New Construction
NEW CONSTRUCTION CONSIDERATIONS
The purchase of a new construction apartment includes considerations that do not come into play in resale transactions. Here are some of the key issues I have encountered in my years of dealing with new construction apartments:
Offering Plan/Initial Negotiations: Purchasers of a new construction condo are presented with an Offering Plan, which describes what you are buying, including your rights and obligations. In the Offering Plan and the Purchase Agreement, the Sponsor will transfer the obligation to pay transfer taxes, Sponsor’s legal fee and, sometimes, a % share of the Super’s unit to the Purchaser.
- Sponsor concessions: Some Sponsors are willing to make concessions, such as paying transfer taxes, Sponsor’s legal fee, mansion tax, mortgage tax and % share of Super’s unit, especially if sales have been slowed/stopped due to COVID or other market considerations. It is up to you and your advisors to try to obtain these concessions up front. If Seller will not give concessions, Purchaser needs to budget for these additional costs.
Purchase Agreement/Sponsor Flexibility: The Purchase Agreement, which is a part of the Offering Plan, is typically heavily weighted in favor of the Sponsor. It often either doesn’t provide a mortgage contingency or provides the contingency on a limited basis and only with a particular lender. It typically doesn’t include any representations about the condition of the apartment or personal property, provides no protection for Purchaser in case of a Seller default, and provides that Sponsor is entitled to collect legal fees in the case of a dispute, with no such protection provided to the Purchaser.
- Negotiation of terms of Purchase Agreement: Sponsor’s willingness to entertain changes to the Purchase Agreement is determined by the state of the market and the Sponsor’s willingness to be flexible, which is sometimes unrelated to market conditions. Where there was heavy competition for the Unit, Sponsor will be less likely to entertain many changes. Your attorney needs to present a Rider to the Purchase Agreement that includes protections for you, such as a mortgage contingency, balanced legal fee provision, and specific performance, which enables you to force the Sponsor to sell to you.
Timing: The Purchase Agreement typically won’t set a closing date, but will state that Sponsor must provide at least 30 days’ notice of the closing date, with penalties if Purchaser is not ready to close on that date. Most Purchase Agreements also provide that Sponsor can adjourn the Closing with no limitations.
- Right to Adjourn/Outside Closing Date: Your attorney needs to insert a provision in the Rider to the Purchase Agreement that provides you with a one-time right to adjourn the Closing for two weeks without penalty. The addition of an Outside Closing Date will make sure that the Sponsor cannot adjourn forever. If Sponsor is not ready to close by the Outside Closing Date, you get the right to cancel the Purchase Agreement and get your deposit back. This may also present you with the opportunity to negotiate with the Sponsor for improved terms, such as a credit against the Purchase Price or an allowance for continued housing or moving and storage expenses.
Please feel free to reach out to me with any questions about purchasing a new construction apartment.
Robert J. Smith, Attorney at Law
(917) 757-6866