somebody said six figures just to study a building before buying it. is that real?

Question

Someone in a webinar said developers routinely spend six figures studying an office building before they've bought anything, and that most of those studies end with a no. I don't know what's actually in one, or which parts cost money.

What I think I understand: a test fit is an architect drawing apartments onto the existing floor plan to see how many fit. Beyond that I'm guessing there's engineering to check whether the plumbing and power can be extended, and something environmental for asbestos in the older ones. Is that roughly it, or is there a whole list I don't know about?

The other half of the question. I don't have development skills and won't. If I wanted exposure to this kind of project as a passive investor, what's the realistic minimum check size people are actually asked for, and is there any way in below that?

Rena Guide · Accepted Answer

Your list is close. A test fit is exactly what you described, an architect laying units onto the existing plate, and on a large tower it commonly runs in the low tens of thousands, more if they test two or three schemes. A fuller feasibility package adds a structural review of whether the frame and slabs take the new loads and the new plumbing penetrations, a mechanical and electrical review of riser space and service capacity, a code review covering egress and fire separation, an environmental assessment, and a contractor's early cost estimate. On a several-hundred-thousand square foot building that whole package commonly lands somewhere in the six figures. A Phase I environmental site assessment on its own is usually a few thousand dollars, while an asbestos and lead survey with sampling in an older building costs considerably more because someone is physically taking samples floor by floor.

That money is spent before anyone owns anything and it is frequently lost, which is why this work concentrates in groups that can absorb a stack of dead studies to find one building that works.

On passive access, these projects are typically funded through private offerings, and minimums of $50,000 to $250,000 per investor are common, with institutional vehicles asking far more. Private offerings generally limit who can invest, and whether you qualify is a question for a professional who can look at your situation. Publicly traded REITs and funds sometimes hold converted assets, which is a way to get some exposure at a small dollar amount, though you're buying a whole company's strategy rather than one building.

dmitri_v6 · Answer

Add zoning and title to the list. A zoning analysis memo from land use counsel on a downtown parcel is real money, and it's the study that tells you whether residential is permitted at all or needs a rezoning, which changes the timeline by years. Cheap relative to the engineering, and it should be first.

priya_n21 · Answer

So the pre-development money is spent on buildings you mostly walk away from. As a passive investor am I paying for the studies on the deals that died?

dpatel_re · Answer

@marlow depends entirely on the structure. In a blind pool fund, yes, dead deal costs come out of the fund and you're funding the misses. In a single-asset syndication the sponsor has usually already spent that money and is reimbursing themselves at closing, which shows up as a line in the sources and uses. Read that line.

marcus_hale41 · Answer

The item I always ask for is the contractor's early estimate and who prepared it. A number from a real GC who has actually converted an office building is worth something. A number from a cost consultant applying a per-square-foot factor to a floor plan is a placeholder, and I've seen those move 30 percent once a contractor priced the risers.

stephen_ok9 · Answer

Minimums I've been quoted sit at $100k for the smaller sponsor funds and $250k where there's an institutional co-investor already in. A couple of platforms aggregate smaller commitments into a feeder, which lowers the entry but adds another fee layer and usually removes any information rights you'd have had directly.

chriswalton8 · Answer

Worth asking the sponsor how many buildings they studied for every one they bought. If the answer is one for one, either they're extremely good or they aren't studying much.

wendy_park48 · Answer

On fee structures, look for a development fee that's calculated on total project cost. In a conversion, total project cost includes construction that ballooned, so the fee grows when the budget goes wrong. Some documents cap it at the original budget. Most don't, and that's a paragraph in the operating agreement rather than anything in the deck.

gregpowell66 · Answer

One thing the study list misses: an intrusive investigation. Cutting test openings in slabs and walls to see what's actually behind the finishes. That needs seller permission, costs real money, and it's the only part of feasibility that tells you the truth. Everything else is inference from drawings that may not match what got built in 1978.

joe_delgado5 · Answer

And the seller often won't give access for destructive testing while they're still shopping the building, so you're bidding on inference and pricing the unknown into your offer. That's why these trade at discounts that look absurd from the outside.

somebody said six figures just to study a building before buying it. is that real?

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