New Considerations When Buying and Selling San Francisco Apartment Buildings

Whether you are an owner of a San Francisco apartment building or an investor looking to acquire an apartment building in San Francisco, there are new rules to take into consideration at both the local and state level.

San Francisco — Community Opportunity to Purchase Act

The Community Opportunity to Purchase Act (COPA), enacted for the purpose of creating and preserving affordable rental housing in San Francisco, was effective June 3, 2019, but the rules were not published by the Mayor’s Office of Housing and Community Development until September 3, 2019. COPA gives certain qualified nonprofits in San Francisco a right of first offer to purchase any local apartment building containing three or more residential units before the apartment building is put on the market, as well as a right of first refusal if the qualified nonprofit’s initial offer is rejected. COPA also applies to the sale of vacant lots that allow for the development of three or more residential units (without the need for a variance or conditional use approval).

Under COPA, before an owner of an apartment building (or vacant lot that could be developed as apartments) can offer the building for sale, the owner must first provide notice to certain qualified nonprofits and give them the opportunity to make an offer to purchase. Currently, there are only six “Qualified Nonprofits” listed on the website for the Mayor’s Office of Housing and Community Development.

A Qualified Nonprofit initially has five calendar days to indicate its intent to make an offer; then, after receiving certain due diligence information about the tenants, the Qualified Nonprofit has an additional twenty-five (25) days to submit an offer.

The seller of the apartment building is free to accept or reject any offers received from the interested Qualified Nonprofits. However, a rejected offer triggers a right of first refusal in favor of the Qualified Nonprofit. After a seller takes the apartment building out to the market and receives an offer that the seller wishes to accept, then the seller must notify any Qualified Nonprofit that has previously made an offer to purchase and give the Qualified Nonprofit an opportunity to purchase at the same price and on the same terms. The right of first refusal is also triggered in the event any Qualified Nonprofit did not previously have an opportunity to exercise a right of first offer (i.e., if a seller receives an unsolicited offer to purchase the building).

However, if the seller receives a “materially” different offer that the seller wishes to accept, after having already notified the Qualified Nonprofits of an earlier offer, then the seller must again comply with the right of first refusal requirements. But, what constitutes a “materially” different offer is not defined in COPA, leaving this area ripe for disputes.

All sellers of apartment buildings that are subject to COPA must provide a signed declaration to the City of San Francisco within fifteen (15) days of the sale affirming that the seller complied with COPA. The failure to comply could result in damages sufficient to remedy the harm to the Qualified Nonprofits, and penalties of 10% of the sales price for the first willful violation.

California — Tenant Protection Act of 2019

California’s governor recently signed into law the Tenant Protection Act of 2019, providing for statewide rent control and tenant eviction protections. The act, which goes into effect on January 1, 2020, and is scheduled to be repealed as of January 1, 2030, provides for rent control by limiting annual rent escalation to 5% plus the local cost-of-living increase. There are exemptions for certain types of residential properties, including housing issued a certificate of occupancy within the previous fifteen (15) years, duplexes where the owner occupies one of the units as a principal residence, and single-family residences unless owned by corporations or a REIT (real estate investment trust).

San Francisco has more stringent rent control rules that apply to housing built before June 1979, and the act will not preempt these. However, the act will expand the number of apartment buildings in San Francisco covered by rent control as it applies to houses built after June 1979 that received a certificate of occupancy more than fifteen (15) years ago.

Takeaways

• COPA impacts the process and timing of how apartment buildings in San Francisco are sold, as it gives certain Qualified Nonprofits the first right to purchase.
• There is uncertainty as to what constitutes a materially different offer under COPA, triggering a new right of first refusal.
• The statewide Tenant Protection Act of 2019 will expand the number of apartment buildings in San Francisco covered by rent control.

Ian O’Banion is an associate in the Affordable Housing and Real Estate Practice of Nixon Peabody LLP.