Do you underwrite a conversion to sale at stabilization or to a long hold?

The exit assumption isn't yours to choose, your construction lender already chose it. A conversion loan with a 36 month term and one 12 month extension option is a sale mandate whether the deck says hold or not, because the extension test is going to be a debt yield or a leased-percentage covenant measured at a date you don't control.

So the first question on that 190 unit deal is what the takeout looks like. Is there a forward commitment for permanent financing, is it agency-eligible once stabilized, what's the minimum occupancy and duration of occupancy the permanent lender wants before they'll fund? Conversions can trip on that because the units are unusual and the operating history is short. Terms vary by lender and by market and you should get them confirmed in writing rather than from the model.

If the answer is a bank construction loan with no identified takeout and a 40 basis point cap compression assumption, the hold case in that deck is decoration.

tender is right about the loan, and I'd add the piece that actually decides it in the documents: fund term.

Go find the term provision in the LPA and the extension mechanic. A seven year fund with two one-year extensions cannot hold converted apartments long term, and everyone signing it knows that. The hold case exists so the sponsor can tell you there's a plan B, but the fund's own life makes plan B a forced sale into whatever market exists in year nine.

Also read the clawback and the definition of stabilization. On one conversion vehicle I reviewed, stabilization was defined as 90 percent leased for one month, which starts the promote clock while concessions are still running and before you know what the operating cost of a converted building actually is. Rent-up in a first-generation conversion is where those two numbers diverge most.

tally, ask them one thing: if the exit cap comes in flat instead of 40 wide, does the promote still pay? If yes, the assumption isn't the sponsor's risk.

Naive question, why would a converted apartment building trade at a tighter cap than a normal one? I'd assume buyers pay less for something unusual, not more.

rigging, it wouldn't, and that's the flaw. Sponsors justify compression with the housing shortage and with the idea that new supply is expensive to build, so existing units get rerated. Buyers of a first-generation conversion price the opposite way. They discount for unknown operating expenses, odd unit mixes, older building systems carrying a new residential load, and whatever the original structure does to insurance.

I ran the sensitivity on a similar deck last year. Deal showed 19 percent to the LP at a 40 basis point compression. Flat cap took it to 13. Forty wide the other direction took it to 7 with a full construction contingency intact, and to roughly breakeven if you spent the contingency, which every conversion does.

So the honest structure is the third poll option. Underwrite the sale, require the hold case to clear on unlevered yield on cost against today's cap, and don't count compression as anything but upside. That constrains which buildings pencil quite a lot. It should. tally, what's the yield on cost on that 190 unit at their own numbers?

ledger, that's the number I'd want too, and I'd want it stated two ways, at budget and at budget plus 15 percent hard cost.

What I keep coming back to on the sale-versus-hold question is that they demand different sponsors. Selling at stabilization rewards a developer who can execute a complicated conversion and hand it off. Holding requires a property manager who understands a building whose plumbing stacks and window layout are inherited from an office use, and those are usually not the same firm. When a sponsor says they'll hold, I ask who manages, whether it's in-house, and how many converted buildings they currently operate. Answers get vague fast.

I voted for the hold-case floor, mostly because it forces the acquisition price down. If today's cap has to work, you can't overpay for the shell no matter how much you like the story.

One thing from decades of holding: the buildings that survived a bad decade were the ones bought at a price where rent covered everything without a sale. That's the hold-case floor ledger described, arrived at by a slower route.

The conversion twist is that a converted building has a capital profile I don't fully trust yet. Ground-up multifamily, I know roughly when the roof and the systems come due. A 1970s office frame carrying new residential loads, with a facade nobody planned to keep for another 40 years, I don't. So if I'm underwriting to hold, my reserve assumption has to be larger than the model's, and larger reserves cut the price I'll pay.

tally, the reconciliation you're looking for probably doesn't exist. Two cases in one deck usually means the sponsor hasn't decided, and the lender will decide for them.