What San Francisco’s COPA Act means for landlords

What San Francisco’s COPA Act means for landlords
by Brad Cartier, posted in Investment Strategy

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In April of this year, the San Francisco Board of Supervisors unanimously approved the Community Opportunity to Purchase Act (COPA).

COPA went into effect on June 3rd and applies to all buildings with three or more residential rental units, regardless of other uses on the same lot—such as mixed-use retail or office.

In this article we’ll take a quick look at what San Francisco’s COPA act means for landlords, including the pros and cons, and frequently asked questions about COPA.

What is the purpose of COPA?

COPA is designed to preserve affordable housing by preventing displacement that destabilizes communities. Under this policy, qualified nonprofits now have the right to make a first offer and the right of first refusal for:

  • Any non-condo residential building with three or more units
  • Any vacant land zoned for three or more units

COPA seeks to provide a clear pathway for nonprofits to buy multifamily properties, and ultimately help protect tenants’ interests. While this policy is new for San Francisco, similar housing policies can be found in Chicago, Seattle, and Boston. In fact, Washington, D.C., has had a first-right of refusal ordinance on the books for over 30 years.

The text of the COPA ordinance can be found here.

Non-profit right of first offer and refusal

The Community Opportunity to Purchase Act gives qualified nonprofits the right of first refusal of a non-condo, multifamily property of three or more units a right of first refusal when the property is listed for sale.

What makes a nonprofit qualified for COPA?

  • Nonprofits must be prequalified by the City as bona-fide nonprofits with a mission of creating permanently affordable housing for low- and moderate-income residents.
  • The nonprofit must also demonstrate the capacity to effectively acquire and manage residential property at multiple locations in San Francisco.

How does COPA work in San Francisco?

  • Sellers are required by COPA to notify the pool of qualified nonprofit organizations of their intent to sell.
  • Nonprofit buyers have 25 days to exercise their right of first offer and enter into a purchase-sale agreement if the offer is accepted by the seller.
  • Most importantly, qualified nonprofits also have a right of first refusal, which gives them the option to match any competing offer.
  • If the nonprofit organization successfully closes, deed restrictions are placed on the property at closing to permanently restrict the use of the building to affordable housing. This means that the average amount of all rents paid in the building can’t exceed 80% of the San Francisco median income.

How does COPA affect sellers?

There are a number of ways – both potentially good and bad – that COPA affects sellers of multifamily property in San Francisco:

Pros

  • Sellers could save time and money – including broker fees and other marketing expenses if they’re able to quickly identify an interested nonprofit and solicit a fair offer.
  • Sellers will not be subject to increased incremental transfer taxes for property with a value equal to or greater than $5 million that is sold to a qualified nonprofit.
  • Qualified nonprofit buyers must work with the seller in good faith to facilitate a 1031 tax deferred exchange.

Cons

  • Buyers may be less likely to make an offer on a property when they know that a qualified nonprofit has a first-right of refusal.
  • By giving qualified nonprofits a free 25-day window to review the property, sellers may run the risk of losing a motivated for-profit buyer.
  • Sellers involved in a 1031 exchange or the settlement of an estate may be unable to meet required timeframes.
  • Multifamily investors may decide that the thicket of regulation and new hurdles to clear to acquire property in San Francisco is simply not worth the hassle. They may migrate to other less-restrictive investment markets.

What happens if a seller violates COPA?

Within 15 days of closing escrow, any seller of a multifamily residential building in the City of San Francisco must provide the City with a signed declaration stating that the sale substantially complied with all requirements of COPA.

Sellers violating COPA may be sued by qualified nonprofits for remedies including damages, attorney fees, and possibly civil monetary penalties that are tied to the value of the property. Real estate brokers and purchasers could also be held liable if there is evidence they willfully colluded with the seller to violate COPA.

Frequently asked questions about COPA

Question: When did COPA go into effect?

COPA went into effect on June 3, 2019.

Question: What agency in San Francisco is responsible for COPA?

The Mayor’s Office of Housing and Community Development (MOHCD) is responsible for implementing the COPA program.

Question: Are sellers of property already under contract required to comply with COPA?

If a listed property for sale went under a binding contract prior to September 3rd, COPA requirements are not applied to the transaction.

Question: What happens if a property is listed for sale but not yet under contract?

If the property is already listed but not under contract by September 3rd, qualified nonprofits must be notified and provided with the right of first refusal but not the right of first offer. Property that was listed for sale on or after September 3rd is covered by all COPA provisions, including both right of first offer and right of first refusal.

Question: How are LLCs affected by COPA?

Sales that include partial transfers within LLCs are regulated by COPA.

Question: Who are the qualified nonprofits recognized by San Francisco?

As of September 9th, there are six qualified nonprofits in San Francisco: 1) Bernal Heights Neighborhood Center, 2) Chinatown Community Development Center, 3) Mission Economic Development Agency, 4) San Francisco Community Land Trust, 5) San Francisco Housing Community Development Corporation, and 6) Tenderloin Neighborhood Development Corporation.

Question: How does an organization become a qualified nonprofit?

The MOHCD website provides access to an application and instructions to follow for organizations seeking to become qualified nonprofits.