Coping With Copa

• Publication year: 2019
• Author: Patricia J. Hartman and M. Brett Gladstone

Coping with COPA

Patricia J. Hartman and M. Brett Gladstone

Patricia J. Hartman is a partner with Hanson Bridgett LLP. Patricia has been practicing commercial real estate and business law for more than thirty-five years. She represents clients in the health care, senior care, engineering, accounting, architecture, agriculture, and consulting industries with their real estate, general business, and commercial law matters.

M. Brett Gladstone represents investors, developers, and government in land-use proceedings, CEQA compliance, and condominium law with respect to residential and mixed use development throughout the Bay Area. Brett makes regular appearances before Planning Commissions, City Councils, Boards of Supervisors, and landmarks boards. He regularly writes and lectures on development entitlements, condominium law, and historic preservation.

I. INTRODUCTION

On June 3, 2019, San Francisco adopted the Community Opportunity to Purchase Act ("COPA")¹ conferring upon "Qualified Nonprofits"² a first right to purchase certain residential real property in San Francisco. While such legislation is new to California, similar legislation has been enacted in other jurisdictions and we can learn from the experiences of those other jurisdictions.

For example, the City of Paris, France, has, for some time, had a shortage of affordable housing for lower- and middle-income families. Consequently, the City adopted a right of pre-emption law known as the "droit de preemption urbain" or "DPU." The DPU now applies throughout France.³ 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. Farmers are granted special rights in rural areas. As a practical matter, the mayor's office only purchases property where it is required for development purposes, which include public works or leisure facilities. The scope of the French preemption law, or DPU, is quite broad and its requirements are specific and diverse.⁴

Similar to Paris, the District of Columbia more than thirty years ago adopted the Tenant Opportunity to Purchase Act ("TOPA").⁵ 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.⁶ 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. TOPA was recently revised to exempt single-family dwellings to primarily address the fact that renters have become more savvy about the law and were assigning their rights to speculators for large sums of money and delaying closings.⁷ However, tenant-occupied properties with two to four units, and buildings with five or more units, remain subject to TOPA.⁸ With the assistance of the District of Columbia, tenant groups are not only able to purchase buildings as rental units, but they are also able to purchase buildings and convert the units into cooperatives or condominiums. The District of Columbia provides a variety of services including (i) financial assistance, such as seed money, earnest money deposits, and acquisition funding; (ii) technical assistance; and (iii) specialized organizational and development services, including structuring a tenants' association, preparing legal documents, and helping with loan applications.⁹

On September 3, 2019, the San Francisco Major's Office of Housing and Community Development (the "Mayor's Office") published COPA program rules on its website.¹⁰ The program rules expressly provide that, notwithstanding the June 3, 2019, effective date of the legislation, (i) "Qualified Nonprofits" (as defined in COPA) ¹¹ (see Section III below) may only exercise their rights under COPA commencing September 3, 2019; and (ii) a seller that has executed a written and binding purchase and sale agreement for a building otherwise subject to COPA prior to September 3, 2019, will not be required to comply with COPA, unless the agreement is terminated or expires after September 3, 2019. A seller that has offered or listed a building for sale, but has not executed a purchase and sale agreement prior to September 3, 2019, must comply with the COPA right of first refusal provisions described therein.¹²

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COPA confers upon certain Qualified Nonprofits a first right to purchase real property in San Francisco that (i) is improved with three or more residential rental units (whether or not the property also includes non-residential uses), and (ii) 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.¹³

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 and high prices, particularly college towns. In fact, during the last several months, the City of Berkeley has held public hearings on the adoption of a similar law. In June 2019, the City Council was presented with a proposal by the City Manager to develop an ordinance modeled after the TOPA law in the District of Columbia.¹⁴

The impact of COPA on owners of multi-family residential buildings in San Francisco is monumental and fraught with practical questions and legal implications. The seller of a multi-family residential building in San Francisco will be subjected to transactional delays and related costs. Even with the program rules in place, the logistics of complying with the law are complex and easily misunderstood. Delays from five days to perhaps six months or more can be anticipated. This article attempts to explain the law and the logistics of complying with COPA.

II. WHAT IS A "SALE" UNDER COPA?

COPA likely will affect a wide range of transactions in San Francisco. A sale is broadly defined and includes not only the transfer of a fee interest in the building for money or anything of economic value, but also certain transfers of interests in trusts, corporations, or other entities. There are exceptions to a sale, including, but not limited to (i) transfers made under a mortgage, deed of trust, or deed in lieu of foreclosure; (ii) transfers to heirs; and (iii) transfers among defined family members.¹⁵ COPA is intended to be construed so as not to impair any purchase contract, option to purchase, or any right of first offer or right of first refusal in existence before its effective date.¹⁶

The San Francisco legislation contemplates that transfers akin to the transfer of a fee interest in a multi-family residential building will be enough to trigger COPA.¹⁷ For example, if a trust owns an interest in a multi-family residential building, the transfer of a beneficial interest in the trust in exchange for money or any other thing of economic value, where the value of the beneficial interest in the trust is substantially equal to the value of the fee interest in the multi-family residential building, will trigger COPA.¹⁸ To avoid sham transfers, COPA will also be triggered in the event that there is a transfer of a controlling interest in a corporation, partnership, or other entity where two conditions are met: (i) the transfer is substantially equal in value to the value of the fee interest of a multi-family residential building that is held by any...