Sponsor Unit Closings

A sponsor unit is a condominium unit or cooperative apartment sold directly by the entity that developed the building or converted it to condominium or cooperative ownership — the "sponsor" — rather than by an individual resale owner. Sponsor sales are governed by a distinct body of New York law, and the closing process differs from an ordinary resale in nearly every material respect: the contract is the sponsor's form, the disclosure document is a regulated offering plan, the purchaser typically pays taxes a seller would ordinarily pay, and many customary buyer protections do not exist unless the offering plan or the regulations supply them.

This page explains the governing statutes and regulations, walks through the mechanics and deadlines of a sponsor closing, and identifies the pitfalls that most frequently cost purchasers money. For representation on a specific transaction, see our sponsor unit closing attorney page.

The Governing Law

• General Business Law Article 23-A (the Martin Act), § 352-e — Prohibits the public offering of condominium units or cooperative shares in New York unless the sponsor first files an offering plan with the New York Attorney General and the plan is accepted for filing. Every sponsor sale occurs under an accepted offering plan (or a qualifying exemption granted by the Attorney General).
• GBL § 352-eeee — Governs conversions of occupied buildings in New York City to cooperative or condominium ownership, including the rights of non-purchasing tenants under non-eviction plans.
• GBL §§ 352-e(2-b) and 352-h — Require that purchaser down payments be held in escrow and not commingled with the sponsor's funds.
• Lien Law § 71-a(4) — Imposes a statutory trust on down payments received in connection with newly constructed or converted units, requiring deposit within five business days into an attorney escrow account at a New York bank. This trust cannot be waived by contract.
• Real Property Law Article 9-B (§§ 339-d through 339-kk, the Condominium Act) — Governs the creation and operation of condominiums, including the declaration and by-laws recorded for the building. RPL § 339-i defines each unit's common interest; RPL § 339-z and § 339-aa govern common charge liens that must be cleared or apportioned at closing.
• The Attorney General's regulations — 13 NYCRR Part 20 (newly constructed or vacant condominiums), 13 NYCRR Part 18 (newly constructed or vacant cooperatives), and 13 NYCRR Part 23 (conversions of occupied buildings). These regulations dictate the required contents of the offering plan, escrow handling, amendment disclosure, and rescission rights.
• Tax Law §§ 1402, 1402-a and NYC Administrative Code § 11-2102 — The New York State transfer tax, the additional "mansion" tax on residential purchases of $1,000,000 or more, and the New York City Real Property Transfer Tax.

How a Sponsor Closing Differs from a Resale

Transfer Taxes and the Gross-Up: A Worked Example

In a resale, the seller pays the New York State transfer tax (Tax Law § 1402: 0.4% of consideration, or 0.65% for residential transfers of $3,000,000 or more) and the NYC Real Property Transfer Tax (Administrative Code § 11-2102: 1% up to $500,000; 1.425% above $500,000 for residential property). Sponsor contracts almost universally shift these taxes to the purchaser. When the purchaser pays a tax that is legally the grantor's obligation, the amount paid is treated as additional consideration — so the taxes are computed on a grossed-up price, not the contract price.

Example. Purchase price: $1,000,000 for a new condominium unit. Combined transfer tax rate: 1.425% (NYC) + 0.4% (NYS) = 1.825%. The grossed-up consideration is $1,000,000 ÷ (1 − 0.01825) ≈ $1,018,590. Transfer taxes are 1.825% of that figure, approximately $18,589 — about $340 more than taxes computed on the raw price. The purchaser also owes the mansion tax under Tax Law § 1402-a (1% at this tier, rising in brackets to 3.9% at $25,000,000 or more), which is likewise computed on the grossed-up consideration: approximately $10,186. Total tax exposure attributable to the sponsor structure: roughly $28,775 — a cost that simply would not exist in the same form in a resale, and one of the first items a purchaser's attorney should attempt to negotiate.

Down Payment Escrow Rules

Sponsor deposits — typically 10% of the purchase price, sometimes staged higher for new construction — are protected by overlapping statutes:

• GBL §§ 352-e(2-b) and 352-h require the deposit to be held in a segregated escrow account and prohibit commingling with sponsor funds.
• Lien Law § 71-a(4) makes the deposit trust funds, deposited within five business days after the contract is signed into an escrow account maintained by an attorney at a New York bank, with written notice to the purchaser identifying the bank, account, and escrow agent.
• 13 NYCRR 20.3(o) (and the parallel provisions of Parts 18 and 23) prescribe the escrow terms that must appear in the plan and purchase agreement, including the procedure when a dispute arises: the escrow agent may not release contested funds without the parties' consent, a judgment, or a determination obtained through the Attorney General's dispute-resolution process.

Practical consequence: if a sponsor demands that a deposit be paid outside escrow, or fails to deliver the statutory escrow notice, the purchaser has grounds to demand return of the deposit. Conversely, a purchaser who defaults under a properly drafted sponsor contract will usually forfeit the entire deposit as liquidated damages — New York courts routinely enforce 10% liquidated damages clauses in real estate contracts.

Rescission Rights and Key Deadlines

Unlike a resale purchaser, a sponsor-unit purchaser holds regulatory rescission rights that arise from the offering plan process:

• Material adverse amendments. When the sponsor amends the plan to disclose a change that materially and adversely affects purchasers, the Attorney General's regulations require the amendment to offer rescission, with at least 15 days after presentation of the amendment to elect it (13 NYCRR 20.5 and its counterparts in Parts 18 and 23).
• Delayed first closing. Where the commencement of the first year of operation is delayed more than 12 months beyond the date projected in the plan, the sponsor must amend the plan and offer purchasers rescission.
• Budget increases. A projected increase of 25% or more in the budget for the first year of operation likewise triggers a rescission offer.
• Effectiveness. The sponsor cannot close any unit until the plan is declared effective. For newly constructed condominiums the plan must have executed purchase agreements for at least 15% of the units before it may be declared effective; for non-eviction conversions of occupied buildings, GBL § 352-eeee requires purchase commitments from at least 15% of tenants or bona fide purchasers.

These deadlines are strictly construed. A purchaser who fails to return the rescission election within the stated window generally waives the right, and a sponsor who closes before effectiveness or fails to offer required rescission faces Attorney General enforcement and purchaser claims.

Procedure: Steps in a Sponsor Unit Purchase

1. Obtain and review the offering plan and every amendment. The plan controls; nothing a sales agent says binds the sponsor. Review the budget, special risks section, construction description or building condition report, sponsor financial obligations, and the schedule of unsold units.
2. Negotiate a rider to the sponsor's purchase agreement. Typical rider points: shifting or capping transfer taxes and sponsor's attorney fees, an outside closing date with a right to cancel, deposit-interest allocation, punch-list procedures, and confirmation that closing will not occur before a certificate of occupancy (or acceptable temporary certificate) is issued.
3. Sign and deposit. The 10% deposit goes into the Lien Law § 71-a(4) escrow; confirm receipt of the statutory escrow notice.
4. Financing and title. Order title (condominiums) or a lien search (co-ops); verify the condominium declaration and by-laws recorded under RPL § 339-n and § 339-s, real estate tax lot creation, and any 421-a or other abatement status — abatements described in a plan are projections, not guarantees.
5. Pre-closing inspection. For new construction, conduct a walk-through and prepare a written punch list. Closing rarely waits for punch-list completion; the rider should require the sponsor's post-closing obligation to complete it.
6. Closing. The sponsor's transfer documents (unit deed under RPL § 339-o for a condominium; stock certificate and proprietary lease for a co-op), ACRIS transfer tax returns reflecting the gross-up, common charge or maintenance apportionments, working capital contribution, and delivery of keys and warranties.

Common Pitfalls

• Treating the plan's budget as a promise. First-year budgets are estimates; common charges frequently rise sharply once the sponsor cedes board control.
• Ignoring the sponsor's retained rights. A sponsor holding unsold units or unsold shares typically retains board designation rights, exemption from board approval on resales, and exemption from flip taxes — all of which affect the building's finances and governance.
• No outside closing date. Without a negotiated cancellation right, a purchaser in a delayed new-construction project may be locked in for the duration, protected only by the 12-month rescission trigger.
• Assuming an "as is" conversion unit was inspected. In occupied-building conversions under 13 NYCRR Part 23, the sponsor's disclosure is the engineer's building condition report; unit-level defects are frequently the purchaser's problem.
• Overlooking tenant rights. Buying an occupied sponsor unit under a non-eviction plan means taking subject to the tenant's rights under GBL § 352-eeee — non-purchasing rent-regulated tenants cannot be evicted for purposes of the conversion.
• Missing the gross-up in the budget. Purchasers who calculate closing costs at resale rates routinely under-budget by tens of thousands of dollars.

Co-op Sponsor Units and Unsold Shares

In cooperative buildings, sponsor units are held as unsold shares — shares allocated to apartments never sold to a bona fide resident purchaser since the conversion. The holder of unsold shares typically enjoys rights under the offering plan and proprietary lease that ordinary shareholders do not: sale and sublet without board consent, and exemption from sublet fees and flip taxes. A purchaser buying from a holder of unsold shares generally does not inherit those rights — they extinguish on sale to a resident purchaser — but does gain the practical advantage of a closing without board approval. Whether the seller genuinely holds unsold-shares status is a due diligence question that turns on the plan's definition and the chain of transfers, and it should be verified in writing before contract.

You can contact us by phone at 212-233-1233 or by email at [email protected].