Ok. You want to buy property in New York City; you’re mostly interested in co-op buildings (they’re generally less expensive than condos, after all); but you’re financial situation isn’t ideal for passing a co-op board’s stringent rules. Is there any hope? Yes! Enter, the sponsor unit. (Queue bright white lights and angelic music now.)
A sponsor unit, by definition, is an apartment or unit purchased directly from the sponsor — the person or legal entity responsible for developing a new building or converting a rental building to co-op or condo. When you purchase a sponsor unit, you’re the first owner of the apartment, but that doesn’t necessarily mean the unit is located in a brand new development or conversion.
Many of today’s co-op buildings were converted from rental to co-op back in the 1980’s. At that time, most plans were non-eviction plans, meaning the sponsor was not allowed to kick out tenants currently renting in the building who didn’t want to leave. So, the sponsor would have to wait for units to become available as rental tenants decided to move on, and renovate one at the time. Today, there are still occasional sponsor units that hit the market because of this particular situation.
So, what does this mean for YOU? Well, if you purchase a sponsor unit in a co-op, your purchase is not subject to co-op board approval. That’s right: no board approval. So, if your debt-to-income ratio isn’t quite up to par or you’re planning on using gift money for a portion of your purchase, the board can’t block you. (You will, of course, have to play by the bank’s rules if you’re financing.) It’s a pretty sweet deal. BUT, there is a downside…
Normally, the seller pays the transfer taxes on a sale, which, in NYC, amounts to 1.825% of the purchase price if the price is over $500K and 1.425% of the purchase price if it’s under $500K. However, when a sponsor unit is purchased, the buyer is traditionally responsible for paying the transfer taxes.
So, that’s it: no board approval, but you have to pay the transfer taxes – sponsor units in a nutshell.