If you're new to New York real estate and you've come across the term "sponsor unit" while scanning the ads for co-ops, you may be wondering what it means. Of course, if you already know, you're probably wondering how to find one, because for some, they are very desirable units.
A sponsor co-op is an apartment that still belongs to the original owner or corporation responsible for turning a building from a rental into a co-op. Many rental buildings in New York City were converted to co-ops in the 1980s. At that time, existing tenants had the option to buy or keep renting. So the sponsor unit is a rental unit that is now being sold by the building’s original owner.
[Editor's note: An earlier version of this post was published in 2017 and has been updated with new information in April 2019.]
Buying a sponsor unit allows you to skip the board interview but the units can be slightly more expensive, in spite of rental wear and tear, and often have higher closing costs than regular units. Here's a guide to the ins and outs of sponsor apartments and what's involved in buying one.
Skipping the dreaded co-op board approval process
This is the biggest advantage of buying a sponsor unit. You won’t have to go through the scrutiny that a resale buyer would. Depending on the individual sponsor, the financial requirements may not be as stringent than a non-sponsor apartment.
“The rules about these transactions will ultimately be dictated by the by-laws for the individual co-op, but in most cases a sponsor sale means credit issues, down payment requirements or other common barriers to purchasing a co-op can be ignored,” says Patrick Lavell, a loan officer and director at Hudson United Mortgage.
Different kinds of sponsors
A sponsor who owns a handful of apartments and is not involved in the operation of the building will be more lenient typically. Sponsors who still sit on the building's board of directors may require more cash left after the finalized purchase.
In addition to jumping through fewer financial hoops, "the buying process is also quicker in a sponsor sale, since you don’t have to wait for a board review and interview," points out broker Edward Liao of Halstead.
Sponsor units are frequently in original condition with prewar details like dentil moldings and herringbone floors. These architectural details may well be partially obscured behind paint, applied with every new lease, but can give the unit character that’s hard to find in resale. You should be aware that original prewar units may require the removal of lead-based paint or asbestos and that’s a job for the specialists.
When you’re buying a co-op, condo or townhouse in New York City, expert legal representation is as critical as light, air, and water. “Protect yourself, your investment and quality of life by working with an independent lawyer who has deep experience in New York City real estate, and not necessarily the one who is referred to you by a broker involved in the transaction,” says New York City real estate attorney Steven Wagner of Wagner Berkow & Brandt.
Among other things, your lawyer should read the minutes for issues affecting your apartment or that may increase the carrying charges, review the financials to see if the coop or condo is financially sound and check to see if there is any litigation or contingent liabilities that may result in large assessments. To schedule a free 15 minute telephone consultation with Steve Wagner, click here or call 646-780-7272.
Sometimes the units have been renovated. Keep in mind, there’s likely a difference between a renovation you would do yourself and a sponsor makeover. Some buyers may find themselves re-renovating within a couple of years if the sponsor’s upgrades were merely cosmetic.
On the plus side, a sponsor will not need approval for a renovation so the unit may have a washer/dryer where the building doesn’t permit it. In this case, Karen Sonn, closing attorney with Sonn Associates, says what usually happens is “when that purchaser sells, the board will not grandfather that washer/dryer to the next buyer.”
It’s not uncommon to find sponsor units that require some kind of renovation work. Sonn says an alteration package or sales package may state the need for upgrades to the electric panel, windows, or radiators.
Sponsor units come at a premium
All things being equal, sponsor units can be more expensive than non-sponsor units. If you purchase from a sponsor, you would have to pay the transfer tax, as well as a premium for the ease of not having to go through the board process.
Jonathan Miller, president of the appraisal firm Miller Samuel, says, "While there is no hard and fast rule, we do see sponsor units going for more than resales—assuming both can be delivered vacant. The premium could reflect their renovated condition but another significant factor is the lack of board approval needed by the purchaser, a common attribute of a sponsor sale."
"Two similar renovated apartments or two similar non-renovated apartments with sponsor ownership being the only difference might see a 5 percent or even 10 percent premium on the sponsor unit," says Miller. "But it's not a hard and fast rule since we can see sponsor units sell for less. In that case, the sponsor unit is far more derelict in condition than a typical unrenovated non-sponsor apartment."
Higher closing costs
You can finance the deal with as much as your lender will approve you for. It could be as little as 3-5 percent down on conforming loans or as little as 10 percent down on jumbo loans. However, most co-ops require buyers put down 20 to 25 percent of the purchase price.
Buyers are also expected to pay city and state transfer taxes on co-op sponsor sales unless it’s negotiated otherwise. "This will add a percentage of the purchase price to your closing costs,” says Liao. ”Most sponsors will not negotiate on this since there is enough of an incentive for a buyer to buy without board approval," he says.
Possible legal issues
As with any rental unit, you'll need to “be sure the lease was terminated properly and that the tenant has vacated the property or was properly evicted,” says real estate attorney Jerome Strelov of Frankfurt Kurnit Klein & Selz. “You don’t want a family member claiming that he or she was living with the previous tenant and improperly evicted or that the apartment was vacated while they were on vacation.”
Where to find sponsor co-op units
Sponsor units are all over the city. A majority are in prewar buildings on the Upper East Side and Upper West Side of Manhattan. Depending on your needs and the inventory available, prepare to shop for six to 12 months for a sponsor-owned apartment. These units are few and far between, and some Manhattan homebuyers who want to avoid board approval are always on the hunt.
Let your broker know you are interested in sponsor apartments. If you are searching on listing sites, put the terms “sponsor unit,” or “no board approval” in the search parameters to find these types of units.
Do your due diligence
Find out as much about the building, the previous tenant and the sponsor as you can—your broker can help you with this. Ask how many units the sponsor owns in the building and how many apartments are owner-occupied. The more owned apartments in the building, the easier it should be to secure financing, and the more your apartment will hold its value or increase later on. Banks are more likely to look at the building as a sound investment if most units are not rentals.
Building rules still apply
You may still have to abide by the rules of the actual building. Although the sponsor may not have “control” as defined by the offering plan, there are buildings where the sponsor has a huge vested interest and is still involved. Some buildings actually benefit from the expertise and relationships that the original sponsor or successor sponsor has established, bypassing a management company and getting answers from an individual instead.
Get an inspection
Inspections are important for “as is” apartments so you know the overall condition of the apartment before buying, and what is involved in the renovation. They can also be useful for the renovated units to help determine the quality of the upgrades.
Although you’ve purchased a sponsor unit, you may be required to get all renovation plans approved by the co-op board, the building architect and the management company before you start the project
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