San Diego pays top dollar and near-top dollar for hotels to house the homeless

The city of San Diego appears to have paid above-market rates for the two Residence Inn hotels it purchased late last year for just over $106 million, properties that city officials are relying on to help reduce the homeless population across the community.

According to an analysis of sales data obtained by The San Diego Union-Tribune, the Residence Inn Mission Valley cost taxpayers $67 million — not including a $502,000 broker’s fee paid by the buyer — or just under $349,000 for each of 192 rooms.

That was the highest per-room cost for any hotel sold in San Diego County last year — and it was based on a valuation that was set weeks before the global coronavirus pandemic wreaked havoc on the hospitality industry.

The Kearny Mesa Residence Inn, also bought by the city of San Diego last year, was acquired for $39.5 million, almost $275,000 for each of its 144 rooms. Both properties closed escrow on Nov. 25.

Only two other hotels sold locally for a cost higher than $300,000 per room last year, and they are both in La Jolla.

The Hotel Palomar, a Gaslamp Quarter property that features a ballroom, meeting space, a 24-hour business center and a rooftop pool, among other amenities, closed for $62.8 million, or just under $298,000 for each of its 211 rooms.

Hotels elsewhere in the city and county sold for as little as $25,000 per room, although most were in the low six figures, according to the Atlas Hospitality Group, which tracks hotel and motel sales across the state.

“For the Residence Inn Mission Valley the numbers seem to be really, really high,” said Alan Reay, the Atlas Hospitality Group president who examined the city of San Diego’s transactions at the Union-Tribune’s request. “I don’t think there are any comps that support it,” he said, referring to sales of comparable properties.

Reay said the sale price for the Kearny Mesa property was more in line with industry standards.

But he also noted that four other Residence Inns had sold in California over the past two years — all before the COVID-19 pandemic provoked steep declines in hotel valuations — and the average per-room cost for those sales was $227,300.

The two properties purchased by the city in November are located miles from the city’s core homeless service providers, which are concentrated downtown.

Dubious real estate history
Questions about the hotel purchase prices come as San Diego city officials continue to struggle with the cost and value of previous real estate transactions.

Most notably among those expensive deals is a high rise at 101 Ash St. the city bought under a 20-year lease-to-own arrangement in 2017. The property is mired in litigation and remains vacant due to asbestos and other issues years after the city paid tens of millions of dollars on the lease.

A spokesman for Mayor Todd Gloria declined to discuss the city’s two hotel purchases but issued a statement noting they “were negotiated and completed by the previous administration” of former mayor Kevin Faulconer.

“Mayor Gloria is focused on solutions for homelessness like this partnership between the city, San Diego Housing Commission, Father Joe’s Villages and PATH, which permanently housed hundreds of San Diegans who would otherwise still be homeless now have a place to call home and support services that will help them succeed,” mayoral spokesman David Rolland wrote.

In agreeing to the purchases, city officials relied on a pair of appraisals conducted by CBRE, the national real estate services and investment firm.
According to those evaluations, the Mission Valley property was worth $68.1 million and the Kearny Mesa hotel was valued at $39.6 million.

County records show they were assessed at the time at $63.4 million and $28.9 million, respectively.

Both CBRE assessments included a warning that the COVID-19 pandemic had seriously affected hotel market conditions.

Friday Atlas reported that the dollar value of San Diego hotel properties sold in 2020 plummeted by more than 60 percent compared to 2019, largely because of the pandemic. Atlas reported 22 hotels sold in San Diego last year for under $300 million total, compared to 20 sold in 2019 for $767 million.

“Real Estate investment activity is down as investors largely take a wait and see approach,” the CBRE appraisals state. “A prolonged pandemic could have a significant (and yet unknown or quantifiable) impact on certain sectors of the property market.”

What’s more, the Mission Valley Residence Inn appraisal was based on an evaluation date of Feb. 25, 2020 — two weeks before the global pandemic was declared. The value of the Kearny Mesa property was effective as of July 21, 2020.
$50 million in new debt
The city has borrowed almost half of the $106.5 million it paid for the two hotels and about $38 million came from state’s Project Homekey, a program of the California Department of Housing and Community Development that made more than $600 million available to provide housing.

Much of the Project Homekey funds distributed across the state in the second half of 2020 were invested in hotels, pitting more properties against one another for the limited number of buyers, Reay and other experts said.

Scott Marshall, a San Diego Housing Commission vice president, said the city would not have qualified for its $50 million loan from Chase Bank if the hotel valuations were not accurate. He said Chase also required independent appraisals to close the loan, but the city does not have copies of those documents.

“However, if the appraisals conducted for Chase Bank had not supported the value and purchase price of the properties as reflected in the CBRE appraisals, Chase Bank could not have legally funded its loans and (the housing commission) would not have acquired the properties,” he said.

Real estate experts generally note that lenders are most concerned with ensuring they can recover their investment — not the full sale price — if a borrower defaults on a loan.

In all, the two hotels feature 336 rooms, each with kitchenettes and furniture in good condition that transferred with the title. The properties also include common areas, swimming pools and space for service providers to meet with clients.

Two rooms at each site were reserved for property managers, leaving 332 units for affordable housing. Father Joe’s Villages will run the Kearny Mesa site and PATH, or People Assisting The Homeless, will operate the Mission Valley facility.

Almost 300 people have moved into the hotels since late last year, city housing officials said.

Marshall said the housing commission examined 29 hotels before recommending the purchase of the two Residence Inns.

“Based upon these reviews, SDHC identified the Kearny Mesa and Hotel Circle properties as the two viable options to quickly provide quality, permanent affordable rental housing with supportive services for individuals experiencing homelessness,” he said. “These two properties were extended-stay properties that were constructed and/or rehabilitated more recently than other properties.”

The CBRE appraisals show the Mission Valley hotel was renovated in 2018 and the Kearny Mesa property was upgraded in 2013.

Marshall also said the city agreed to pay the $502,000 broker’s fee for the Mission Valley acquisition because the seller agreed to deliver the property at close of escrow without any residents, which saved the city time and money.

“The total amount SDHC paid for the broker’s commission was 0.75 percent of the purchase price for the Hotel Circle property, which is commercially reasonable in a complex commercial real estate transaction,” Marshall said.
‘Windfall for the seller’
Of the 22 hotels that changed hands in San Diego County last year, the highest per-room cost was the Mission Valley Residence Inn, which at $348,958 was just over $2,000 more than the Bed & Breakfast Inn at La Jolla, a boutique hotel with 15 rooms that sold for $5.2 million in October.

The 73-room Empress Hotel La Jolla was the only other property to record a per-room cost above $300,000. It closed in January 2020 for $22 million, or $301,370.

Most of the other properties sold for between $70,000 and $160,000 per room.

But a Motel 6 in La Mesa sold for $25,000 per room in September. And the Bristol Hotel, just four blocks west of the Hotel Palomar in downtown San Diego, was bought in February 2020 for just over $201,000 per room.

The average cost of each hotel room sold in the county last year was $191,270 — $156,906 if the hotels purchased by the city of San Diego are removed from the calculation.

For all hotel sales in San Diego city limits, the per-room average was $259,676 — $227,000 if the city’s purchases are removed.

Commercial real estate broker Adrian Glover has consulted on hotel transactions for decades, representing buyers and sellers. He said the city paid too much for the two Residence Inn properties.

“Hotels are worth probably 30 percent to 40 percent less than they were a year ago because of COVID-19,” he said. “This should have come out in the due-diligence period” of the escrow process.

“The city is short of money. Somebody should be watching the pennies,” Glover said. “This is a windfall for the seller, but it’s a major burden for the buyer.”

Marshall said the city financed the Kearny Mesa property at a 3.39 percent interest rate and the Mission Valley hotel at 3.29 percent. The combined monthly payment over the 10-year loans are just over $220,000.

The Mission Valley Residence Inn, on just over 5 acres at 1865 Hotel Circle South, was previously owned by Chatham RIMV LLC, a Delaware corporation run by Jeffrey H. Fisher of West Palm Beach, Fla., according to California Secretary of State’s Office documents.

The Kearny Mesa property, on 3.6 acres at 5400 Kearny Mesa Rd., was sold to the city by RT San Diego LLC, a Delaware company managed by Allan V. Rose of Yonkers, N.Y., state records show.

The purchases also will eat into the city’s annual tax revenue as officials confront a $240 million budget deficit.

In addition to the loss of property taxes generated by the two Residence Inns when they were privately held, the city will no longer collect the transient occupancy tax assessed on every room rented.

Based on capitalization rates reflected in the CBRE appraisals — the measure of annual returns on investment — the city will lose about $866,000 a year in hotel taxes, plus $100,000 or more in annual income for the tourism marketing district.