San Francisco passes law giving nonprofits first rights to purchase multifamily residential property

California’s shortage of housing, especially affordable housing, is a conundrum that becomes harder and harder to avoid with each passing day.  It is only a slight exaggeration for me to say that it seems like I’ve blogged about this problem every month for years.  In every conversation I have about Silicon Valley real estate, this situation raises its ugly head, regardless of the specific topic at hand.

“Unique” housing issues in San Francisco

The high cost and low supply of housing are particularly pressing concerns in San Francisco, which has the well-deserved reputation for having one of the most challenging rent control regimes in California.  Recently, the San Francisco Board of Supervisors enacted a new ordinance, the Community Opportunity to Purchase Act (“COPA”), which gives certain nonprofits first rights of purchase with respect to certain residential rental real estate.  While the purpose of this new law is to help maintain the existing stock of affordable housing in San Francisco, it seems destined to present even more difficulties for owners of residential rental property in the City.

Main features of the Community Opportunity to Purchase Act

Introduced by San Francisco Supervisor Sandra Lee Fewer, the key provisions of the COPA are as follows:

1. All privately-owned residential buildings with three or more rental units (either completed or under construction), as well as all privately-owned vacant lots zoned for at least three rental units, are subject to the requirements of the COPA.
2. Before any such property can be put up for sale on the market, the owner must give notice that the property is up for sale to all “Qualified Nonprofits” (see below for “What is a Qualified Nonprofit?”).
3. Qualified Nonprofits have 5 days in which to respond indicating their interest in the property.
4. If any Qualified Nonprofits respond within that time period, the owner must then provide those responding Qualified Nonprofits with certain information about the tenants at the property.
5. At that point, those Qualified Nonprofits have 25 days in which to make an offer to purchase the property.
6. If none of the Qualified Nonprofits makes an offer, or if the owner rejects any such offers, the owner may then offer the building for sale to the public.
7. If the owner wishes to accept an offer to purchase the property from someone other than a Qualified Nonprofit, the owner must first notify all Qualified Nonprofits and offer to sell them the property on the same terms and conditions.
8. Qualified Nonprofits would then have five days to accept the owner’s offer to sell; this period would be extended to thirty days if the owner received an unsolicited offer to purchase.
9. All owners who sell such property must submit a declaration under penalty of perjury affirming that the sale substantially complied with the COPA within fifteen days of the close of escrow.
10. Owners that fail to comply with these obligations may be sued for specified damages under the COPA by Qualified Nonprofits.

What is a “Qualified Nonprofit”?

Critical to the implementation of the COPA is the definition and identification of Qualified Nonprofits under the new ordinance.  The Mayor’s Office of Housing and Community Development (“MOHCD”) has been charged under the COPA with creating the process for certifying Qualified Nonprofits, which must satisfy specific requirements under the new law.  Among a variety of factors, Qualified Nonprofits must demonstrate both (1) the commitment to providing affordable housing to low income and moderate income residents and preventing the displacement of those residents, and (2) the legal and financial wherewithal to effectively acquire and manage residential real property in multiple locations in San Francisco.

The COPA became effective on June 2, 2019.  Under the terms of the COPA, the MOCHC must develop rules and regulations for the implementation of COPA, including the qualification and identification of Qualified Nonprofits, within ninety days of the effective date of the COPA, on or before September 3, 2019.  It should be noted that the MOCHC has issued a written advisory stating that, until it completes the list of Qualified Nonprofits, owners will not have to comply with the COPA.

Good idea?  Or not?

At the present time, there is a great deal of uncertainty and differences of opinion regarding the COPA and its impacts.  Unsurprisingly, the politician who proposed this new law is sanguine about it: “This is a win-win for landlords and tenants as it protects a landlord’s ability to sell their building at market rate while preventing the displacement of tenants and stabilizing communities,” said Supervisor Fewer.  On the other hand, housing industry representatives are more negative: “This may be preserving a certain category of housing for some, but that doesn’t add to the inventory that we need to focus on….It’s not really adding any new housing, which is what we seriously need,” criticized Janan New, the director of the San Francisco Apartment Association.

Meanwhile, it does not appear that there are many Qualified Nonprofits with the financial capacity to acquire these properties.  It should be noted, however, that San Francisco is putting an affordable bond measure on the November 2019 ballot, which could raise $500 to $600 million for these purposes.  It is expected that these funds, if approved, would be available for Qualified Nonprofits to purchase property under COPA.   In addition, a lawsuit is presently in the works, which is expected to be filed within the next few months by at least two property owner associations in San Francisco.  For the time being, the future is murky; one of my clients, which owns residential rental property in San Francisco, is proceeding with as much as haste as possible to sell that property before the COPA must be complied with.  As usual, the rest of us will have to wait and see what develops.