going to be required now by the city in terms of converting these units? Is it going to be, you know, sprinklers, fire panels? I mean, life safety equipment like what are we going to run? Turn what are what costs are we going to run into with this? Right.

Those are the four biggest items. And then, you know, all the other items such as parking and density ratios of all that stuff can be kind of figured out. But as long as those four main items are met, then I think I think that’s a good candidate for property. And then also having common areas. Right. A lot of common areas such as large offices or banquet facilities, meeting spaces, which can be converted into uses for, you know, business center or like a playroom area or, you know, having additional land for having dog park or whatever it may be. That, you know, creating those additional amenities that the guests can use in the future.

Kevin Bupp: Yeah, no, that’s great. That’s great. Would you say that one of the bigger hurdles is getting zoning approval, getting a municipality to be receptive to the idea of a conversion?

Jay Desai: Absolutely. Yeah. So a lot of this municipalities, depending on where you work with, they all have different rules and regulations around it. A lot of them, you know, want to make sure that they’re working with the right developer. Number two, they want to make sure that whichever developer is going to come in, they’re going to do it correctly without taking any shortcuts. Follow all the local code enforcement guidelines, all those items. And that’s that’s number one. And number two, you know, some locations and some municipalities are quick. You know, we’ve gotten zoning done within a few weeks to maybe, you know, three months. Some municipalities, depending on who you work with, you know, larger cities, sometimes they take longer.

Right. Because they just have so many projects in the play where they have to go to different departments. They have to submit their full design plans, get the permits and go to numerous meetings. And then, you know, zoning can can take place. So I would say it just all depends on, you know, locations and whatnot. And I think it also depends on, you know, if there’s a housing need or not in that specific area to push things through quicker or faster. Right. You know, it just is going to come down to that.

Kevin Bupp: Yeah. No, no. Understood. Understood. So again, I want to stay on this example here because I think there’s a little bit more to dissect here. So you’d mentioned that they were purchasing it for about $50,000 a unit. They put about $30,000 into it. So all into it for $80,000. I would assume, just given it was located in downtown Tucson, 11 acres, a big piece of property. My guess is that the cost to replace that property would be far more than that of $50 a foot than what the actual multifamily buyer purchased it for, correct?

Jay Desai: Yeah.

Kevin Bupp: And so help me understand the, I guess, the valuation of how the value would have been different if it had just been valued as purely as a hotel, you know, using an income model to that of how a multifamily buyer would be evaluating. Obviously, the valuation methods have similarities, but ultimately, there’s a lot of differences as well as it relates to valuing a hotel versus that of a multifamily.

Jay Desai: Yeah. Sure. If it was… Okay, so taking a step back, if you were going to evaluate the property as a hotel, a lot of things come into play, right? So number one, how much money is going to be needed in terms of deferred maintenance and managing this hotel, right? You have 272 rooms. You got to look at what the market is doing in terms of how many of these units are actually being… occupied on a day to day basis are all 272 rooms being occupied. Doubt it. Um, second thing is, you know, what are the what’s the competition in there? Is there more hotels coming in?

Is there newer inventory coming in? That’s going to drive this older product out. A lot of guests usually just want to stay at, you know, newer hotels, especially when they’re able to spend maybe 10, 20, 25, 30 dollars more. And they’re staying at a brand new Marriott or Hilton or something like that versus staying at, you know, an older property like this, right, that has issues. The next item is, you know, branding options. Like what brand can you put on this property, right? You know, you got to look at what brands are currently available in the market. What brand can you put on the property?

What value that’s going to bring? What kind of clientele that’s going to bring? What kind of rates are you going to get? How much are you going to be able to charge for this type of a hotel? Yeah. to the guests. And the last thing is, you know, the numbers. The numbers are the biggest thing. Right now, lending has gotten so strict in terms of underwriting. A lot of banks are looking at what the property has been doing on paper within the last three to five years. Has the revenues been going up? Has it been going down? If it’s been going down, why has it been going down?

What’s the NOI look like? What are expenses looking like? Right now, in terms of operations, the expenses are all rising. Payroll is going up day to day. Property taxes are going up. Insurance is going up. All those fixed costs are going up. So the margins of profitability have slimmed down over the years. And based on that underwriting to get hotel loans, they’re looking at these things and they’re like, OK, well, a new owner is going to come in. What are they going to do to turn this place around? You know, how are they going to increase the revenues? What marketing items do they have in place?

Right. And based on those things, that’s where a hotel is going to be valued at. If they’re not able to get a loan on it or the NOI numbers aren’t there and the revenues are decreasing, then, you know, a buyer is going to look at these items and look at, you know, the PIP that’s going to be involved and get a loan. maybe come down instead of paying $50,000 a key, they may be down at $20,000 a key or maybe paying, you know, like 10, 11, 12 cap, you know, pricing, right? Which is going to drive the value down. It just has to make sense for the next buyer to come in and do whatever they need to do and hold it stabilized and maybe get out.

You know, they’re not going to be able to get the valuation that they’re going to get as and maybe another use, unless numbers are there or it’s going to require minimal PIP or something like that.

Kevin Bupp: You mentioned PIP. That’s a property improvement plan, correct? Okay.

Jay Desai: Yes, exactly.

Kevin Bupp: Let’s talk about that. I’m by no means a hotel expert. But I guess through my lens, what I see is that hotels tend to have, and not all hotels, but a lot of hotels kind of have this inevitable… downward death spiral that they go through, right? Like you got the, you know, the new latest and greatest hotels. It’s got what, you know, it’s got one of the, you know, predominant flags, you know, Hyatt, Hilton, whatever, you name it. And then, you know, over time it gets a little tired out, gets a little worn out. And, you know, 10 years later, 15 years later, it turns into, you know, whatever the lower tier down is, I don’t know, best Western, something along those lines.

And then it stays at for a period of time and then it gets another flag, right? You know, now 30 years down the road. Now it’s a, it’s a, Super 8 or Motel 8, whatever the name of that chain is. And then, you know, does that tend to be the case? Is that the normal life cycle of a lot of hotels that they just trend downwards? Because really, at the end of the day, it’s almost like it’s a problem. pricing game, it’s really difficult to compete against any of the new inventory coming to the market unless you’re willing to reinvest substantial amounts a month. You have the property improvement plan to actually keep that predominant flag that you had going into it.

Am I accurate with that assessment there? Is that typically what happens in a lot of hotels over time?

Jay Desai: Yeah, I think it’s all case by case, depending on the market that you’re in. Some of these larger markets, if there’s especially new inventory coming in, which is going to create more competition in the area, then it’s going to come down to, you know, for an owner to, you know, should I keep the property reposition, sell it or should renovate it or downgrade, you know, the brands. The biggest thing is when you’re downgrading the brands, you’re also losing the. the revenue that you were originally going to be getting, they’re going to be charging less rates. Yeah, you may be spending or not spending any money at all in terms of renovation because now you’re downgrading a brand and your clientele segments changing as well too.

But yeah, I’ve seen some of the markets like in Metro markets, especially, I’ve had owners start off as a Hampton Inn and back in the day and the property, usually these hotels require a soft property improvement plan every five to seven years. And then there’s like a heavy property improvement plan, which includes like full case goods, interior paint, flooring, bathrooms, all those, you know, the nine yards just to keep up with, you know, modern industry standards, which end up costing, you know, 15, 20,000 a unit in nowadays when you’re doing those full renovations. And so that it comes down to like, okay, you know, Is this property going to be worth, you know, this property is already aged 20 years.

Should I continue keeping the same flag, spending the 20, 25,000 in the property and my revenues are going to sustain? Is there other inventory that’s coming in that’s newer that’s going to affect my competition? Yeah. Or is it the time to downgrade maybe from a Hampton Inn to a Best Western, for example, and maybe take a hit in the revenue, but I’ll have a lower operational cost than what a Hilton flag may have and spend a little bit and continue operating. I think it’s going to come down to the specific property in the market. things to keep in mind as well when making that decision.

But yeah, no, I’ve seen the hotels, you know, continue where they’re in, you know, maintaining high RevPARs, revenue per available room, over that $100 mark of numbers where there’s no new inventory coming in. There’s limited competition where a lot of those guys are, you know, continuing to spend the money in every 10 years because they know that, you know, I’m the only guy here. But then I’ve also seen in some markets where there’s a lot of new inventory that’s being built. They’re like, all right, now it’s hard for me to keep up with this. Now it’s creating a price war. I’m not able to agree that I was able to.

Now it’s like, all right, I don’t want to spend that 20, 25,000 a unit. I’d rather, you know, downgrade to a decent flag, maybe take a little bit less. But I’m still maintaining my operational costs because I’m able to cut those expenses.

Kevin Bupp: Yeah. Is there a value opportunity? Are there opportunistic buyers out there that look for units that have downgraded flags, assuming that it might have been a Hilton, now it’s a Best Western? I’m probably not giving good examples here, but is there an opportunistic plan and other buyers out there in the marketplace that look to take the folks that didn’t want to invest the capital necessary to maintain the original flag? They downgraded it, but now a new set of eyes comes, looks at it and says, hey, I think this is still a great opportunity. I’m willing to invest the capital. And they go in and ultimately, you know, do the necessary improvements per room and enhance the value, enhance the property and be able to charge higher rates.

Is there a value add play like that? And again, I think of like traditional multifamily, right? Like that is the game plan with multifamily. Does a similar thing exist in the hotel space?

Jay Desai: It does. And I’ll give you an example. I transacted on a 100 unit exterior corridor property. And the property, you know, originally was built as a higher end Hilton product. And, you know, the lifespan of that property just deteriorated. I mean, deferred maintenance, everything just deteriorated. The building just kind of went down, plumbing issues, I mean, roof issues, things like that. And it ended up being, you know, a lower flag economy brand at that point. There was a buyer that came in on the 100 units and spent, you know, $24,000 a key. And his idea was like, you know what, I’m going to turn this exterior corridor property into a boutique soft brand hotel in one of the higher end flags.

And he took the Marriott flag and turned it into one of their soft brand options. Guy came in, dumped in almost $5 million into the property. And the rooms were small. They were, you know, they were the 250 square foot traditional like Motel 6 type of rooms that they had. And this guy came in, hired a, you know, architect, put a full service bar and restaurant on site, redid the whole pool area, put cabanas in. He hired a GM and GM was very involved and created an experience out of this property. Yeah. You know, it was in a it was in a decent location. So he put a fence around the whole thing.

There was extra land in the back. This guy, you know, it turned it into glamping in the back. The pools, you know, they have like cabana parties now. When you walk into the front desk, it’s like, you know, you have the bar, the restaurant, all in one space, meeting space. You know, people can hang out. Yeah. You know, the GM, you know, they have the fitness center where they have Peloton bikes, their fitness facilities on side and the GM on the weekends would do bike tours where they would gather like people at this time. I’m going to take everybody out hiking and things like that and go do bike tours within the area.

So he created a whole experience out of it. And now that property, you know, with the money that he put in. And he was all in about 70,000, 75,000 a unit. It took him about three years to bring that revenue up. And underneath the Marriott flag, the revenue, he’s already achieving close to $3 million in revenue now. And that’s like the most hot spot to be in town now. But yeah, no, there’s buyers out there that do see if there’s a vision for it and there’s a need for it. And they are seeing like, oh, this is converting this property into boutique hotel all day.

We’re doing it all currently right now. I’m transacting one. I’ll give you another example. I’m transacting one right now where the city condemned this hotel and the owner calls me up and he was the lender on the deal. And the guy that he lent the money to walked away. City came in, condemned the property because there was a lot of homicides, drugs, prostitution, everything going on there. City was just completely tired of it. They shut the property down, condemned it. All the units were literally gut down. I mean, everything, it got to the place where you can’t even walk into it. It was that bad.

The owner calls me up and he’s like, look, I’m not a hotel guy. I don’t know what to do with this place. I was just simply an investor and I lent money to this guy. You know, I was doing well in the beginning and then he just ended up stopping me. So I don’t know what to do with this. I walked the property. It was a 120 unit hotel and small rooms. And I’m looking at this and I’m like, man, what can we do here? And I saw that right across the street, the city had big development plans. So You know, it was all raw land.

And in the next five years, a developer came in and bought it and they had a Costco coming in. They had a Planet Fitness coming in. They had all these restaurants coming in and a new multifamily coming in. And I said, you know what? This area is growing. I was like, I see something here. So I reached out to a couple of my clients, took it out in the market. And I said, you know what? This is going to be a perfect either extended stay concept or a boutique hotel concept here. Brought it out. I walked in with a couple of guys and a lot of the brands said, you know what, I see, you know, potential here to turn this into like a cool boutique spot where people can come in.

And I got a buyer right now that I’m in works with. And what he’s going to do is he’s going to convert it into a soft brand boutique collection underneath the Choice Hotels brand. He’s going to be putting in a full service bar and restaurant on site. There’s a second floor where they have a flat roof. So he’s going to create a second floor, like open rooftop bar there for the guests to utilize. Bathrooms are going to be completely upgraded. The rooms are going to be upgraded, you know, with, you know, large TVs. I mean, it’s just going to be with pools, with cabanas. I mean, he’s going to turn this place around.

I mean, I can send you the renderings. But yeah, there’s buyers out there that are turning these properties where they’re picking up that 20,000 unit right now, or maybe even less that are closed and converting them into other uses too.

Kevin Bupp: Hmm. No, that’s great. I appreciate that. What are your thoughts on third party management versus that of being vertically integrated? I mean, you know, for someone that’s looking to maybe looking at the hotel sector, looking to get into their first hotel investment, is the easy button simply just hiring, you know, the most competent third party operator to come in and help, you know, see out their vision or is it something where you got to get in and get your hands dirty, understand the business inside out first before handing it off to a third-party manager?

Jay Desai: Sure. I think that’s going to depend on a couple of different items. A lot of the higher brands that you’re going to be working, especially if you’re going to be spending this much money and going into soft brands or going boutique, or if you’re going to have like a higher brand, like a Hilton, Marriott or IHG, for example, they’re going to require a third-party management to come in because there’s a lot of moving aspects to it, such as, running the food service, bar, restaurant, the hotels, making sure that, you know, things are mandated by the brand, history of services on point, things like that. There’s just a lot of items that, you know, that they’re going to require from a brand standpoint that they’re going to, you know, require a third party management company to come in that’s approved by the brand.

And they’ll make sure, you know, the full operations on a day to day. But again, with the third party management, they’re in charge of the full hiring, firing, revenue management, sales, I mean, everything. So at that point, you’re kind of hands off in a way, but you’re, still involved as an ownership because you’re still having those meetings with the third party management company. You’re getting those full daily reports. You’re having the quarterly monthly meetings with them and you’re working off of ideas off of each other. I think third party management is, you know, sometimes a great idea, especially when you’re when you’re working with larger properties like this that for people that don’t have experience or limited experience and still being an owner and also running off of ideas off of each other.

There’s a ton of third party management companies out there, but I think it’s finding the right partner to get in with you. Somebody that’s local is great. Somebody that knows the market, that’s great. Somebody that’s, you know, keeping an eye on the property, you know, day to day. Those are a lot of things to think about is finding the right partner when it comes to third party management. Flip side, I’ve also had a lot of guys that have a lot of experience with running hotels where they started kind of like I did, you know, in back in the day with 20 room, 15 room hotels and went up to 80 rooms, 100 rooms.

And they have the renovation experience that have the operational experience that have the manpower and staffing that, you know, are… you know, based on their portfolio, they have the experience to run the properties themselves. And based on that, a lot of the brands, or even if you go independent, they’re able to operate the property that way that they already have done because they have the experience to do so. So I think, again, it just depends on the buyer, the operator, and also with, you know, the partner that they’re going to go with in terms of brand options and whatnot.

Kevin Bupp: And I think what I gathered from you as well is if you’ve got one of the major flags, it sounds like they have a final say in who that third-party management company is, correct? They have to approve them?

Jay Desai: Absolutely, because they have to uphold to their brand standards as well too, right? I mean, if you’re a Hilton, Marriott or IHG guest and you know what kind of service you’re getting, you’re a member with that hotel, you’re always staying at those properties. They want to make sure that they’re not losing any type of market share. They want to make sure that those properties are running to the T according to their brand standards.

Kevin Bupp: That makes sense.

Jay Desai: Whether you’re able to, you know, do that with a management company or you have the experience based on your previous hotels that you have, it’s going to come down to the brand accepting whether they’re going to let you operate it or make you mandate getting a brand in for a few years and then, you know, see how things go.

Kevin Bupp: Yeah, no, that makes sense. So curious to know, Jay, what you’re most excited about in the hotel industry and sector today, or maybe the better way to phrase that would be, where do you see the biggest opportunity here over the next, call it three to five years in the hotel sector?

Jay Desai: Yeah. If you ask me, you know, two, three years ago, I think, you know, the biggest opportunities with the interest rates being so low, there was a lot of conversion opportunities, right, where you were able to pick up properties at, you know, less than $50,000 a key, in some cases, you know, $10,000, $20,000, $30,000 a unit, where you can transition those properties into either multifamily or behavioral health or transitional housing. in which is a requirement for, you know, in a lot of municipalities that’s needed. Right now, I think, you know, we’re going to be seeing a lot more distress. You know, I’ve done already about six, seven distressed hotel assets on the banks and for the lenders this year.

I think there’s going to be opportunities for a lot more properties that are going to be coming to the market. Unfortunately, there’s a lot of guys that bought in 22, 23 and 24 when the rates were so low, you know, around the three, four percent. that were overpaying for properties. And we were getting multiple offers by so many clients on a lot of our deals that now with rising costs of operations and payroll, wages, taxes, utilities, I mean, you name it, it’s just getting tough for a lot of the operation guys that bought these properties with 15, 20% down SBA loans to kind of survive.

And in that sense, the banks are either working it out with them and giving them interest only terms or saying that, hey, we’ll work with you for six months, a year. Or sometimes I’ve even seen the banks taking the properties back for closing them and running it themselves by placing a management company until they find a buyer that can bail them out for whatever their loan amounts are for. So I think that’s where the trend is kind of heading. And I think there’s like if there’s capital that you have on hand, these are properties that you may want to look into. Some banks are even taking over and closing the properties down.

And that, you know, if there’s a developer there that, you know, can go in aggressively and price these things at the right amount and close quick, you know, there’s great deals to be had there as well, too. So I think that’s where we’re going to be heading in the next three to five years if the rates don’t start going down or if things don’t start shifting in the economy. And I think, look, with the municipalities, I know there’s been a lot of government funding cuts and monies that are not being allocated into housing purposes or nonprofits and things like that. But there’s still a huge sector of for-profit and private entities out there.

that are always looking to, you know, do low income housing or transitional housing or behavioral health facilities, where they are looking for these larger type of assets that are possibly struggling, or they’re not able to keep up with, you know, current day expenses and debt. And, you know, we’re getting a lot of calls on that too, you know, right now where we’re like, do you have anything that fits? These are the buckets, you know, we need properties over 100 units, they need to be less than 50,000 in key, they need to be Over 300 square feet, struggling properties, we can come in close quick, right?

Aggressive terms. These are the key terms that a lot of these guys are looking at. And if we’re able to find it, yeah, there’s a deal to be had because there’s a lot of private money out there as well, too. And it’s a great time for, I think, private investors to pick these properties up that can do something else with it versus building brand new, which is going to cost them four or five times more. and the time it’s going to take, right? And the time it’s going to take to sustain, you know, the building aspect and the construction phase of it versus buying something that’s existing and then converting it themselves to whatever their need is for.

Kevin Bupp: That’s fantastic, Jay. Yeah, I appreciate you coming on the show, my friend. Just lots of tremendous value here for anyone that’s interested in the hotel space, whether it be traditional hotel ownership or, even think of a higher and better purpose, potentially converting it into a multifamily property or some other type of use. But Jay, before we wrap this up here, I just want to give you a moment to share a website, LinkedIn handle, or wherever folks could reach out to you to learn more about you and all the fun projects that you guys are working on.

Jay Desai: I’m available on LinkedIn. Our website is newgenadvisory.com. I also have an Instagram page. It’s Elite Hotel Broker. You can find me on there. My email is jigar.desai@newgenadv.com. And I can also be reached directly by phone as well. If there’s any questions, comments, you know, discussion that you want to have, phone number is 520-664-4091.

Kevin Bupp: And as always, to each of you that tuned in here today, I appreciate you joining here. I hope you enjoyed the episode. Please do us a favor if you haven’t done so already. Subscribe to the show. Leave us a rating review. And then do share this episode with someone that you feel would benefit from hearing Jay’s perspective. Until next time, this is Kevin Bupp.