Condo Deconversion Project- Lessons learned?

[Spencer Gray]

We are hoping to have a fractured condo project under contract to purchase in the coming days/week and I was curious who on BP has executed a condo de-conversion before? We have significant experience in more typical multifamily projects (value add, core plus) but this project is a little different.

A few details about the project:

The property is a 36 unit building originally built as for-sale condos in 2005 at a true "main on main" location on the North side of Indianapolis. The project suffered as the recession gained steam and were never able to sell all 36 units to owner-occupants. The seller purchased 24 units starting in 2012 as has been renting them out since, achieving 95% occupancy with $2,500/m rents. The units are large (2,200 sft) and feature custom kitchens and baths, granite tops, wet bars, fire places, and cathedral ceilings. No other product in the market comes close to this finish level, however the rents are still below newer construction units at competing properties.

We have negotiated that the seller must purchase the remaining (12) owner occupied units and dissolve the HOA before we close. We have a fixed purchase price so it is completely up to the seller to acquire the remaining units at a reasonable price and consolidate the property on their dime. The seller owns 24/36 units and has already received verbal commitments from 9/12. They have 180 days to consolidate the property and are "highly confident" that they will be able to so in under 60 days.

The seller has not been operating the property like a typical multifamily property. They charge no fees, do no marketing and do an OK job in maintaining the asset. There are also 5 down units that we plan to bring online in the first few months of ownership to immediately increase revenue. We plan on implementing professional management, charge market fees, do some aesthetic updates to the property, and do a rebrand/relaunch as a premiere multifamily asset in a true "main on main" location.

The underwriting is very strong, even with assuming high vacancy in the first year while we bring down units online and in the event not all 12 owners want to stay on as renters. We're also assuming a salty tax reassessment that we plan on fighting.

For those of you who have successfully executed a project similar to this I would love to pick your brain. 

What are some of the pitfalls to avoid?

Lessons learned?