Photo: Modlin Group
If you’re considering buying a new condo, you may be familiar with some of the risks, such as construction defects, sponsor control of the board, warranty and punch-list issuesBut if you’re anything like the clients who walk into my office every day, there are a few more potential time bombs that may take you by surprise:
1. The developer has the right to convert the building into a rental—and hang onto your deposit for months until the switch is official
Under the New York Code of Rules and Regulations (the Martin Act) and in BOLD print on the front cover of the Offering Plan, it reads:
BECAUSE SPONSOR IS RETAINING THE UNCONDITIONAL RIGHT TO RENT RATHER THAN SELL UNIT, THIS PLAN MAY NOT RESULT IN THE CREATION OF A CONDOMINIUM IN WHICH A MAJORITY OF THE UNITS ARE OWNED BY OWNER-OCCUPANTS OR INVESTORS UNRELATED TO THE SPONSOR.
Accordingly, your deposit can be held hostage indefinitely until the sponsor files the appropriate paperwork with the Attorney General’s office to effectively abandon the plan.
I have three clients in this limbo situation—two in Brooklyn, one in Manhattan—and unfortunately there is nothing they can do but wait for their money back, then start their apartment hunt again.
Not much can be done here as it is never the sponsor’s intention to rent units and this decision is made after hard deposits are delivered.
2. The offering plan is laced with hidden costs
With offering plans clocking in at several hundred pages, developers rely on the fatigue-and-fine-print factor to camouflage a battery of hidden costs that they intend to pass on to you at the closing table.
Recently, perhaps because buyers have come to expect concessions like payment of transfer taxes and sponsor’s legal fees, I have seen sponsors raise these costs and attempt to pass along new ones, including:
- Reimbursement to the sponsor’s attorney for ‘offering plan expenses’ of up to $2,000.
- Payment of the sponsor’s broker’s fee. This is a hefty sum ranging from 1% to 3% of the purchase price. That’s $10k-$30k on a $1 million condo. This is rare, but we have seen this.
- Tax abatement filing reimbursement
It is important to work with an attorney who not only knows new development, but can use this knowledge to attempt to reduce these fees.
For example, fees that go to the condominium (e.g., working capital and reserve fund contributions, and insurance premiums for the first year) are generally non-negotiable, while fees that help the sponsor reduce its own costs (like legal fees and transfer taxes) can easily be negotiated. Remember, sponsors have carrying costs, and for the time it takes to negotiate these things and get a client to close, the sponsor may be better off agreeing and closing.
3. Your property taxes will be significantly higher than the offering plan says when that abatement wears off
Most tax abatement programs and the offering plan summary and opinion relating to these programs are complicated and some attorneys don’t even understand them. Most importantly, buyers should be aware that programs such as the 421-A tax abatement program (which is being phased out) do not take increases in the tax rate into consideration or increases in the assessed value of your home. If you expect either of those to go down over the long haul, think again.
Make sure that you are confident that you will be able to afford an annual tax bill that climbs steeply as that abatement wears off. Also make sure you consider the depressing effect this will have on your apartment’s resale value. Is the apartment still competitively priced if you factor in unabated property taxes?
Buying new is great. It is just crucial that you have accurate advice and that you are going into the transaction with your eyes open.