In office to housing conversions, is cheap basis the deal or is the housing shortage the deal

Basis is the number that gets quoted and the smallest line in the total. On a typical conversion, the building itself often runs 20 to 30 percent of all-in cost and the conversion work is the rest. So a 40 percent discount on the shell moves total cost maybe 10 points. That's real, it isn't protection. What protects you is a floor plate and a core layout that produce leasable units without heroic plumbing runs and without a hundred windowless bedrooms. Two buildings at identical price per square foot can differ by 30 percent in cost per finished unit depending on depth from window wall to core, and cost per finished unit is the only denominator that matters at the end. So neither deck is describing the source of profit. The profit sits in the conversion factor, how many rentable units you get per gross square foot and what each one costs to build. Basis and exit rents are the two ends you bolt that onto. Ask both sponsors for gross square feet, net rentable, unit count, and cost per unit on their last three completed conversions, not projected. If they only have projected, you're buying a first attempt.

I'd read the documents before I picked a side of your question, because the two decks probably have very different waterfalls and that changes what the basis discount is even worth to you. Cheap basis in the acquisition entity doesn't automatically reach the LP. Look at how the sponsor's acquisition fee is calculated (percent of purchase price versus percent of total project cost), whether there's a development fee on top and when it's earned, and whether the promote is measured against invested capital or against total capitalization including the construction loan. A fund can buy a building at a 50 percent discount and still hand the LP an ordinary return if fees and the debt sit in the right places. The housing-shortage deck worries me for a different reason. Rent growth assumptions are the easiest place to hide a return, and there's usually no clause anywhere that constrains them.

Sextant's cost per finished unit is where I've landed too, and I got there by asking a much dumber question: how many buildings did you look at to find this one?

One sponsor told me they screened 60 and were pursuing three. Another told me they had two under contract out of eleven reviewed. The first answer told me they had a feasibility process. The second told me they had a pipeline problem and were going to make one of those two work whether it worked or not.

Sable, on your $50k, the thing I'd want isn't a view on basis versus rents. It's evidence the sponsor is willing to kill a deal after spending real money on it. Ask how much they've written off on abandoned feasibility studies in the last two years. If the number is zero, they've never tested a building hard enough to fail it, and you're the one funding the first failure.

The part that still doesn't follow is timing. If the maturity wall is what forces these buildings to market, doesn't buying now mean buying before the cheapest ones show up?