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Sponsor Unit Sales: Why Co-op Boards and Buyers Love 'Em and Hate 'Em

New York City

Sponsor unit sales, co-ops boards, apartment buyers, co-op board approval process.
July 15, 2022

Co-op boards and apartment buyers have different reasons for loving and hating the sale of sponsor units. These are apartments that remained rentals when the sponsor converted the building to a cooperative. When the sponsor decides to sell such a unit, the rules are different from a conventional co-op resale. Here are the pros and cons for both sides:

Pros and cons for buyers. The biggest plus for buyers, according to Brick Underground, is that buyer can skip the co-op board approval process, which can bring intense scrutiny of the buyer's finances and character. It also allows the buyer to get around the co-op's rule on minimum down payments.

“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 $970,800 in New York City — then it’s possible to get as much as 97% financing, she says. This is in contrast to a resale co-op where the board often limits financing to 80%.

This opens up opportunities for buyers with less traditional incomes, including freelancers, consultants with contract work or those who are self-employed. “There are banks that do not require income verification or that use alternative means of verifying income if qualifying using conventional loans doesn’t work,” Cohn says.

The downside is that sponsor units tend to cost more. Jonathan Miller, president and chief executive of real estate appraisal firm Miller Samuel, says this is partly because sponsor apartments are often newly renovated, but even if there are two similar renovated apartments or two similar unrenovated apartments and sponsor ownership is the only difference, he says that you “might see a 5% or even 10% premium on the sponsor unit.” In essence, the buyer is paying a fee for bypassing board approval.

Buyers may also face higher closing costs with a sponsor unit because buyers are expected to pay city and state transfer taxes. This will add a percentage of the purchase price to your closing costs.

The pros and cons for boards. A big plus for boards is that a renter is replaced by a shareholder, meaning the ratio of owner-occupied units increases. This is widely seen as good for the quality of life in the building, and it's a sign to lenders that the building is more likely to be a good risk. Apartment values rise accordingly.

The downside, obviously, is that the board has little control over who buys into the co-op. The board's cherished role as gatekeeper vanishes, with the possible result that a troublesome shareholder gains entrance to the building. The good news for boards is that the new shareholder will, like everyone else in the building, have to comply with the bylaws and house rules. And in worst-case scenarios, the board still has the power to revoke shares and expel an unruly shareholder.

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