Sponsor still owns 65% of the units

The risk is they crater. The building ends up owned by the bank, but the bank does not pay common area charges - YOU DO. You and the (very few) remaining owners.

I am not sure this is accurate.

If the Sponsor defaults on a loan, the bank can certainly foreclose. But that doesn't abdicate their responsibility to pay common charges. The lender gets title to the remaining units but is still obligated under the ownership to pay common charges.

Now, if there is a bankruptcy, that is a different story. The Condo would be in the line of creditors owed money.

The transfer of ownership from a sponsor to a bank doesn't mean common charges don't get paid. It may mean, depending on the bank, they get paid in a more timely manner. Remember, in the 1970s, it was individual unit owners -- in co-ops - who stopped paying maintenance and forcing buildings to make up the difference by raising charges for the remaining owners capable of paying.

The bigger issue is a quick liquidation by the Sponsor. That's why lenders have reserve prices. Sponsors aren't allowed to sell below a certain price or they risk violating the terms of their loans. But if the lender does foreclose, it can of course sell remaining inventory at any price it chooses to dump them and recoup as much of the loan value as possible.

That said, an "investment purpose" purchase in a building 65% owned by the Sponsor seems like a bad idea. The Sponsor can easily undercut your asking rent price as they park apartments waiting for sale. Look elsewhere.

"The broker said I should be able to get financing through a small private lender."

I thought the new Fannie Mae rules prohibited banks giving loans on buildings that were sub-50% owner-occupancy. I haven't found a single bank that will do it.

"The risk is they crater"
If the sponsor owns from when the building was converted (probably in the 80's or so), their mortgage is probably minuscule. I would imagine their monthly roll way more than makes up their expenses... I mean, isn't that pretty much the norm?

Fannie Mae rules do not restrict how banks lends - they do restrict what Fannie will buy and practically all banks follow the Fannie rules - however, it is possible (not likely in this environment) that a small bank willing to keep the loan for its own account would make the loan. Of course, the absence of a mortgage market for apts like these should make them trade at even lower prices than the rest of the market and one shouldn't buy an apartment like this unless you have a high degree of comfort that the sponsor is not going to go belly up.

I guess when banks have told me they "can't" give a fixed-rate mortgage on a building like this, what they really meant was they "won't". I heard the same thing from a few banks, so I thought that they actually couldn't do it (although some said they could do arms, which I had no interest in).

ezal is 100% right. Should also note if the bank can't off load to fannie, the rate will be higher as the fannie rates are pretty much the best around if the loan qualifies.

The loan will not only be harder to get as there are fewer lenders willing to lend and hold in their own portfolios, but it will be more expensive as well.

Unfortunately, I don't have time to find the link right now, but the Battery Park City Broadsheet profiled a buyer (I want to say last week maybe?) who got a loan in the type of building that you describe (there are several of these, all owned by Millstein, in Battery Park). This guy was willing to talk to people about how he got his loan, so try finding that article.

I would honestly try to get more info about the sponsor - if they are renting for the long haul (as Millstein decided to do back in the 80s in their BPC buildings) as opposed to renting b/c they can't sell, I think you are in better shape from a risk standpoint. Out of curiosity - why buy in a building that's mostly rental? Are you getting a good deal?

Good luck!

http://www.downtownyblog.com

do not make any assumptions about the solvency of the sponsor or whomever owns the 65%--if they bought in the 80's and have only their intial mortgage they are probably fine--the chances are almost nil that they havent taken equity out, or pledged equity to collateralize other ventures--the most sensible investments by a building sponsor can easily be polluted by other ventures of that sponsor--and in bankruptcy the owners stuck in the bldg pay all generally---in a foreclosure the bank assumes responsibilities of the sponsor

This sounds like a recipe for disaster. Let's leave aside the idea of purchasing for investment & just consider that you are competing with the sponsor who owns 65% of the other units in the building - seems like a lopsided balance of power there. Good luck to you but I wouldn't advise it.

I own in a building where the sponsor still owns majority of the units. Until a certain percentage is sold, the sponsor has full control of the board. Which has meant routine increases in maintenance fees, absolute power with respect to vendor contracts, building staffing, and many other things. Thankfully, the end is in sight, as more units are closing each month. We are hoping to gain control of the board in 2-3 months. But 65% is large hill to climb and I would advise against it.

hrsmith, 65% still owned. Once they get to 50, or if a certain amount of time passes (in offering plan) then the sponsor is no longer in control. The sponsor must abdicate control at some point. Condos in NYC --- someone will own them and pay CC on them --- if the price is right, I would invest.

Is the sponsor in good shape, financially?
A nightmare scenario in the '80s was coop conversion
sponsors who, when the market tanked, were unable to
stay current on maintenance charges for units they
still owned. This is what drove some coops into
bankruptcy - a bankrupt sponsor unable to make
maintenance payments. Check out the sponsor.

gcondo, our offering plan stipulates 80% "closed" units for owners to take control of board. that last 5% has taken 1.5 years (and counting) to close. hopefully, the building in question has softer requirements.