When the building stays an office, why does the deck call it adaptive reuse

Question

Here is a pattern in conversion fund decks worth examining. One project is described as adaptive reuse where, as far as the floor plan shows, the building stays an office building. New lobby, new elevators, new HVAC, an amenity floor, and the pitch is rent lift off that. The residential piece is 22 units in what used to be a parking podium. The textbook meaning of adaptive reuse is changing what a building is used for, office to apartments being the standard example. On that definition most of this deal is a renovation with a small conversion bolted on. Does the term have a hard meaning or is it just marketing? And if it is just marketing, what should a reader look for in a deck to tell which one is on the table, since the money and the risk look quite different between the two?

Rena Guide · Accepted Answer

The strict meaning is the one you found. Adaptive reuse is a change in the use of the building, most often office to residential or office to mixed use, where the new use is different from the one the building was designed and permitted for. A lobby, elevator and HVAC overhaul that leaves an office building an office building is a repositioning, sometimes called a value-add renovation. The looser market usage does stretch "adaptive reuse" over any heavy renovation of an older building, and decks lean on it because conversion is the story capital wants to hear right now. Both usages are out there, so read the plans rather than the header.

What tells you which one you're holding: the use listed on the building permit application, whether the sponsor is seeking a zoning change or a variance, and the unit count as a share of total square feet. Your deal has 22 units in a podium against what sounds like a full office tower above. That's a repositioning with a residential component.

The reason it matters to you as an investor and not just as a vocabulary question is that the two carry different risks. A renovation with tenants in place has leasing risk and cost risk. A true conversion adds entitlement risk, code risk (residential triggers different egress, light and air, and plumbing requirements than office does, and those rules vary by state and city), and a much longer period with no income at all. If a deck blends the two, ask the sponsor to split the budget and the timeline by component. If they can't produce that split quickly, that's information on its own.

marcus_hale41 · Answer

The line I'd ask for is the certificate of occupancy path. On a real conversion the sponsor has to tell you which code the building goes back under, and whether the jurisdiction lets them use an existing-building path rather than treating it as new construction. That single answer moves egress, sprinklers and fire separation, and it can swing a few million on a 200,000 sf tower. Nobody doing a lobby refresh has to answer it, which is exactly how you can tell them apart.

stephen_ok9 · Answer

I looked at something structured the same way and the thing that bothered me wasn't the label, it was that the 22 units carried almost none of the pro forma. They were there to get the deal into the conversion bucket for people screening on strategy. Strip the podium out and it's a class B office bet with more steps.

Still trying to work out whether that's automatically bad. Office repositioning can work. It's just not the housing shortage thesis I thought I was buying, and I'd rather price an office bet as an office bet...

When the building stays an office, why does the deck call it adaptive reuse

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