The Dark Lining to the Silver Cloud of Sponsor Apartment Sales

We recently reported here that there has been an uptick in sales of sponsor-owned apartments in New York City co-ops and condos, driven largely by the renter-friendly Tenant Protection Act of 2019. Many in the co-op and condo community welcome the trend because it means a decline in sublets and an accompanying rise in owner-occupied apartments, which are seen as good for the health of cooperatives and condominiums.

But, as Brick Underground reminds us, there are downsides to this welcome news, especially for co-ops. Here are a few:

No board approval. One of the most treasured powers of co-op boards is their ability to vet potential buyers, then approve or reject them – for any reason or no reason. This sweeping power vanishes, however, when a sponsor sells a unit. Anyone deemed worthy by the sponsor and a mortgage lender qualifies to buy the apartment, and the co-op has no control over who moves in.

Higher prices. For buyers, sponsor-owned apartments usually carry a higher price tag than resale units, despite the wear and tear they might have suffered as rentals. Buyers of sponsor-owned apartments also typically have to pay the transfer tax, which bumps up closing costs. But there’s an upside to this downside: buyers don’t have to meet the co-op’s financing standards, which can be onerous.

“Buying in a sponsor owned co-op allows you to finance as much as the banks will allow you,” says Melissa Cohn, executive mortgage banker at William Raveis Mortgage. So if the loan amount is conforming – up to $822,000 in NYC – then it’s possible to get as much as 97% financing. This is in contrast to a resale co-op, where the board usually limits financing to a much lower percentage as a way of weeding out marginal buyers.

Patrick Lavell, vice president of mortgage lending at Guaranteed Rate, adds: “The rules about these transactions will ultimately be dictated by the bylaws 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.”

No grandfather clause. Sponsors do not need board approval for renovations, so a sponsor-owned apartment might have a washer/dryer in a building that forbids shareholders from installing them. In such cases, says Karen Sonn, a closing attorney with Sonn Associates, “the board will not grandfather that washer/dryer to the next buyer.” Sonn adds that the building’s alteration package or sales package may require the incoming buyer to do upgrades to the electric panel, windows or radiators.

Renovation rules. Co-op boards do not forfeit all their power when sponsors sell apartments. Buyers who wish to renovate such an apartment will still be required to get all renovation plans approved by the co-op board, the building architect, and the management company before starting the project.

Despite these drawbacks, most co-op and condo boards welcome the increase in sales of sponsor-owned units. Owner-occupancy, even at a cost, is still the Holy Grail.