What is a Sponsor in New York Real Estate?
A sponsor is more commonly known in New York by another term--the developer.
A sponsor or developer may or may not be one person.
In some cases, the sponsor is a conglomerate of entities (e.g., the construction company, architect, etc.) who have combined forces under the umbrella of an LLC for that particular real estate development project.
The sponsor could also be the property owner that oversaw the initiation of a condo or co-op; whether that means it was converted from a rental building to a co-op or condo building or through the means of new construction.
The sponsor then sells the building’s units to buyers.
That sales process starts with an “offering plan” that buyers and their advisors—e.g., real estate agent and attorney—review prior to purchase as part of their due diligence.
Developers giving buyers an offering plan is required by law.
That’s the pre- and in-construction role a sponsor plays, but a sponsor can still hold tremendous sway after you’ve purchased your unit as well.
What is a Sponsor?
- A sponsor is a person or business entity that starts a condo or co-op either through conversion or as a new construction.
- Buying a sponsor unit in a converted co-op or condo means that the unit does not need to comply with co-op bylaws such as board approval or right of first refusal.
- Other perks of buying directly from a sponsor can be lower cost, or a brand new never-lived-in unit.
- Some potential negative aspects can be higher price tag and closing costs on brand new units or having to spend a lot on renovations.
- Having a sponsor retain ownership of a high number of units in the building can affect your ability to secure a mortgage for your purchase.
What Are the Pros of Buying from a Sponsor?
Although the sponsor is responsible for selling building units, most will also retain some ownership of several of them as investments.
In the case of buildings that have converted from rentals to condos or co-ops, this can also include apartments that have remained rentals—and therefore are still under the control of the sponsor.
Since these apartments are owned by the original sponsor who converted the building from rentals to co-ops or developers who created new-construction condos, such units are not considered resales.
Skipping board approval
Since you’re dealing directly with the developer, purchase of sponsor-owned units enables buyers to bypass the board’s financial-package review and interview process.
In some cases, buyers pay a premium for such units because of this inside track that can help bypass board approval.
On the flip-side, some sponsor apartments can be less expensive than resale units in the building—particularly when the sponsor unit hasn’t been refurbished, making the sale “as is.”
Another upside to buying a sponsor unit concerns financing. Sometimes sponsors can be more flexible about a buyer’s profile, making it easier for individuals—such as the self-employed—to purchase a unit.
The lack of board vetting also makes this process easier—and can potentially expedite closing.
However, do note that lenders are more inclined to approve a buyer mortgage in a building where the majority of units are not sponsor-owned or rentals—with at least 50% of units being owner occupied.
While, in co-ops, by-laws still apply, there can be flexibility in terms of credit profile, down payment requirements, and type of occupation that could be barriers to homeownership in other scenarios.
Original Construction Detailing
Another boon is that sponsor-owned units may still have the original construction detailing that was gutted in renovations over a succession of different owners in a building’s other units.
What Are the Cons of Buying from a Sponsor?
There are not too many disadvantages of purchasing a sponsor unit, but here are some things you should consider.
As mentioned, sometimes sponsor units are “as is”—which is great for the overall purchase price. However, this may be followed by extensive—read costly—renovations.
Higher Price Tag
- Unit Cost
As mentioned several times, the cost of sponsor units is potentially higher based on the significant benefits that can come from purchasing directly from the developer in a newly constructed building.
- Transfer Tax
As previously mentioned, buyers sometimes pay a premium for sponsor units—a kind of quid-pro-quo for the ability to circumvent traditional board vetting and scrutiny.
Add to that expense another: developers often ask homeowners to pay the transfer tax for units, especially in a hot market.
This will increase closing costs. (The transfer tax is the tax paid to transfer the title—and ownership—of a home from the seller to buyer. Traditionally it’s the seller who has to pay the transfer tax.)
Sponsors can potentially have an inordinate impact on a building, pre-sale and post.
However, at the end of the day, when a buyer purchases a home, he or she becomes part of the building’s larger owner fold and must comply with the buildings by-laws and rules.
Ways a Sponsor Can Negatively Affect a Co-op or Condo
Even if you're not purchasing a sponsor unit, a sponsor's presence in a building can impact the value and in some cases, you're ability to even finance your purchase.
Typically, a developer maintains board control—until the sponsor has sold off the majority of the building’s units.
When a developer maintains board control long term, or indefinitely, this can create an issue when the sponsor locks horns with the building’s owners about major issues like renovations or what to allocate the operating budget towards.
Similar to new-construction purchases, the answers to scenarios like this lie in the offering plan: It details whether or not the sponsor will still maintain control of a significant-enough number of units to maintain board control—even after most of the building’s units have been sold to owner-occupants.
Retaining Ownership of Too Many Apartments
While being able to purchase a sponsor unit can be a boon to an individual—it can be less so, collectively, to all of the building’s homeowners.
A key impact is financing: If there are more rentals and sponsor-owned apartments than owner occupied ones, this can make financing—and refinancing—difficult for unit owners.
As mentioned before, lenders prefer approving financing in buildings where at least 50% of units are homebuyer owned.
Often, banks will require this number to be even higher.
As is generally the case when researching a coop or condo, investigate the reputation and track record of the developer—including the developments created by that sponsor.
Were there too many renters—which became problematic for owners?
Look for any problematic patterns that span across multiple developments that sponsor worked on.
Use a sponsor’s track record as a potential gauge of things to come in your complex.