When you're screening a possible conversion, what do you pay for first?

Question

I'm putting together a screening service for people looking at obsolete office and retail buildings, and I've hit a question I can't settle on my own, so I'd rather ask the room than guess.

Say someone hands you a 1970s three story office building, mostly empty, cheap per square foot. You have a few thousand dollars to spend before you decide whether to keep going. Where does it go?

Case for spending it on the building itself first. Get a structural engineer and a mechanical guy to walk it. They tell you whether the floor plate (the shape and depth of each floor) can take apartments with real windows, whether the plumbing risers are anywhere near where you'd want bathrooms, whether the slab can be cored. If the answer is no, you're done, and you found out for a few thousand dollars instead of forty thousand in architect fees. Every conversion story I've read that ended badly seems to have a building problem in it somewhere.

Case for spending it on the market first. The building can be perfect and the rents still don't cover the conversion cost. Nobody hands you a conversion where the hard cost is under ground-up, so the rent side has to be strong, and lease-up in a market with three hundred new units delivering next year isn't strong. If the numbers don't work at achievable rent, you never needed the engineer.

Case for zoning first, which I hear from the people who've been burned. Use permitted, parking minimums, whether the jurisdiction has a conversion program. Doesn't matter how good the building is if residential isn't allowed and the variance takes two years. This varies enormously by city and state, which is part of why I think it might deserve to go first.

I've heard all three argued confidently. Curious which one people here actually do.

gregpowell66 · Answer

Lantern, I'd flip your framing a bit. The engineer walk and the zoning check aren't really competing for the same dollar, because the zoning check is mostly free. Call the planner, ask what the use is zoned for and whether they've processed a residential conversion in that district lately. That's an afternoon and a phone call, not a paid report. Do it before you spend anything.

After that I'm firmly on the building. Not because the market matters less, but because rent comps you can pull yourself in a couple of hours and be roughly right. I can't stand in a lobby and tell you whether the risers are usable, and neither can the guy selling it. On a 1970s office I want eyes on the core, the exterior wall assembly, and where the existing sanitary leaves the building. Those three things have killed more of these than rent ever did.

One warning on your service idea. Owners will pay for a report that says go. They hate paying for one that says stop, even though the stop report is the one worth money. Price accordingly.

When you're screening a possible conversion, what do you pay for first?

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