A sponsor is more commonly known in New York by another term, the real estate developer.
And to put it simply, a sponsor is the original holder of the unsold shares or the condo units in a building located in the USA.
A sponsor or developer may or may not be one person and In some cases, the sponsor is a conglomerate of entities who have combined forces under the umbrella of an LLC (Limited Liability Company) for that particular real estate development project.
A New York sponsor unit
Sponsor units are apartments in a co-op where the real estate developer or building owns the unsold shares allocated to the unit.
The appeal of these sponsor units is that there is no need to comply with co-op bylaws such as board approval or right of first refusal and other perks of buying directly from a sponsor can be lower cost, or a brand new never-lived-in unit.
However, the good things come with disadvantages too: some potential negative aspects can be higher price tag and closing costs on brand new units or having to spend a lot on renovations.
Outlined below are some of the advantages and disadvantages of buying units form a sponsor/developer.
Benefits of Buying from a Sponsor
The biggest advantages to buying a sponsor unit in NYC are privacy and convenience.
- Skipping board approval: because you’re dealing directly with the developer, purchase of sponsor-owned units enables buyers to bypass the board’s financial-package review and interview process.
Although, in some cases, buyers will have to pay a premium for such units because of this inside track that can help bypass board approval.
- Less expensive: when the sponsor unit hasn’t been refurbished, some sponsor apartments will be less expensive than resale units in the building making the sale “as is.”
- Easier Financing: Sometimes sponsors can be more flexible about a buyer’s profile, making it easier for individuals to purchase a unit.
The lack of board vetting also makes this process easier and can potentially expedite closing.
However, lenders are more inclined to approve a buyer mortgage in a building where the majority of units are notsponsor-owned or rentals with at least half of units being owner occupied.
- Original Construction Detailing: usually, sponsor-owned units might still have the original construction detailing that was gutted in renovations over a succession of different owners in a building’s other units.
Disadvantages of Buying from a Sponsor
There are only few disadvantages of purchasing a sponsor unit, outlined below are some of them to consider.
- Potential Renovation: sometimes sponsor units are “as is” which is great for the overall purchase price. However, this may be followed by extensive and costly renovations
- Higher Price Tag:
On Unit Cost– the cost of sponsor units is potentially higher based on the significant benefits that can come from purchasing directly from the developer in a newly constructed building.
On Transfer Tax– buyers sometimes pay a premium for sponsor units—a kind of quid-pro-quo for the ability to circumvent traditional board vetting and scrutiny.
Add to that, another expense: transfer tax for units who developers often ask homeowners to pay. The transfer tax is the tax paid to transfer the title and ownership of a home from the seller to buyer.
This transfer tax will increase closing costs.
However, at the end of the day, when a buyer purchases a home, he or she becomes part of the building’s larger owner fold and must comply with the buildings by-laws and rules.
Ways a Sponsor Can Negatively Affect a Co-op or Condo
Even if you’re not purchasing a sponsor unit, a sponsor’s presence in a building can impact the value and in some cases, you’re ability to even finance your purchase.
- Board Control: when a developer maintains board control long term, or indefinitely, this can create an issue when the sponsor locks horns with the building’s owners about major issues like renovations or what to allocate the operating budget towards.
Similar to new-construction purchases, the answers to scenarios like this lie in the offering plan: it details whether or not the sponsor will still maintain control of a significant-enough number of units to maintain board control—even after most of the building’s units have been sold to owner-occupants.
- Retaining Ownership of Too Many Apartments: while being able to purchase a sponsor unit can be a boon to an individual it can be less so, collectively, to all of the building’s homeowners.
A key impact is financing: if there are more rentals and sponsor-owned apartments than owner occupied ones, this can make financing and refinancing difficult for unit owners.
As mentioned before, lenders prefer approving financing in buildings where at least 50% of units are homebuyer owned.
Often, banks will require this number to be even higher.
As is generally the case when researching a coop or condo, investigate the reputation and track record of the developer including the developments created by that sponsor.
If there too many renters, it became problematic for owners.
Before you seriously consider buying from a sponsor, think through every last detail and find as much information as you can find on the developer.
As usual, Damalion expert helps foreign investors who plan to buy an apartment in New York.
