What’s So Special About a Sponsor Unit Anyway?
Dec 20, 2020
Hate the prospect of a co-op board going over your financials with a fine-tooth comb? Think it’s years till you can get anywhere near 20% together for a down payment? It’s time to learn about sponsor units.
What is a sponsor unit?
A special category of apartments in New York City are called “sponsor units.” Basically, a sponsor unit in a condo building is a residence that has been owned by the developer and it’s going up for sale for the first time. Or in the case of a co-op, it is owned by the original owner or the corporation that originally converted rental units into co-ops.
“Sponsor listings” mostly are found in condo buildings, since new development has brought mostly condos to the market. The real market for sponsor units is in cooperative buildings, many of which underwent conversion from rentals to co-ops over the conversion boom that started in the 80’s.
What is the Benefit of Buying a Sponsor Apartment?
Since most buildings in New York were converted many years ago, the opportunity to buy a sponsor co-op unit that has never before been privately sold can be a real advantage.
- No Board Approval: A sponsor unit for sale in a co-op allows a buyer to make the purchase without approval from the co-op board. This will save you time and the ridicule of the co-op board, since financials, income and occupation are not subject to the co-op boards approval. This is a great way for self-employed buyers or those whose financials may have blemishes to buy into a co-op.
- 10% Down: Since the down payment is negotiated between the buyer and the sponsor unit owner, there is the potential for the down payment requirement to be below the 30 percent suggested figure required by many co-op boards. Also a buyer’s cash reserves often don’t need to meet the same standards as a buyer for a non-sponsor unit. A 10-20% downpayment could be accepted.
- Rules of the co-op conferred on other shareholders in the corporation do not extend to a sponsor unit. A sponsor unit may be sublet or rented but once transferred to a buyer it is no longer a sponsor unit.
- TLC : Since many of these units were occupied for a long time by rent- controlled tenants, they may often be in “estate condition” — a plus for some buyers who appreciate the details and materials used in prewar buildings. Sponsor units appeal to buyers who want to completely remake the apartment according to their taste.
This may all sound to good to be true. So what are the drawbacks and concerns you should consider?
Deal or no deal? While many sponsor units are in need of major and costly renovation, they may not come at a discount. The premium that many sponsor unit seekers are willing to pay to get into one of these units has to do with wanting to sidestep the co-op board or to not have their financials scrutinized or wait a long time for board approval. There’s nothing worse than sitting through weeks or months waiting for a co-op board to approve your construction plans only to have them reject them.
Value. Sponsor units can often be the same square-foot price as renovated units, or more expensive. An owner may understand that a sponsor unit is a special class that attracts a certain kind of buyer that is often willing to pay a premium.
Over the past 15 years, the city’s co-ops have undergone a 110.8% price increase on average while condos have undergone a 138.2% price increase. Of course, depending on the neighborhood, the performance of co-ops versus condos does vary. In downtown neighborhoods, co-ops experienced a 126.9% price increase over the past 15 years while the value of condos has soared by 179%.
Closing Costs: The closing costs are steep for a sponsor unit in a co-op. This can add about 1.825 percent of the purchase price to a buyer’s closing costs in transfer taxes if the apartment is over $500K. Making the co-op closing cost amount closer to that of a condo. Additionally, a seller will try and negotiate to have all closing costs associated with the unit paid for by the buyer.
Legal Legal issues need to be sorted out if a sponsor unit had been a long-term rental. This is especially true for controlled or stabilized apartments, where there are no leases. In all cases buyers should make sure the lease was terminated legally and with the consent of all named tenants.
You must also have a real estate lawyer look into the terms of any proprietary lease associated with the unit. A buyer must get a clear read on obligations when it comes to the unsold shares in a sponsor unit so make sure to do your due diligence. This is true for anyone who aims to occupy the unit. It is more imperative for an investor who wants to buy a sponsor unit(s) in a co-op and then rent the unit(s) out.
The hunt :The demand is high and inventory low for this type of apartment. Anyone looking specifically for a sponsor unit apartment must be willing to stick it out for the long haul.
Construction: Despite not having to pass the co-op board’s approval process to buy a sponsor unit, any renovation plans will probably need approval by the board. If possible, use someone who has worked in the building before. As for what kind of work needs to be disclosed what doesn’t, it will depend on your building. You may not need permission for cosmetic work that doesn’t involve major systems like electrical or plumbing, but some co-ops have more regulations, or what’s known as a “decoration agreement.”