When the San Diego Housing Commission bought a Mission Valley hotel last year in the grips of the COVID-19 pandemic, it paid what the property was worth months earlier – before the pandemic, and the lockdowns that came with it, devastated the city’s tourism industry.
The Housing Commission paid $67 million for a Mission Valley hotel based on an appraisal of the value of the hotel just one month before the pandemic massively disrupted the market value of hotels. The value of the hotel would have plummeted soon after, and at least one expert told Voice of San Diego that backdating the appraisal was highly unusual. The hotel acquisition is now under investigation after the Housing Commission determined the broker who aided the deal had a major conflict of interest and financial stake in the firm that sold the hotel to the city.
The whole point was to take hotels that were suddenly cheaper, and rapidly turn them into housing.
The purchase was part of a city and state effort to buy up hotels and convert them into housing for homeless residents. It was a component of the pandemic response that was seen as having the long-term benefit of helping combat the region’s housing crisis by creating low-income housing units for cheaper than it costs to build them from scratch.
“There’s never been this much of an opportunity, and there’s never been this much of a need,” said then-Mayor Kevin Faulconer last April, when the city began pursuing its housing acquisition plan , before the state gave it a boost by making hundreds of millions of dollars  in federal COVID-19 relief available as part of its Project Homekey.
The Housing Commission eventually decided to purchase two extended stay hotels, one in Mission Valley and the other in Kearny Mesa, with the help of $37.7 million in state funds.
One of those purchases – the Residence Inn by Marriott San Diego Mission Valley – is now part of a criminal investigation. Housing Commission lawyers concluded that the broker the agency hired to find and negotiate hotel purchases, Jim Neil with the firm Kidder Matthews, had broken criminal conflict-of-interest laws  when he bought 50,000 shares of stock in the company that owned the Mission Valley hotel, after he signed an agreement with the Housing Commission but before he arranged the acquisition.
The acquisition of the Mission Valley hotel stands apart from the Kearny Mesa hotel in another way, too.
The appraisal completed for the Mission Valley hotel  on the Housing Commission’s behalf explicitly determined the value of the property as it was on Feb. 25, 2020, nearly a month before the onset of the COVID-19 pandemic in California. The appraisal itself emphasizes that this increased the value of the property, and appraisers specifically did not consider effects of the pandemic in the months that followed that threw the market into chaos.
The appraisal for the Kearny Mesa hotel, by contrast, determined the value of the property on July 21, 2020, during the time the appraisal was conducted and after investors and hotel operators were already reeling from the pandemic. CBRE conducted both appraisals.
To recap: The two appraisals were conducted at the same time, and the Housing Commission’s board approved the two purchases simultaneously, too. It was only the Mission Valley property – which is also the only one involved in the matter referred to the district attorney for potential criminal prosecution – whose value was assessed based on the real estate and tourism markets prior to the pandemic.
Two hotel acquisition professionals agreed that the effect of the backdated appraisal for the Mission Valley property would, whatever the motivations, lead to an elevated valuation. One of those professionals said he considered the decision to backdate the appraisal “highly, highly unusual.” He also said the property was likely worth about $20 million less than the Housing Commission paid for it in the middle of 2020, when it agreed to terms on a deal.
The San Diego Housing Commission would not answer questions on why it appraised the property the way it did.
“The San Diego Housing Commission (SDHC) declines to comment on these matters at this time because they are related to items subject to potential litigation or investigation, upon which SDHC does not comment,” wrote Scott Marshall, the Housing Commission’s vice president of communications, in an email. “When these issues are resolved, SDHC would gladly respond to your questions.”
Dan Beverly, vice president at CBRE, did not respond to a request for comment on the appraisal, and the instruction to assess the value of the property prior to the pandemic.
One of These Appraisals Is Not Like the Other
The Mission Valley purchase was supported by an appraisal, conducted by CBRE Hotels on the commission’s behalf, that pegged the hotel’s value at $68.1 million. The commission paid $67 million.
But the appraisers wrote in their report that they determined the hotel’s value as of Feb. 25, 2020, nearly one month before Gov. Gavin Newsom imposed a stay-at-home order  across California. The appraisal was conducted in August, the appraisers wrote, and it was delivered to the commission on Sept. 17, 2020, before the transaction was finalized in November.
The Mission Valley hotel included 192 total units, 190 for low-income residents, and the Housing Commission received $27.7 million from the state’s Project Homekey to make the purchase happen. The rest of the money for the hotel came from a loan and various local and federal funds the city had available.
Alan Reay, president of the Atlas Hospitality Group, a firm that sells hotels across California and analyzes the statewide hotel sales market, said a backdated appraisal would typically only be necessary if the transaction is associated with ongoing litigation or the dispensation of an estate after someone dies, and the people involved in the sale need to know what a property used to be worth. When the Housing Commission was negotiating to buy the Mission Valley hotel in July, he said he couldn’t see why it would want to know what it was worth in February.
“The relevant question is, ‘What would be the value in July of 2020?’” Reay said. “I must have gone over thousands of appraisals, and I’ve never seen one – except for in cases of litigation or estate dispensation – where they had to go back in time to set the value. It’s highly, highly unusual.”
The Housing Commission staff, in its presentation to the agency’s board of directors  when it approved the purchases, highlighted the appraised value of the Mission Valley property and that it exceeded the sales price, but did not mention that the appraisal had been backdated to the property’s value ahead of the pandemic. No board members asked about it.
CBRE, though, was not so coy. The firm spelled out explicitly that it was reporting the hypothetical value of the property in February, before the pandemic. The appraisal stated in at least eight separate instances that its conclusions that fed into the overall value were all dependent on the market prior to the COVID-19 pandemic.
In a section titled “Important Warning – Market Uncertainty from Novel Coronavirus,” the appraisal outlined how the pandemic was affecting the real estate market, and the tourism industry.
“We note that as of the effective date of appraisal, February 25, 2020, the hotel market was not yet feeling the effects of the COVID-19 pandemic, which began to be felt in the United States market in March 2020. As of the date of report in August 2020, the nation, region, and market area have been materially impacted by the COVID-19 pandemic, which will have a prolonged effect on macroeconomic conditions and corresponding hotel market conditions,” the appraisal reads.
Kevin Mallory, senior managing director for hotel brokerage and investment sales at CBRE out of the company’s Chicago office, did not review the appraisal or the Housing Commission’s purchase, but spoke generally about the hotel market last year and the appraisal process.
He said it isn’t common for buyers to backdate their appraisal, but that it also isn’t “terribly, terribly unusual, for a myriad of reasons.”
“It would definitely change (the value), whether positive or negative,” Mallory said. “Most purchasers or lenders want to understand the value on the date of acquisition, or as close to it as they can get. There may be reasons to change that, but a property being purchased in mid-2020 would have been worth less than one purchased in 2019. I can’t speak to the rationale for commissioning a backdated appraisal. I would say, everyone was trying to figure out values in 2020. So a methodology that looked back and said basically, ‘Some day it may be worth that again,’ could be one of many methodologies deployed at that time. It’s something that’s worth noting, but we were all focusing on the future.”
Buying High When the Market’s Low
As Mallory said, investors last year were scrambling to figure out where the market was going.
They had just come off a great year in 2019. The number of hotels sold increased 26 percent from a year before, and the total dollar amount of those transactions jumped 84 percent. The median price of a hotel room based on those sales ticked up slightly, bringing it to the second highest level on record, just behind 2017, according to a year-end report  prepared by the Atlas Hospitality Group.
That was the state of the market in February, before the pandemic hit, and when CBRE pegged the value of the Residence Inn Mission Valley at $68 million.
By the middle of 2020, things had changed. A lot.
“As expected, the impact of the Coronavirus pandemic has had a huge negative impact on both the number and dollar volume of California hotel sales through the first half of 2020,” wrote the Atlas Hospitality Group in its mid-year 2020 report .
Across California, the number of transactions fell by 21 percent from a year earlier, the total value of those sales fell by 53 percent and the median price of a room fell by 13 percent. In San Diego, the money spent on hotel sales fell 70 percent.
“The California hotel sales market has suffered the steepest decline in sales on record due to the COVID pandemic,” the Atlas Group’s report wrote. “With a large number of hotels closed down and occupancies and room rates at record lows, no one has ever experienced a market like this before.”
That was the state of the market in August, when the Housing Commission negotiated to buy the Mission Valley hotel and CBRE appraised the property.
But by the end of the year, the state’s Project Homekey funds began flowing, and the market made another about-face.
“COVID-19 has had a devastating impact on hotel sales transactions in every state – except California,” the Atlas Group wrote in its 2020 year-end report . Sales for the year actually increased in California, and in the end accounted for 28 percent of all hotel sales in the country. More hotels sold in California than in Florida, Texas and New York combined, thanks to 78 hotels purchased with Project Homekey funds, totaling $890 million, which accounted for about a third of the money spent on hotels in California last year.
That up-and-down market underscores the significance, Reay said, of appraising any property as close to the date of acquisition as possible.
But in this case, the Housing Commission determined the value of the property when the market was near its all-time highs, even though it came to terms on a deal on Aug. 5, with the market in shambles.
“To pay the number they did and say, ‘It’s based on an appraisal from February 2020,’ I sort of chuckle, because I’d say, ‘I wish I could go back to the best year ever and use those numbers to sell hotels. I’d sell way more hotels!’ But no one would buy that,” Reay said. “If someone came to me and said, ‘I want to sell a hotel based on the numbers from my best year ever,’ I’d say, ‘Go to another company, we won’t be able to sell this for you.’ You might say, it’s just ‘July to February, that’s fine,’ but from July to February in 2020? That’s as big of a correction as you could possibly have.”
Reay said he could quibble with the February assessment – he’d put it closer to $60 million than the $67 million sales price or the $68 million appraised value – but he wouldn’t be too confident guaranteeing that a buyer, in a pre-pandemic world, might up their offer to lock in a deal.
But the property wasn’t even in the same ballpark as those numbers by mid-summer, he said.
Based on the return buyers were expecting last summer, he said the best-case scenario would be for a sales price of about $44 million.
“That doesn’t mean the seller would accept that, but that was the going rate,” Reay said. “That tells me that the price that the seller wanted was way above what the value of the hotel was, and the Housing Commission was so focused on buying that asset that they made it work,” Reay said. “I’m not blaming the appraiser, they did what they were told, and they called it out in the appraisal.”
Like other industries, appraisers have a designation for certified professionals. MAI stands for “member, appraisal institute.”
“We have a joke that the appraiser designation MAI actually stands for ‘made as instructed,’” Reay said.