Is the cost line real on a 210,000 sf office going to 180 apartments?

Run their own numbers back at them. 180 units at $2,900 is $6.26m gross. Take 6 percent for vacancy and credit loss and you are at $5.89m. Operating expenses on a converted mid rise with an elevator, common areas and a doorman are not going to be $8,000 a unit, call it $10,500, so $1.89m. That leaves NOI of about $4.0m. At their 4.75 cap you get $84m, not $92m. At 5.5 you get $73m, which is under their cost.

So the whole gain sits inside three quarters of a point of exit cap. That is not a conversion thesis, that is a bet on where cap rates are in 2028. I would want to see the deal work at a cap 75 basis points wider than today with no rent growth, and if it does not work there they should say so out loud.

The 45,000 feet you are missing is corridors, stairs, elevator lobbies, mechanical rooms, trash rooms and the leasing office. Losing a fifth of gross to that is ordinary in a conversion because the original core was sized for one tenant per floor, not for a double loaded corridor.

The exit cap rate is carrying most of the underwriting here, and ledger has already shown what happens when you move it. The second one is the $290 per gross foot, and there is a specific reason to distrust a per foot number applied to gross area on a conversion. Conversion cost concentrates in the plumbing and the facade. You are adding a kitchen and a bathroom for every unit in a building whose waste stacks were sized for a handful of restrooms per floor, which means new risers, new horizontal runs, and slab penetrations that have to be located, cored and fire stopped. Window replacement across a full curtain wall or punched opening set is priced by the opening, not by the floor area, so it does not scale with the number the deck is using.

The more useful metric is cost per unit and cost per rentable foot of apartment. On this deck, $61m over 180 units is about $339,000 a unit of hard cost alone, or roughly $370 per rentable foot before soft costs. That is in the range where ground up construction is a live comparison in many markets, which is exactly the test the chapter describes. Not every building converts well. Floor plate depth, window placement and existing plumbing layout decide it building by building.

On your client's exposure, a fixed price against a scope that is not drawn is a change order machine. The normal answer is a not to exceed number tied to a drawing set at a stated completeness, with an allowance for concealed conditions and a written process for handling what gets found behind the ceiling.

The 40 percent leased part bothers me more than the cost line. Buying out short term tenants is a negotiation with people who now know you need them gone, and the deck almost certainly carries that as a fixed number. Does it show what happens if two of them sit and demand three times the estimate.

Beginner question so I understand ledger's math. When he says a wider cap rate lowers the value, that is because the buyer is paying fewer years of income for the same building, so the same $4m of NOI is worth less. Is that all a cap rate is.

Yes, vellum, that is all it is. Price equals NOI divided by cap rate, so a higher cap means a lower price for identical income.

Beacon, the item I would chase is the loan. A $77m project needs construction debt, and the maturity of that debt against a 30 month build plus a lease up period is where these deals die. If the loan comes due while the building is 60 percent leased, the sponsor is refinancing into whatever the market is that month. Ask what the lender's terms actually are today and get it in writing, because the deck was probably written against a quote from last year.

What I would have been embarrassed to ask a year ago is why anyone buys an office building at all if it is this hard. And the answer in the deck is right there, $34 a foot. The land plus structure is nearly free compared to buying dirt and pouring a frame. That is the whole reason the strategy exists.

Compass, the structure being cheap is only half of it. The other half is time. A conversion can get to rent roll faster than ground up on the same site because the frame and the elevator shafts are standing, and on a deal financed with a floating construction loan every month you save is money.

Beacon, my underwriting note on this deck would be the unit mix. An average of 917 square feet across 180 units on a deep floor plate usually means a lot of long units with a bedroom that has no exterior window, which either becomes a den at a lower rent or fails code depending on the jurisdiction. That is a question for the architect and the local code official, and it can move the rent assumption by a couple hundred dollars a unit. Two hundred dollars across 180 units is $432,000 of gross rent, which at a 5 percent cap is $8m of value. Same order of magnitude as their entire projected gain.

Nobody has asked what the building is worth if the conversion is abandoned halfway. Patience only helps if you can afford to stop, and a gutted office with no plumbing is worth less than the $34 a foot they paid.

Reading this thread mostly taught me how much of a deck is one number in disguise. Beacon, did they show any sensitivity table at all, or just the single case. Every deck I have seen so far shows one outcome and calls the downside conservative.

Ember, if there is no sensitivity table that is the answer to beacon's question. Sponsors who have actually finished a conversion lead with the downside case because the lender made them build one. The ones who lead with a single $92m exit are selling the thesis rather than the building.

Beacon, one concrete thing for your client. Ask whether the sponsor has closed and delivered a conversion before, and if so how the final cost compared to the original budget. A sponsor who says we came in 14 percent over and here is why is worth ten who say it went fine.