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Apartment Investors Can Face Competition From Tenants With Opportunity to Purchase Laws

The Tenant Opportunity to Purchase Act (TOPA) or Community Opportunity to Purchase Act (COPA) grants tenants the right to buy their multifamily property when it’s for sale. These laws exist in various cities, and amid growing housing shortage concerns, numerous proposals are currently advancing through the legislative process nationwide. While the law is generally intended to preserve affordable housing, depending on the fine print, TOPA and COPA rules can put apartment investors at a substantial disadvantage as they face a different kind of competitor: tenants with a lot of power and a lot of time.

In California, the city of Berkeley is in the midst of hashing out a TOPA bill, which has gone through several revisions and updates since its presentation to the Berkeley City Council in 2020. In Massachusetts, TOPA legislation made it all the way to the governor’s desk in early 2021, only to be vetoed. Now, state legislators are giving it another go, with the state house and senate having presented joint legislation described as an act to guarantee a tenant’s first right of refusal. And the list goes on, with proposals at the local and state level across the U.S.

While these proposed laws vary, they all center on the goal of preserving affordable housing by preventing a buyer from coming in, upgrading a property, and increasing rents. These laws generally cover all multifamily properties, even luxury apartment communities, but it’s the rent-controlled pool of properties in market-rate or even upscale neighborhoods that could present challenges for investors. Tenants of rent-controlled properties don’t want to relinquish what is frequently a highly coveted housing option among renters of all income levels. If tenants choose to act on these TOPA laws, they can form a tenant association and match a prospective buyer’s offer, often with the help of a community association and other agencies, and maintain their housing as part of a co-op or condominium. But it’s a process, and the owner who is selling the property is forced to wait for the tenants to arrange the particulars that come with communal acquisition.

Laws allowing tenants the first option to purchase their for-sale apartment community are nothing new. Washington, D.C., is a pioneer on this front, having enacted TOPA in 1980, giving tenants the right to purchase and the right of first refusal. It can be a long process. Laws allowing tenants the first option to purchase their for-sale apartment community are generally designed to promote the protection of affordable housing units and provide an avenue to homeownership for residents who may not otherwise qualify as homebuyers. However, given that the laws usually apply to all multifamily housing, investors seeking to acquire a property for redevelopment in a market-rate neighborhood may have to contend with a tenant association that wants to keep prices low for the sake of saving money, not because they are income challenged. Many apartment investors in Washington, D.C., a TOPA pioneer, having given tenants the right to purchase and the right of first refusal in 1980, have been involved in situations where TOPA was used as a tool for tenants to secure valuable upgrades while maintaining their rent-controlled monthly payments. Certain clauses in the city’s legislation open the door to misuse and stall tactics.  “The spirit of the law in the District of Columbia is well placed, it’s the mechanics of the law that really make it hard to work through,” K. David Meit, President & CEO of Oculus Realty LLC in suburban Maryland, said.

In Washington, D.C., a property owner has to send an offer of sale letter to the tenants, and tenants of apartment properties encompassing five or more units then have 45 days to express their interest to buy. If a seller gets an offer from a buyer, tenants have the right of first refusal and 120 days to negotiate a transaction with the seller, matching the investor’s offer. But there’s more. Tenants then have an additional 120 days to arrange for financing to settle the contract. And just like that, nine months have passed. For a motivated seller, the process can lead to the loss of additional offers from investors and, worse yet, loss of potential profit should the apartment market go south or should economic conditions, like rising interest rates, drive away other potential buyers.

For any TOPA-related law, the devil is in the details. Washington, D.C.’s TOPA includes a right of assignment clause, allowing tenants to assign all or a percentage of their rights to a public entity or a private developer. And it’s this option that turns a competitive sales process with tenants into something else entirely. These showdowns typically happen in cases involving older but well-located rent-controlled properties. “Often, what really happens is the tenants essentially hold the building ransom and then they re-bid the sales process to other developers,” Meit said. “And what they’re looking for is the entitlement to the best deal that they can get.” That ‘best deal’ can mean exacting a commitment from the intended buyer to maintain tenants’ rents at a low level, leaving the new owner to charge higher rates for vacant units during lease up of what becomes a renovated and highly amenitized apartment community.

Meit has seen the ugly side of TOPA firsthand with his firm Oculus’ involvement with the joint venture that acquired the former South Cathedral Mansions, a 1920s-era apartment community sited in a prime location adjacent to the Washington Zoo in the desirable Woodley Park neighborhood. After a contract purchaser was in place, the joint venture came in with a new proposal and successfully negotiated with the tenant association. After closing on the acquisition in 2016, a full year after the TOPA process began, Oculus, acting as property manager, helped negotiate buyout deals with the residents of the 135-unit building, which was 70 percent leased at the time because of the seller’s decision not to lease during the sales process. “That’s the other thing in TOPA, the buyout. At the end, we were paying six figures, about $3 million, to buy out the residents,” Meit said. “So, suddenly an individual who has nothing more than a leasehold on property gets all the benefits of actually having a freehold, of actually owning property, because they’re getting paid to move.”

But money couldn’t buy the 13 tenants who refused to leave 2900 Connecticut. These legacy residents stayed put to take advantage of their ability to continue paying their original rent-control rent rate in a property that has been transformed into a Class A jewel.

Most investors aren’t against the concept of TOPA, Meit noted. Mainly, they take issue with the right of assignment clause in such legislation. “If you get rid of the right of assignment, then the spirit of the law is exactly what it’s supposed to be. The tenants can come together and go to the economic development people and all the tenant association support groups, raise the money and buy the building,” he said. He pointed to Montgomery County in Maryland as a model for TOPA legislation. In Montgomery County, the Housing Opportunities Commission has the right of first refusal to buy a multifamily property, not the tenants. Giving the public housing authority the power takes the potential for tenant strong-arming out of the equation.

Many cities have successfully instituted TOPA legislation, including San Francisco. And the states of Minnesota and New Hampshire have long provided tenants of manufactured housing parks with the first right of refusal in a sale. However, as it stands, TOPA legislation is stalling in state houses and with city councils across the country, plagued by years of revisions and, well, no enactments.  

The general idea behind TOPA legislation is a meritorious one. However, if certain tenant powers are given without boundaries, neighborhoods that can benefit from multifamily investment may find themselves ignored by qualified bidders and left with blocks and blocks of old apartments.

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