The Pros and Cons of Buying a Co-op Sponsor Unit

The Pros and Cons of Buying a Co-op Sponsor Unit

  • Sapir Team
  • 03/31/22

Have you ever heard the term “sponsor unit” and wondered what it was all about? When a co-op apartment is described as a sponsor unit, it means it is being sold by the original developer or owner of the entire building. 

Many prewar rental complexes in New York City were converted to co-ops during the 1970s and 1980s as a way of rehabilitating the buildings and creating a new ownership structure. So a sponsor co-op may be owned by the original owner of the building, or a property company that has come in more recently and bought and renovated an entire co-op building. Many times, a renovation like this will be an extensive gut work, replacing all of the electric, plumbing, walls, insulation, windows… as well as adding condo-like amenities and common spaces, such as a gym, lounge, playroom, co-working space or outdoor recreation areas.

One of the main advantages of the sponsor unit is that you don’t need board approval to buy. The board interview—the final step for approval when buying a NYC co-op—tends to be one of the most daunting. Avoiding the scrutiny of the board can help pave the way for purchasers who might otherwise be rejected, like freelancers and consultants with contract work, or entrepreneurs who might be cash poor at the time of purchase.

On the flipside, although co-ops are typically priced more affordably than condos, you can expect to pay more for a sponsor co-op than a resale co-op. If you compare two similar apartments and one is a sponsor unit and the other is a resale, there might be a 5 percent or even 10 percent premium on the sponsor unit.

 

Another thing is closing costs—they tend to be higher than in resale co-ops.

Compared to a condo, a co-op will have lower closing costs mainly because you won’t have to pay title insurance (because there is no deed for a co-op) or mortgage recording tax (which just applies to real property).

However, with many sponsor units, even when the market favors buyers, the developer will insist on the buyer paying the transfer tax of 1 percent of the purchase price on purchases over $500,000, plus a point four percent (0.4) transfer tax to New York state. This may be negotiable when it is a resale but less so if it’s a sponsor unit. 

Remember that gut renovation I mentioned earlier? It may not be to the highest specs.

A sponsor unit will typically have been rented out, perhaps for decades, so in order to sell it, the developer will renovate the apartment. Keep in mind, there’s probably 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.

If the sponsor unit hasn’t been renovated, the apartment will likely need considerable work. The apartment may have some prewar decorative features, but upgrades may require the removal of lead-based paint or asbestos. An inspection will be important to uncover the overall condition of the apartment before buying, and what might be involved in a renovation.

Lastly there is the down payment: you might get away with a smaller one.

The deal you make will ultimately be dictated by the by-laws for the individual co-op, but in most cases a sponsor sale means credit issues, and down payment requirements or other common barriers to purchasing a co-op can be ignored. So if the co-op generally requires a 30 percent down payment, for a sponsor unit, you may be able to pay just 20 or even 10 percent.

So, to summarize, on the plus side, you will have an easier time purchasing since you avoid a board approval process, your down payment may be smaller, and you will most likely get a renovated space. On the downside, that renovation may be merely cosmetic, your closing costs may be higher, and the purchase price may be steeper, too.

 

 

Source: Brick Underground