Pitched a $50k LP unit in an office to apartment conversion, is that the normal minimum?

Question

Guy at a local meetup runs a sponsor group doing office-to-apartment conversions and offered me a $50k LP unit. 8 percent pref, 70/30 split after, three to five year hold, and he says the whole thesis is buying obsolete office at $45/sf when apartments trade at $180/sf.

I build things for a living so the construction side I can follow, and honestly a full gut of an office core into residential sounds expensive in ways his budget didn't show. What I don't know is the investing side. Is $50k a normal minimum for this stuff, what does someone with less than that do if they want office exposure, and what fees should I expect to see on top of the split? He mentioned an acquisition fee and I didn't know whether to react.

Also he asked if I was accredited and I said probably, which in hindsight is not an answer.

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

I'm after income without picking up a second job, and a conversion is the opposite of that. 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 doesn't.

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 buy vs $180/sf apartment value is doing a lot of work in that pitch. What's the number in between? Conversions I've read about land somewhere around $250k to $400k a door all in, and if he's making 90 units out of it that's a $25m to $35m project on top of the acquisition. The spread isn't $135/sf of profit, it's $135/sf minus whatever the gut costs, 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.

Pitched a $50k LP unit in an office to apartment conversion, is that the normal minimum?

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