One of the more unique to Manhattan apartment types are sponsor units. But what is a sponsor unit in New York City? And what makes them so special?
Generally speaking, a sponsor unit is an apartment that has never been sold. New York City brokers define sponsor units as rent-controlled apartments in converted co-op or condo buildings that weren’t sold during the initial conversion.
In this article, we’ll cover a short history of the conversion wave of the 1970s and 1980s, the pros and cons of buying a sponsor unit, how the purchase process compares to buying a traditional resale condo or co-op, and why the term isn’t used to describe new development sales.
Everything You Need to Know Before You Shop For A Sponsor Unit in New York City
A Brief History of How Rent-Stabilization and Rent-Controlled Apartments Caused Conversions
In the 1970s and 1980s many NYC residential rental buildings were converted to condominiums or co-ops. This wave of conversion was mainly due to the effects of a rent stabilization law that was enacted in 1969 (though there were certainly other microeconomic and macroeconomic factors that go beyond the scope of this article).
Unfortunately, the apartment’s stabilized rent rates just couldn’t keep up with the market value as the apartments appreciated with time.
Since landlords couldn’t raise rent (and more often than not were having trouble making ends meet due to the stabilization laws), many decided to convert their buildings and sell the apartments. This let them get around rent regulations and recover some of the financial losses that those regulations had caused.
Landlords listed their apartments for sale and offered tenants discounted pricing to incentivize them to purchase – it was a win-win for both parties.
Landlords could make more money than if they continued to rent at stabilized rates, and tenants became homeowners at around half the market rate compared to if they purchased a non-sponsor unit. As a result, buildings were converting left and right.
Why There Are Still Sponsor Units Available After the Conversion Wave of the 70s and 80s
What happened if a tenant didn’t want to (or couldn’t) purchase their apartment? Well, they had a right to stay due to non-eviction conversion laws – and that means their apartments would continue to be rent-stabilized.
As with anything in NYC housing, there’s a lot more nuance to it than simply ‘they got to stay’…but for the purposes of this article we are focused on how it affects modern-day transactions.
If you are interested in the history, the New York Fed wrote a piece about the co-op conversion wave in 1980 that’s a surprisingly good read.
Most of the time the sponsor/developer/landlord in this situation can do nothing but wait until the tenant moves out, which can take years because family members can pass down rent-stabilized apartments to one another. For this very reason, there are still many rent-controlled apartments in the city today.
Just like in the 1970s and 1980s, as building costs and taxes rise, the original owner of the unit loses money on the rent controlled apartment. The original owners usually cut their losses by selling their rent-controlled apartments to mega-developer sponsors, who have a large enough portfolio to sustain long-term losses until the apartment can be sold.
There are a number of mega-developers in Manhattan who have turned this into a business. They essentially buy the unsold shares of the co-op, wait for the rent-stabilized tenants to move out, then flip the apartment and list it as a sponsor unit.
Aren’t New Developments Technically Sponsor Units?
New developments are technically sponsor units, but NYC brokers don’t refer to them as such – they’re just called new developments.
If you see sponsor unit anywhere in a listing, it’s referring to the first-time offering of a rent-controlled apartment in a converted co-op or condo building that wasn’t sold during the initial conversion.
Perks of Buying A Sponsor Unit
There are advantages to purchasing a previously unowned apartment in an established condo or co-op. These advantages can be attributed to two factors: the origin of the apartment and the different requirements these purchases are subject to.
- No board approval required: When purchasing a non-sponsor unit in a co-op building, buyers are required to be approved by the co-op board. This is to ensure they are financially sound and would make good neighbors. In a sponsor unit sale however, you have the opportunity to buy into a co-op building without having to be approved by the board. Note: any subsequent buyers of the apartment will be subject to the usual board approval process.
- Some financial advantages can be had: If you are self-employed (or have other non-traditional income streams) and, despite high levels of income, you’re struggling to show that you can actually afford real estate, sponsor units can be a great way to purchase NYC property. Additionally, you may be able to save some money when it comes to the down payment because you are free of the board’s requirements.
- Quicker closing time: Yet another perk of skipping the board approval process is that you can expect to close about a month sooner than you would in a typical co-op purchase. 90 days is a typical timeframe for that process, but it’s much faster when you’re not dealing with the board.
- Utilitarian updates will be made: A sponsor unit that has been occupied by a tenant with rent control for years often needs a lot of TLC. While you shouldn’t expect a full cosmetic flip, the sponsors of such units usually update aging electric, water, or heating systems. So while the rest of the unit may be sold in “original” condition, you can usually rest assured that those big ticket items have been modernized.
Downsides of Buying A Sponsor Unit
Unfortunately there are also disadvantages to purchasing a previously unowned apartment in an established condo or co-op. These disadvantages mainly come from the history of the apartment and how the costs of a sponsor unit add up.
- They’re often sold in “original” condition: While it is true that absolutely necessary updates to electric, water, and heating systems and a fresh coat of paint will usually be done to a sponsor unit…the updates usually stop there. Appliances, trims, moldings, light fixtures, and sinks/tubs/toilets will usually be outdated. This means that most sponsor units need significant renovations before they’re up to the average New Yorker’s standards. These renovations will be expensive and subject to the co-op board’s approval.
- You will likely pay more up front: Sponsor units typically sell for more than their resale co-op counterparts, because people will pay a premium for the privilege of skipping the board’s approval. Also, closing costs for sponsor units may be higher than average due to the buyer paying the transfer taxes and for their real estate attorney. If you’re renovating your new home before you move in, that will add to the costs as well.
- Rare legal issues regarding tenancy: If the apartment you’re looking to buy was previously a rental, buyers and their real estate attorneys must investigate the termination of the existing lease prior to the sale as part of due diligence. If the lease was not terminated legally, especially if the apartment was rent-stabilized or rent-controlled, you could get caught up in a years-long legal case that’s both expensive and exhausting to deal with.
- When you resell, your buyer will need board approval: The perks of a sponsor unit sale end with the first buyer. As soon as you take ownership of your new apartment, you are subject to the rules and regulations of the co-op board. And when it comes time for you to sell that apartment, any potential buyers will be too. That means that you won’t get the same premium purchase price that you bought for, and closing on the sale of the apartment will take longer.
How Do Sponsor Units Compare to Co-ops & Condos?
When it comes to the ease of purchase, the flexibility of use, and the average purchase price, think of sponsor units as the midpoint between a co-op and a condo. As the buyer of a sponsor unit, you’ll get to enjoy the same accelerated closing process and lack of board approval that buyers of condos do.
However, when it comes time for you to renovate, if you want to sublet the apartment, or you decide to sell the property, your experience is that of a typical co-op owner. Board approval and requirements apply to all three scenarios.
Ready To Start Apartment Hunting?
If you’ve made it this far, you should know absolutely everything you need to (maybe more) about sponsor units. They’re not for every buyer in New York City, but they are definitely the savvy choice for New Yorkers in unusual financial circumstances or seeking a little flexibility.
Unsure of whether or not a sponsor unit makes sense for your household? Give us a call or send us an email, we’d love to get to know you a bit and see if we can help you figure it out!