Buying an apartment in a brand new building or in a conversion from rental to condo/co-op or even in a building under construction that does not yet exist, has enormous appeal for many reasons, including:
1. Everything is new. For some buyers there is nothing that compares to owning a brand new home that no one has lived in before.
2. Ease of purchase. When purchased directly from the sponsor of a new development project there is no intrusive board approval process, i.e. no financial statement, board package or interview. Sponsors give buyers a great deal of flexibility with financing a purchase by requiring a minimal down payment of 10% in most cases. In brand new buildings, down payments on contracts can be as high as 25% of the purchase price.
3. Flexibility for owners. With few exceptions, new development projects are condominiums. Owners are permitted to rent out their apartments with limited restrictions. Condos also have no restrictions regarding pied-a-terres, parents buying for children, or a purchase by a corporation or trust.
4. Luxury lifestyle. New development buildings typically offer an array of luxury amenities, such as: health clubs or fitness centers and spas, swimming pools, sport facilities, playrooms and classes for children, landscaped outdoor areas, plus an attentive staff of doormen, concierges, and porters.
5. Top-of-the-line appliances and finishes. To attract buyers, developers often include high-end kitchens and bathrooms, and stylish finishes throughout the entire building.
6. Cutting edge design. World-renowned architects and designers are major players in new development projects. Buyers feel excited about living in a space designed with creativity and vision which can be tailored to your own needs and taste. The media buzz created by a name-brand architect or designer infuses these projects with undeniable caché.
How do you know that a new development is a sound investment?
Sponsors are required by law to issue an offering plan that contains all information relevant to the sale of units, such as description of the neighborhood, details on construction, design and materials, projected operating budget, reserve and working capital funds, procedure to purchase, unit prices, monthly charges, and closing costs. It is important to engage a real estate attorney to perform due diligence on the project. Real estate attorneys know what to look for when reviewing the offering plan and purchase agreement. They review all relevant details of the purchase and advise you on any potential risks before you sign a sales contract.
Potential Issues with a purchase in a New Development
Even if the due diligence does not reveal specific problems there are potential complications inherent with all purchases in a new development. Some common issues that arise include:
1. Closing date. In a building not yet built or apartments not yet finished, one should expect that the promised closing date will be delayed. This is because variables such as bad weather, labor disputes, material shortages, delayed deliveries, or cash flow problems can slow construction. Buyers are then forced to wait well beyond the original completion date. Those who have a clause in their sales contract stipulating an end-date for the closing are protected from tying up their down payment if the sponsor fails to complete the project in a reasonable length of time. Developers are aware that buyers may want a solid date, and they often fight to push the end- date as far out as possible. For a buyer who wants a desirable apartment that other buyers may want as well, many often choose to go with what is standard in a purchase contract for that particular development.
2. Mortgage financing issues. With closing dates vague, buyers may find it difficult to lock in an interest rate to coincide with the closing. Most lenders offer a 60-90-day rate lock if financial markets are moderately stable. In addition, lenders may refuse to provide funds for a closing if fewer than 15% or as high as 50% of units in the building have sold and closed, or if the common areas and amenities have not been completed. Most recently, developers will line up a bank or two that make a commitment to lend in the building without requiring closings to occur. These banks usually believe in the development and will often hold a high percentage of the loans/mortgages in the building. In fact, to make it appealing to buyers, some banks are mitigating the interest rate risk by allowing a borrower to lock in a rate for up to a year! Depending on the schedule for closing, buyers should look for such an arrangement.
3. Property taxes. One of the appeals of owning an apartment in a new development is the property tax abatement that some developers receive for building on certain sites. The abatement does not take effect until the building has received a Certificate of Occupancy (C of O), so those who purchase in a building with a temporary C of O may have an initial tax bill which is much larger than expected. These tax abatements generally phase in over a period of 10-12 years. In some neighborhoods, the phase-in period of the abatement can be as long as up to 20-25 years.
4. Fixtures, appliances, overall condition. Sponsors, who are permitted to close on units with a temporary Certificate of Occupancy, may begin to schedule closings on units where details have not been fully finished. A pre-closing inspection is essential to verify that the apartment is ready for occupancy and everything in it is in order, as promised. Very often, buyers will have a “punch list” of smaller details that need to be completed or rectified post-closing. This is common and there is usually a time limit during which the sponsor is obligated to complete the punch list.
5. Ground and second level commercial space. Most new development buildings have a large commercial rental or condo on the ground (and sometimes second) floor. Since the quality of the commercial tenant will have an impact on your building, it is important to try to find out what plans the sponsor has for renting any space dedicated for commercial use. One question to ask: are there restrictions on the types of businesses that will be permitted? While residents may have no problem with sharing their building with professional offices or boutiques, some may not be happy with a noisy bar, restaurant, or unappealing business on the premises.
6. Adjacent properties. Is there a possibility that future construction will negatively impact the building and/or the unit you are purchasing? Since developers are generally permitted to build a certain number of interior square feet based on the zoning of their property (known as FAR “floor area ratio”), an open view from your apartment could abruptly become a view into a brick wall if a new building is built next door. It’s wise to research zoning laws and neighboring sites to see if that might be the case in the future. Your real estate attorney or a land use/zoning attorney should be able to research that and inform you about the zoning surrounding your apartment.
7. Lot line windows. Some apartments have “lot line” windows. These are windows that are on the legal lot line of the building. If a lot line window of an apartment is overlooking an empty lot or a short building, make sure to find out if a building can be built that reaches the height of your window. If so, it is possible that your lot line window will have to be bricked over. Information about lot line windows must be disclosed in the offering plan. However, there is no requirement that the offering plan disclose anything about neighboring development potential. In this case, “buyer beware” (caveat emptor) comes into play. You should have a knowledgeable real estate attorney help you in this regard.
New York City Real Estate Buyer's Guide
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