Is $50k the normal minimum for an LP unit in an office to apartment conversion?

Question

A common pitch at local meetups: a sponsor group doing office to apartment conversions offers a $50k LP unit. The terms are an 8 percent pref with a 70/30 split after that and a three to five year hold. The whole thesis is buying obsolete office at $45 a square foot when apartments trade at $180. Anyone with a construction background can follow the building side, and a full gut of an office core into residential tends to be expensive in ways a sponsor's budget does not show. The investing side is the harder part for a first time LP. Is $50k a normal minimum for this kind of deal, and what does someone with less than that do if they want office exposure? What fees should be expected on top of the split? An acquisition fee usually appears in the pitch and most new investors do not know whether to react. There is also the accredited question. When a sponsor asks and the answer is probably, that is not an answer, and it matters what the real one is.

Rena Guide · Accepted Answer

$50k is inside the normal band. Private real estate LP minimums usually sit somewhere between $25k and $100k, with $50k being about the most common single number you'll see. Below that, the realistic routes into office are public REITs that own office, where you can buy a single share for whatever it costs, and non-traded vehicles with minimums closer to $2,500 to $5,000 that come with their own fee loads and limited ability to get your money back out.

On accredited: that's a defined status under securities rules, generally tied to income or net worth thresholds, and the sponsor is usually required to verify it rather than take your word. Whether you qualify, and what the current thresholds are, is a question for a licensed professional rather than a forum.

Fees to expect written into the documents, and they should all be findable in one place: an acquisition fee of roughly 1 to 2 percent of purchase price paid at closing, an asset management fee of 1 to 2 percent annually on equity or on assets, a construction management fee on a project like this often 3 to 5 percent of hard costs, a disposition fee at sale, and then the promote, which is his 30 percent. Reacting to the acquisition fee alone misses that the stack of them together can be several percent a year before you see a dollar of pref.

The other thing worth separating in your own head: an office-to-apartment conversion isn't passive office income. It's ground-up-adjacent development risk with construction, permitting and lease-up all in front of the cash flow. The 8 percent pref is a priority in the waterfall, not a payment schedule. Ask whether it's paid currently or accrues, and ask what happens to it if construction runs 14 months long.

kevin_lombard · Answer

The accrual question in that last paragraph is the one I got wrong the first time I read a set of docs. I assumed pref meant a check every quarter. In the one I looked at it accrued unpaid until a capital event, which means for three years you get statements and no cash, and if the exit disappoints the accrued pref just soaks up whatever equity is left.

priya_n21 · Answer

For an investor whose goal is income without picking up a second job, a conversion is the opposite of that. There is no rent at all until units deliver. If girder wants office exposure that actually pays while he holds it, a stabilized leased building or a REIT dividend does that and a construction project does not.

marcus_hale41 · Answer

Things I'd ask for before the $50k, in this order.

The as-built floor plans with dimensions, so you can check window depth yourself given your background. Anything past about 30 feet from glass is dead area or corridor.

The plumbing and electrical risers. Office has wet stacks near the core and apartments need them at every unit, and that's where conversion budgets blow up.

The sponsor's two most recent completed projects, with the original budget next to the final cost. Not the IRRs, the budgets. If he won't send that, you've learned something.

And the zoning path. Residential use in a commercial zone can need a change or a variance, and that timeline is entirely outside his control.

aaron_fitz10 · Answer

$45/sf in and $180/sf out is doing a lot of work in that pitch. The question is the number in between. Office to residential conversions tend to land somewhere around $250k to $400k a door all in, and if the plan is 90 units that is a $25m to $35m project on top of the acquisition. The $135/sf gap only becomes profit after the gut is paid for, and the gut is the entire deal.

Rena Expert · Answer

Kestrel's framing is the right one, so let me add where conversion budgets typically break versus how they're presented.

The per-door number moves with the shell you started with, not with an average. A 1960s or 1970s tower with a narrow plate, operable window line and a spandrel wall you can cut is a different project from a 1985 suburban slab. The cost drivers that don't show up in a pitch deck: new plumbing risers at every stack, adding a second means of egress if the existing stair count fails residential code, fire separation between units where an office had none, and window replacement where the existing glazing can't meet residential energy or operable requirements. Any one of those can add $40k to $80k a door. Whether the project needs them depends on the local code and how the jurisdiction treats a change of occupancy, which varies by state and often by city, so the answer lives with the local building official and a code consultant.

On structure rather than construction, the thing you should press on with your $50k is the capital stack, not the pref. Ask what the construction loan is, at what spread, with what completion guarantee, and who signs it. Then ask what happens if there's a cost overrun: is there a capital call provision, and does non-participation dilute you or subordinate you? In a three to five year conversion with a hard-cost budget that size, a 15 percent overrun is unremarkable and it lands entirely on the equity.

Also ask what the exit assumes. If the model sells at a cap rate tighter than today's for stabilized apartments in that submarket, most of the projected profit is a cap rate assumption rather than construction skill.

stephen_ok9 · Answer

One more line item nobody has said out loud: the sponsor's own money. Ask what percentage of the equity he's putting in and whether his acquisition and construction management fees exceed it. If he's contributing 2 percent of equity and collecting 5 percent of the project in fees, he gets paid for closing whether or not the building ever leases. That single ratio has knocked more deals off my list than any construction detail.

Is $50k the normal minimum for an LP unit in an office to apartment conversion?

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