Buying New Development? Consider a ‘Right to Assign’ Clause
BY BERNARD KLEIN APRIL 5, 2017
In the world of New York City real estate, there’s no shortage of issues to consider when negotiating a contract. This is especially true if you’re considering new development or a building undergoing a condo conversion. That’s because there is a significant time lag between signing a purchase contract and the closing where conditions can change. This is where a “right-to-assign” clause for you as the buyer can be a real bonus.
Reduce Risk – Ask for ‘Right to Assign’
By the time closing occurs many months later, economic conditions could change. Interest rates could go down (or up), your income and asset mix could change and perhaps the overall value of the building takes a hit. One way to reduce the risk of not being able to close on the property, and thereby defaulting on the down payment, is to negotiate a clause in the contract called the “right to assign.” This clause enables the buyer to assign the contract to another party.
Once the contract is assigned, the assignee is able to carry forth with the deal and original terms set forth in the sales contract with the initial buyer (assignor) and seller (the sponsor).
Example of Right to Assign
Imagine you signed a contract on a $2 million apartment being built in Tribeca. You put 10 percent of the sales price down ($200,000) and plan on putting another 10 percent down at closing and financing 80 percent of the total purchase price. Closings are planned in approximately 2.5 years. You’ve also negotiated for the right to assign. This means that at any point, you can sell the contract to another party. Depending on your rationale for selling, you may sell the contract at a premium, at cost or at a discount. If you were to sell it at cost, you would essentially sell the contract for the $200,000 down payment you initially put down. Once you receive the $200,000 from the new buyer, you assign the contract (through your lawyer) and are officially out of the deal. This essentially acts as an insurance policy, should you need to get out of the deal for any reason such as job loss or no longer having the financial means to close on the property.
Make Money by Having the Right to Assign
Sometimes buyers purchase pre-construction because they expect prices to be higher in the future. If you buy into a project before it even breaks ground, you have the opportunity to catch significant upside as the property market continues to trend upwards. You may want to capture that upside without even having to close on the property. To do so, you will need the right to assign, which will enable you to flip the contract at a profit.
For instance, using the example above, let’s say that two years have passed since you signed the contract, and the property is now worth $2.7 million, a $700,000 increase from when you signed the contract. If you have the right to assign, you could sell the contract to someone for up to $900,000 ($200,000 down payment + $700,000 premium in pricing). Of course, you would probably need to sell it for a bit less, to make it competitive. But if there are no longer similar apartment lines available, then you may be able to sell it for the maximum gain.
Sponsor Allows Buyer to Reduce Risk But Not Make Money
Sometimes the sponsor of a new development may be comfortable with the idea of allowing the purchaser a right to assign clause, but doesn’t like the idea of the buyer making money when flipping the contract. Contractually, there is a way to ensure this balance that will satisfy the buyer and the developer.
According to real estate attorney Lior Aldad from Aldad & Associates, P.C., “Another solution is the right to assign subject to the sponsor’s prior written consent with the sponsor keeping all or part of the monetary gain above the purchase price received by purchaser.”
This ultimately enables the buyer to walk away if they can’t close but also enables the sponsor to benefit from the increased price points without giving that benefit away.
Getting The Right To Assign Is Not Easy
While getting the right to assign is ideal, it’s much more difficult to actually receive. Developers don’t like giving this right because it allows buyers to directly compete with their own inventory, which they are trying to sell as well. Additionally, while the right to assign provides protection to would-be buyers, it’s more frequently used as a tool to flip contracts for profits.
If a sponsor allows it, it’s generally given to buyers who are buying the highest-priced units in a building or buyers who are buying multiple units within a development. Each project and sponsor are different, so even if a buyer checks all these boxes, there is absolutely no guarantee of receiving this benefit. Additionally, it’s not simply received; it’s something that must be negotiated amongst respective brokers. Furthermore, it must be firmly written into the contract of sale by the attorney.
While the right to assign acts as an insurance policy against not being able to close on a property, it’s also often widely used as an in-the-money option that’s used to generate handsome profits for the original buyers.
(original article posted at: http://streeteasy.com/blog/new-development-right-to-assign-clause/)