We considering buying a condo in a new development that doesn’t have a Certificate of Occupancy or Temporary Certificate of Occupancy yet. We found a lender willing to lend to us and other units in the building that sold a few months ago received mortgages. Our lawyer just finished due diligence and the condo board says they’re working on getting the TCO in the next 90 days. What risks could we face?
A CO or certificate of occupancy specifies how a building may be used, how it's zoned, and how many residences are permitted. (A TCO is a temporary certificate of occupancy, which means the building can be inhabited but there is still some work to be done on it.) Without this document, buildings cannot be legally inhabited.
It takes time for a new development to obtain a CO or TCO, which can cause delays in closing.
"The biggest risk is that the building won’t get a TCO on time and you can’t close on time," says Deanna Kory, a broker with Corcoran. "Eventually most buildings get a TCO. It just can take longer than anticipated."
Some developers deal with this issue by getting TCOs for parts of the building, so that buyers can close and move in, or by filing for extensions for TCOs, which are typically issued for 90-day periods. This is all par for the course when buying in a new development.
"There's no funny business behind it—it's just part of the waiting game of getting the building through the DOB's process, which is extensive and includes a lot of inspections and back-and-forth with the developer," says attorney Shaun Pappas, a partner at Starr Associates. "It's all there for protection, and it's good these things are in place, but it can be uncomfortable for buyers who aren't familiar with the process."
One of those points of discomfort is getting a mortgage: Lenders will ask to see a building's CO or TCO before issuing a loan. To address this, many developers will line up financing in advance with a preferred lender, which smooths the process for buyers.
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Buyers can also protect themselves by adding certain clauses to their contracts.
"Buyers can negotiate into their contracts that the closing process cannot begin by a certain date unless there is a reasonable expectation a TCO will be issued by then," Pappas says. "Offering plans also often have a slew of disclosures about TCOs, including that if it expires, you can't close on the unit until the TCO is extended."
In addition to challenges securing a loan, delays in obtaining a TCO can cause issues in purchasing title insurance, so buyers will want to make sure their contracts also address this contingency.
"Your contract should contain provisions protecting you in the event any issues arise caused by the lack of or any delays in getting a CTO or CO. In particular, you want to make certain that this will not create a title issue," says James Woods, managing partner of Woods Lonergan (and a Brick Underground sponsor). "Typically, a title insurance policy will insure an owner and lender based on the certificate of occupancy; in the absence of that, a company may decline to offer title insurance on a transaction or may limit the representations or coverage."
Finally, you should confirm that any issues that arise around conditions within your apartment are the responsibility of the seller or sponsor, rather than your own.
"If there are conditions in the unit or with the property that may need to be altered, remedied, or removed in order to obtain a certificate of occupancy, those costs and liabilities should be the responsibility of the sponsor or seller, not you as the new owner," Woods says.
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