IS YOUR PROJECT HEALTHY ENOUGH FOR THE LENDER?
Several years ago it was virtually unheard of to have a lender not approve a mortgage loan for the purchase of a condominium unit, cooperative apartment or townhouse development due to the financial health of the project. While this phenomenon was slightly more common in cooperative apartment buildings, it was extremely rare in condominiums and townhouses. Then came the mortgage crisis and the world changed. Lenders are now being required to underwrite the buildings/projects (which they were supposed to do anyway) using the then existing criteria plus some additional and more stringent Fannie Mae/Freddie Mac guidelines. Some of these factors include but are not limited to:
owner/occupancy ratio;
adequacy of the budget including a specific line item for contributions to the reserve fund;
percentage of residential v. commercial revenue;
percentage of delinquent units; and
whether there is litigation against the sponsor or the project.
Historically, if the purchaser(s) were approved by the lender, approval of the building/project was a formality. That is not the case anymore and buyer(s) need to protect themselves accordingly. It is interesting to note that even though the standard form of standard form of Residential Contract of Sale from November of 2000 (“Residential Contract”), the Contract of Sale for a Condominium Unit from 2000 (the “Condo Contract”) and the Contract of Sale for a Cooperative Apartment from July of 2001 (the “Coop Contract”) were all jointly prepared by the various sections and committees of the New York State Bar Association and the Association of the Bar of the City of New York around the same time period, only the Coop Contract has a clause to protect buyers in the event a lender does not approve the building/project.
Section 18.3.1.3 of the Coop Contract provides a buyer with a right to cancel the contract and receive back their downpayment in the event that:
18.3.1.3 any requirement of the Loan Commitment Letter other than one concerning Purchaser is not met (e.g. failure of the Corporation to execute and deliver the Institutional Lender's recognition agreement or other document, financial condition of the Corporation, owner occupancy quota, etc.)
A clause similar to 18.3.1.3 will go a long way to protect a buyer and enable him/her/them to get back their downpayment in the event that the mortgage loan is not approved due to issues with the project. Since this clause is missing from the Condo Contract and Residential Contract, it should be inserted by your attorney, preferably Scott Stone, P.C., in a rider to the Condo Contract and Residential Contract. This clause is also extremely important on new projects and new condo/coop conversions so be sure to have your attorney negotiate a clause similar to the above into the contract received from the Sponsor.
