The city paid 30 percent of hard costs on a gut conversion and the deal still missed its preferred return by 190 basis points.
That number sits in a case study I have been working through, and the mechanics of how it happened are worth putting on the table. The subsidy came in as expected, the construction loan closed on budget assumptions, and the project delivered on time, which is rarer than it sounds on a conversion of that scale. What moved was the lease-up curve. The pro forma assumed 94 percent occupancy at stabilization eighteen months post-delivery, and the actual figure at month eighteen was 81 percent. That gap, thirteen points of vacancy on roughly 140 units in a market where the conversion overlay had attracted three competing deliveries in the same window, was enough to compress the distributable cash below the preferred threshold. The subsidy absorbed by the capital stack meant the senior lender was protected and the sponsor earned its promote once the project eventually crossed 91 percent around month twenty-six, but the LP sitting in preferred equity received less than the IRR printed on page one of the deck, because the waterfall read time-weighted and the slow months counted against the clock. The assumption doing the most work in that pro forma was absorption rate, and the absorption rate was set when the submarket had one conversion project in lease-up, not four. Competitive supply introduced by the same incentive program that made the deal attractive is a feedback loop that I see underwritten away more often than it is actually modeled. What does your market look like on the supply side for the eighteen months after your projected delivery, and has anyone run the absorption if two more conversions certificate at the same time?
