Overview

A number of states and localities have established policies that require owners of rental properties to give residents advance notice of any intention to sell the property or convert to condominium ownership. When combined with a right of first refusal allowing a preservation buyer to match a legitimate offer to purchase the property, the notice provisions can set in motion a process that leads to the successful transfer of ownership—either to the residents or to another entity willing to preserve the property as affordable over the long term.

Right of first refusal laws vary in the length of time that they provide to designated buyers to make an offer to purchase, but typically range from 30 to 90 days. In some cases, existing residents can preserve the property as affordable by agreeing to waive their rights to purchase the property in exchange for a promise by the purchaser to keep some or all of the units affordable for a certain number of years. In other cases, the tenants either purchase the property themselves or transfer their rights to a nonprofit or mission-driven for-profit company that agrees to maintain the property as affordable rental housing.

For a right of first refusal to be successfully exercised, two factors need to be put into place very quickly. First, there must be a capable buyer, which typically involves residents partnering with an entity that has experience purchasing and operating rental housing. Second, the buyer needs quick access to capital to close the transaction. Government funding programs that can respond quickly and flexibly to requests from nonprofits and tenant groups seeking to purchase and rehabilitate at-risk housing can therefore enhance the effectiveness of notification and purchase rights laws.

Case Studies

Tenant Opportunity to Purchase Act (Washington, D.C.)

The District of Columbia’s Tenant Opportunity to Purchase Act (TOPA) states that, before any rental housing unit in the city may be sold, the owner must give notice to each tenant and to the mayor. The tenants then have a right of first refusal to purchase the property. The tenants may assign this right to a third party. The tenants have at least 120 days to negotiate a sale. This time period can be extended for another 120 days if a lending institution provides written notice that the tenant association has applied for financing. Some Washington, D.C., affordable housing developers have partnered with tenant groups to purchase and rehabilitate properties, often in complex transactions using tax credit financing.

For example, Somerset Development and NHT/Enterprise Preservation Corporation worked with tenants to acquire and rehabilitate Galen Terrace, a federally subsidized 84-unit community in serious disrepair and threatened with sale. The D.C. Housing Finance Agency provided $5.6 million in tax-exempt bonds and $4.65 million in tax credit equity toward the acquisition and renovation, while the city’s Department of Housing and Community Development provided $3.25 million in CDBG funds. HUD renewed the complex’s Section 8 rental assistance contract for another 20 years.

To help tenant groups purchase properties themselves, the District operates a First Right Purchase Program, which makes low-interest loans and technical assistance available directly to tenant groups for the purchase and rehabilitation of their buildings. A 2013 analysis found that this program has helped to preserve nearly 1,400 units of affordable housing over the past decade.

For More Info:

http://ota.dc.gov/page/tenant-opportunity-purchase-act-topa

Right of First Refusal to Buy Rental Housing (Montgomery County, Md.)

By law, Montgomery County and its combined public housing and housing finance agency, the Housing Opportunities Commission (HOC), have the right to match contracts on rental facilities built before 1981 or on rental buildings being sold for conversion to condominiums. Certified tenant associations also have the right to match the contract on rentals built prior to 1981. The right can be waived if the purchaser commits to preserving the building as a rental property for five years with rent acceptable to the county, or makes a cash contribution to the county’s Housing Initiative Fund, which supports affordable housing countywide.

The county, either through HOC or a designated nonprofit housing developer, has exercised the right of first refusal at least six times. For example, to preserve some naturally occurring affordable units and hard-to-find three-bedroom units, the HOC bought an unsubsidized 1950s apartment building and is renovating it for moderate-income tenants. The county also recently used this right to purchase a rental property in the high-opportunity community of Bethesda, where the county has otherwise struggled to build new, affordable rental housing.

For More Info:

http://www.montgomerycountymd.gov/dhca/

Condominium Conversion Ordinance (Boston)

Boston’s condominium conversion ordinance gives tenants a right of first refusal to purchase their units, along with several other protections. Before converting a rental unit to condominium, Boston requires developers and property owners to give a five-year notice to senior, disabled and low-income tenants. If the lease expires within the notice period, the owner must extend the lease to allow the tenant to stay for the entire notice period. Also, throughout the notice period, annual rent increases cannot exceed 10 percent of the Consumer Price Index. Owners must provide displaced tenants a relocation stipend of up to $10,000 if they are low-income, elderly or disabled.

For More Info:

http://www.cityofboston.gov/news/Default.aspx?id=17914