What Are the Cons of Buying a New Construction Condo in NYC?

Key disadvantages of buying a new construction condo in NYC include higher closing costs, year two increases in property taxes, post-closing restrictions on renting or selling and the possibility that building amenities and common areas may not be completed by the time you close.

These key disadvantages represent the tip of the iceberg in terms of the special risks associated with buying a new construction condo in NYC.

Click on the sections below to learn more.

Buyer Closing Costs Are Higher for New Construction Condos in NYC

Buyer closing costs for new development condos in NYC are up to 6% compared to 3% to 4% for traditional resale apartments.

Additional buyer closing costs which are only applicable to new developments include NYC Transfer Tax (1% to 1.425%), NYS Transfer Tax (0.4% to 0.65%), sponsor attorney and document fees, building working capital contribution as well as a super apartment (residential manager unit) contribution in the case of larger buildings.

Refer to our comprehensive guide to learn more about new construction closing costs in NYC.

Keep in mind that these additional ‘sponsor’ closing costs are often negotiable. Whether or not a developer is willing to cover some or all sponsor closing costs depends on how motivated the developer is.

If a building is meeting its sales targets with ease, odds are quite low that the developer will negotiate sponsor closing costs.

Conversely, a developer is highly likely to negotiate closing costs if a new development finishes construction and has loads of unsold units.

Estimate your buyer closing costs when buying a new construction condo in NYC with Hauseit’s interactive New Development Buyer Closing Cost Calculator for NYC.

A particularly motivated developer may even be willing to cover some non-sponsor closing costs, such as the Mansion Tax, and possibly throw in other freebies such as a storage cage.

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Real Estate Taxes May Increase in Year 2

Real estate taxes on a new development condo in NYC may increase significantly in year two. The real estate tax figure you see on the listing (and disclosed in the offering plan) is typically only for the first year.

The first year real estate tax figure is actually an average of the taxes on the in construction and finished values. Since the taxable value of a finished building is higher than a partially constructed building (or vacant land), your real estate taxes will eventually be higher than what’s listed in the offering plan.

Cons of buying a new construction condo in NYC include higher closing costs, year two increases in property taxes and unfinished amenities.

Here is an example of actual language in an new development Offering Plan which speaks to the fact that property taxes will likely increase in year two:

Sponsor’s counsel estimates the real estate taxes for the Residential Units for the first year of Condominium operation, (without taking into account any tax abatements that may be available to a Unit Owner) to be $5,579,167.

However, it should be noted that the estimated real property taxes for the first year of condominium operation (i.e., December 1,2016 through November 30, 2017) do not reflect the’ completed Buildings.

Therefore, Sponsor included in Schedule A the projected real estate taxes for the first post-construction tax year, i.e., January 1, 2017-December 31,2018. As indicated in sponsor’s counsel October 20, 2015 letter, real estate taxes for the Residential Units for the first post-construction tax year are estimated to be $7,020,000.

If you’re purchasing a sponsor apartment from a completed new development that’s been around for years, the possibility of property taxes rising in the second year isn’t a concern because the assessed value for tax purposes has already been adjusted to account for the building’s completion.

It’s quite common in the case of very large new developments for a number of units to be unsold at the time closings commence. As such, don’t be surprised if you see a new development condo being advertised in a building which was completed in 2019!

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Restrictions on Renting or Selling

Many new development condos in NYC prohibit purchasers from selling or renting within the first year of ownership. These restrictions are designed to prevent the sponsor from having to compete with unit owners in the event that a substantial amount of units remain unsold by the time closings commence.

New developments also usually prohibit contracted purchasers from listing a property for sale or rent prior to closing. Here is an example of such language in the Offering Plan for a new development condo in Lower Manhattan:

Restrictions on Resale. Prior to the Closing of title to a Unit, the Purchase Agreement prohibits a Purchaser from listing a Unit for resale or rental with any broker or from advertising or otherwise offering, promoting or publicizing the availability of the Unit for sale or lease, without Sponsor’s prior written consent. Any listing of a Unit for sale and/or advertising by Purchaser in violation of the terms of the Plan will be deemed a material default under the Purchase Agreement, and Sponsor may, at its option, cancel the Purchase Agreement and retain, as liquidated damages, the entire Deposit made by the Purchaser, together with interest earned thereon. (See the Sections of the Plan entitled “Procedure to Purchase”, “Assignment of Purchase Agreements” and “Rights and Obligations of Unit Owners”)

Building Amenities May Not Be Completed by Closing

A key disadvantage of buying a new construction condo in NYC is that the building amenities may not be completed by the time you close. Sponsors have one year from the first closing to finish the building’s amenities, but on a practical level there’s not much you can do if the developer doesn’t meet this deadline.

Even if all amenities are completed by the time you close, you may still be inconvenienced by ongoing construction in other units and throughout the building. Here is an example of language in the Offering Plan which speaks to this risk:

Purchasers should be aware that they may be required to close title to their Residential Units while construction in other Units is continuing, possibly, for extended periods of time, and that noise, dust and other objectionable conditions inherent in a construction site may inconvenience Residential Unit Owners after they have taken occupancy of their Residential Units.

Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.

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