Patricia Hartman, left, and Brett Gladstone, right, with Hanson Bridgett.

The availability of affordable housing throughout the United States, and the world, is on the decline. This is especially true in cities and towns with a shortage of rental housing and high prices, particularly college towns. In an effort to preserve affordable housing, on June 3, 2019, San Francisco adopted the Community Opportunity to Purchase Act (COPA) conferring upon "Qualified Nonprofits" a first right to purchase real property in San Francisco improved with three or more residential rental units (whether or not the property also includes non-residential uses) and property on which three or more residential units could be or are being built (all such lots or buildings will be referred to hereafter as a "multi-family residential building"). The first right to purchase consists of both a right of first offer as well as a right of first refusal. A multi-family residential building acquired by a Qualified Nonprofit under COPA must be maintained as rent-restricted affordable housing in perpetuity.

While such legislation is new to California, similar legislation has been enacted in other jurisdictions. For example, Paris, a city that for some time has had a shortage of affordable housing for lower and middle income families, adopted a right of pre-emption law known as the "droit de preemption urbain" or "DPU". The DPU now applies throughout France. Under the DPU, the Mayor's Office is allowed the first right to purchase many different types of property, whether vacant or not. Tenants also are allowed to purchase certain types of existing residential properties and farmers are granted special rights in relation to rural areas. As a practical matter, the Mayor's Office only purchases the property where it is required for development purposes, including public works or leisure facilities. The scope of the French pre-emption law, or DPU, is quite broad and its requirements are specific and diverse.

Similarly, more than 30 years ago, the District of Columbia adopted The Tenant Opportunity to Purchase Act (TOPA). TOPA provides that before an owner may sell, demolish, or discontinue rental accommodations, the owner must give tenants an opportunity to purchase and a right of first refusal to match a third-party offer. TOPA was designed to keep longtime renters from being forced out of gentrifying neighborhoods. As originally written, TOPA applied to renters of single-family homes, including condos and co-ops. Primarily to address the fact that renters, having become more savvy about the law, were assigning their rights to speculators for large sums of money and delaying closing, TOPA was recently revised to exempt single-family dwellings. Tenant-occupied properties with two to four units and buildings with five or more units, however, remain subject to TOPA. With the assistance of the District of Columbia, tenant groups are not only able to purchase the building as rental units, but they are also able to purchase a building and convert the units into cooperatives or condominiums. The District of Columbia provides (1) financial assistance, such as seed money, earnest money deposits, and acquisition funding; (2) technical assistance; and (3) specialized organizational and development services, including structuring a tenants association, preparing legal documents, and helping with loan applications. TOPA has been responsible for more than one thousand (1,000) units being preserved as affordable housing since the year 2002.

It is not surprising that San Francisco and the District of Columbia, two of the nation's most politically progressive cities where tenants make up a very large percentage of the population, have adopted similar legislation to address the continuing affordable housing crisis. We can expect to see the enactment of similar laws throughout the country in cities and towns with a shortage of rental housing. In fact, during the last several months, the City of Berkeley has held public hearings on the adoption of a similar law.

On Sept. 3, 2019, the San Francisco Mayor's Office of Housing and Community Development (the Mayor's Office) published COPA program rules. The program rules expressly provide that, notwithstanding the June 3, 2019 effective date of the legislation, (1) Qualified Nonprofits only may exercise their rights under COPA commencing Sept. 3, 2019; and (2) a seller that has executed a written and binding purchase and sale agreement for a building otherwise subject to COPA prior to Sept. 3, 2019 will not be required to comply with COPA unless the agreement is terminated or expires after Sept. 3, 2019. A seller that has offered or listed a building for sale, but has not executed a purchase and sale agreement prior to Sept. 3, 2019, must comply with the COPA right of first refusal provisions.

The program rules further clarify how to determine whether a building has three or more residential rental units and when a vacant lot falls within the purview of the law. For example, an unlawful residential unit (i.e., presumably meaning one that does not conform to legal requirements at the time it was built, including a unit built without required permits) will not count toward the minimum unit count of three or more residential rental units. As to vacant lots, compliance with COPA is only required if (1) the San Francisco Planning Code and other San Francisco laws permit the construction of a three-unit residential building "as of right" (meaning without issuance of a variance or conditional use permit or the like) and (2) the zoning would allow use of the lot as residential and the development of three or more residential units.

The potential impact of COPA on owners of multi-family residential buildings in San Francisco is significant. Proponents of COPA believe that publishing and maintaining a list of Qualified Nonprofits will facilitate voluntary sales to Qualified Nonprofits in a manner that avoids or minimizes the need for a broker, MLS listing or other transactions costs. In fact, sunset legislation has been put into place that caps incremental transfer taxes on a sale to a Qualified Nonprofit during the right of first offer process. Others, of course, have real concerns about COPA and its potentially detrimental effect on the San Francisco real estate market. At a minimum, sellers of multi-family residential buildings will be subjected to transactional delays ranging from five days to several months or more. Delays will be exacerbated if a seller rejects all offers from Qualified Nonprofits, elects to proceed with a third-party purchaser and there is a material change in the terms of the third-party offer. A material change in terms of the third-party offer will be considered a new offer and the COPA right of first refusal process must commence again. Moreover, even with the program rules in place, the logistics of complying with the law are complex, subject to interpretation and easily misunderstood.

Patricia Hartman, a partner at Hanson Bridgett, has been practicing commercial real estate law for more than 30 years. She has extensive experience in negotiating and documenting complex real estate transactions including options, dispositions, acquisitions and exchanges; development projects, including development agreements; and city and/or county required agreements. 

Brett Gladstone, a partner at Hanson Bridgett, focuses his practice on land use law and real estate transactions. He represents investors, developers and government in land-use proceedings and CEQA compliance with respect to residential and mixed use development throughout the Bay Area.