Commercial conversions are harder than they look

Real Estate Weekly, Nov 13, 1996 by Lois Weiss

Changes are often complex to implement but predictable in their needs: new plumbing, gas for kitchens, individualized climate controls and operable thermopane windows. But others, like a building in the wrong zoning district, Americans with Disabilities Act compliance (ADA), or main features like an elevator or staircase or even an entire core that need altering, can come as a financial surprise.

The problems, the professionals say, come when not enough due diligence is done before the buyer makes the purchase and the hidden costs aren't revealed until it's too late.

In today's quick-moving market, turnaround time on decisions is sometimes key to making the deal. But an uninformed decision can be a costly one, because even a seemingly no-brainer conversion can turn into a no-profit one when the architect or marketing consultant gives you a reality check.

"Do a careful feasibility study and do not buy based on square footage," warned noted architect Costas Kondylis, who has conversions from Trump International Hotel & Tower to The Exchange at 25 Broad Street to his credit, as well as many new buildings.

Says loft conversion architect Joseph Pell Lombardi, who gets calls from several clients whenever a building comes on the market, "Even a fairly sophisticated developer will come to me and say, 'It's going to be the easiest conversion. We just have to finish out the apartments.' Wrong. They figure it would be a $40 conversion and it's a fullblown $100 conversion."

Lombardi immediately checks land maps - which show core locations, lot line windows, zoning location and other data, to get as 'much information as possible for his clients right away. "A day later I can get floor plans from the Dept. of Buildings," he added.

His office computer also contains pro formas for different kinds of building conversions and helps figure out the development costs and income projections needed for a lender.

While Lombardi can do a quick turnaround to see if the building will be a quick and easy or long and costly conversion, for some projects, months can be needed to do the right job.

The need to conduct extensive due diligence was stressed by Scott Coopchik, executive managing director for Galbreath, who is overseeing the Trump International Hotel and Tower (TIHT) changeover to luxury residential use after its past life as the Gulf & Western/Paramount office building.

Carefully define what you are going to be doing to identify the costs, Coopchik said. "Decide what systems you can use and those you cannot," he emphasized. "Know the zoning laws that will affect it in the change of use."

At TIHT, residential marketing expert Louise Sunshine was brought in months before the Columbus Circle building was purchased. She did marketing studies to see what comparable buildings were getting price-wise and helped define what the potential buyers would want in the units.

"A lot of people will design and build," said Coopchik. "We had her on board first and she gave direction and input all the way, and the units were designed with the market in mind."

Be creative and clever in the re-use, continued Coopchik, who warns that while morphing from office to residential "the loss factors will change and the net rentable will change dramatically. If you do your homework you can do well, but you can't leave anything to chance. The surprise can cost you a lot of money."

Coopchik said they avoided surprises by knowing what they were getting into and what needed to be done to achieve their goals.

Most buildings changing from one use to residential have alterations that are destined by code, while others are dictated by market tastes.

Architects say residential buildings need two staircases to meet fire codes, while old elevators don't usually meet new ADA sizes.

Big apartments are desirable, but the developer doesn't always get the price he wants per square foot for larger units.

A mistake can be made when the developer does not factor in the cost of the solution when the core of the building is in the wrong location, a typical problem in commercial buildings originally developed to obtain easy street deliveries. But that same core can block the needed windows.

At Trump International, Coopchik said they purposefully shifted the core out of the portion of building facing Central Park, and that gave the developers more salvageable and highly desirable square footage.

If the building is too deep, i.e. too far from the core to the windows - more than 60 to 65 feet seems to be the consensus - the apartments also won't lay out well. Large beautiful apartments may be a selling point but will decrease the price you get per foot and merely create odd spaces.

Instead of having a 700 square-foot one-bedroom unit, it will layout to 850 square feet. "You will not be able to charge that much more rent for that extra square feet," said noted apartment architect Costas Kondylis. "For people on the market, a one-bedroom is a one-bedroom." He noted, however, that because the apartments are larger, they will become more desirable and people will get a bigger apartment for their money.