Austin City Council Approves $8.3 Million for Purchase of Hotel Appraised at $4.9 Million

The Austin City Council has voted to green-light the $8.255 million purchase of a Country Inn & Suites hotel for use by persons experiencing homelessness.

The hotel sits on a 1.75 acre plot on the I-35 frontage road in the St. John neighborhood. Its appraised value is $4.88 million, according to the Travis County Central Appraisal District.

The vote, taken during a videoconference Thursday, allows the City’s Office of Real Estate Services to finalize a deal being negotiated with Karvins Hotels Inc, the owner of the property.

City Council members did not discuss the plan publicly during an hours-long meeting Thursday. Instead, they approved it on the meeting’s consent agenda, a procedure that allows numerous uncontested items to be approved as one, without separate votes or discussion.

What explains the roughly $3 million discrepancy? City Spokesperson David Green told Honest Austin, “There is often a difference between the tax assessed value and the market value of a property. The tax assessed value is not always the best indicator of a property’s fair market value.”

Green also pointed out that the figure of $8.255 million is not final and that the Council appropriated another $500,000 for closing costs and a pre-purchase occupancy agreement. That will allow the City to use the property pending due diligence and a final purchase deal.

“The City cannot pay more than fair market value and a third party is completing an appraisal to determine this,” he wrote in an email. “The $500,000 is to lease the facility during the due diligence period… During the due diligence period — over the next 90 days — we’ll conduct the associated inspections and appraisals before we can finalize the deal.”

Reasons for the Purchase

City staff, in a document presented to Council members before the vote, framed the purchase as a necessary part of Austin’s COVID-19 response: “Possessing this facility will allow for us to house individuals who do not have the ability to quarantine during the COVID-19 pandemic, the duration of which is unknown.”

“The retention of this facility is necessary and is the most efficient action to ensure that these services and this space is available to address the public health emergency resulting from COVID-19 which is likely to impact the City for more than another year.”

However, plans to purchase hotels and motels for use by the homeless pre-date the pandemic. The Council unanimously approved the purchase of a Rodeway Inn in South Austin in November, and in December discussed plans to purchase additional hotels “throughout the city.”

After the COVID-19 outbreak, the City began leasing several additional hotels for use as isolation sites for persons infected with the coronavirus, and for at-risk persons.

Downtown Austin homeless shelters suffered outbreaks of COVID-19 starting in April. The homeless population are at greater risk of COVID-19 because of a higher prevalence of underlying conditions, and because of the difficulty of self-isolating when living outdoors.

Prior to the outbreak, Austin’s homeless population had grown from last year by 11% to an 11-year high, according to an annual count of the homeless carried out by ECHO, a nonprofit. Part of that increase, however, may be attributable to a higher number of volunteer surveyors who participated in ECHO’s ‘point-in-time’ count this year.

Hotel Values Drop

The purchase of the I-35 hotel comes at a time when economic stress is putting downward pressure on retail, office and hotel property values. Hotels nationwide have been vacant for months after coronavirus-related restrictions brought business and leisure travel to a halt.

A data firm that tracks vacancies, STR, reported that 6% of central Austin hotel rooms were booked on April 11–342 rooms total — compared to 10,777 rooms, or 99%, on the same date last year.

Hotel landlords are beginning to default on mortgages, raising the possibility that banks will begin to take possession of properties later this year and sell at discounted prices. “Owners of hotels and retail properties were the first to run out of money and start to default back in March,” the Wall Street Journal wrote in a May 19 report on distressed commercial real estate.

“For now, there are few sales of distressed assets, in part because the pace of the market downturn has left many in the industry stunned. ‘The buyers want to buy at 50 cents on the dollar, and the sellers are still remembering the prices from nine weeks ago,’ said Mark Edelstein, chair of law firm Morrison & Foerster’s global real-estate group. The lack of deals has made it hard to determine how far property prices have already fallen,” the Journal reported.

These reports suggest that it’s very difficult to determine ‘fair market value’ at the moment, and that the City may be able to get a better deal on a hotel property sometime in the next few months, at least relative to pre-pandemic property prices.

But adopting a wait-and-see attitude would undermine the Council’s own stated reason for buying a hotel: responding to the pandemic. By moving swiftly, the Council is also hoping to take advantage of about $170 million in federal aid given to Austin under the CARES Act.

That law allows local governments to use federal relief money for “necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019.” CARES funds cannot be used for expenses already approved in the city’s pre-pandemic budget.

Could this hotel be purchased with federal money, even though the City’s homeless strategy was in place well before the pandemic?

City staff are hoping to make that case. They wrote in a fiscal note attached to Thursday’s agenda, “All lawfully available federal funds will be utilized to the maximum extent allowable to pay for costs associated with the possession, initial operation, and purchase of the (Country Inn & Suites).”

Originally published at https://www.honestaustin.com on May 22, 2020.

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Original reporting on local Austin news, Texas politics, and the economy. honestaustin.com

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Honest Austin

Honest Austin

Original reporting on local Austin news, Texas politics, and the economy. honestaustin.com

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