Discussion Guide
What is “TOPA/COPA/OPA” and Why is City Council Considering It? An Opportunity to Purchase Act (“OPA”) policy gives tenants, affordable housing providers (also referred to as “Qualified Nonprofits”), or jurisdictions the first opportunity to purchase a residential building or assign their right to purchase to another entity when the owner decides to sell.
Tenant Opportunity to Purchase (TOPA): “TOPA” is usually used to refer to the tenants’ right to purchase a single-family home or residential property when the owner is ready to sell
Community Opportunity to Purchase: “COPA” is usually used to refer to the affordable housing providers’ or in some cases, jurisdictions’ opportunity to purchase apartments or residential property when the owner decides to sell.
East Palo Alto Opportunity to Purchase Act (EPA OPA): The draft policy under consideration (as of March 1, 2022), which has both TOPA and COPA components, is referred to as the East Palo Alto Opportunity to Purchase or “EPA OPA”.
What does EPA OPA do? In East Palo Alto, an EPA OPA can create pathways for tenants to become first-time homeowners and facilitate democratic residential ownership or affordable rental opportunities. It can also create a mechanism for residential properties, including those that are not currently in the City’s below market rate (“BMR”) program or subject to rent stabilization, to become permanently affordable.
An EPA OPA on its own cannot correct for all the shortcomings of existing housing policy and the housing market. However, some of its key features directly address the issues discussed above.
Why is EPA OPA important? EPA OPA seeks to address displacement while adding to the housing stock overall with TOPA for tenant households likely to purchase as well as COPA for tenant households not likely to purchase. New construction of affordable housing, and new housing in general, is important to the City’s housing objectives.
However, because of construction timelines, delays in Tax Credit Allocation, and the extended application geography for constructed units as required under AFFH guidelines, affordable units added through construction may not be sufficient to keep households stable in EPA while the city attempts to grow.
For transactions where tenants purchase, becoming homeowners can help stabilize households and put them on a path to building wealth. For households unlikely to purchase, Affordable Preservation can help address displacement by keeping units affordable, which over time can make it easier for households to save for a home purchase in the future.
EPA OPA has also been designed to cover portions of the housing stock not currently covered by EPA policies for tenant protection – especially Single Family Homes currently being rented but not covered by the Rent Stabilization Ordinance.
OPA Policy Components: While OPA policies differ across jurisdictions, they have the same basic framework. This includes:
• Notice of Intent to Sell
• Statement of Interest
• Right of First Offer
• Right of First Refusal
• Extended Timelines
a. Notice of Intent to Sell: The Seller of a rental property must provide potential eligible purchasers (i.e. tenants, mission-driven affordable housing providers, or jurisdictions, also referred to as “Potential Eligible Purchasers”) notice of their intent to sell prior to listing or otherwise marketing the rental property for sale (“Notice of Intent to Sell”). The Notice of Intent to Sell must be provided a few days prior to marketing the rental property (“Notice Period”). It must be sent to the Potential Eligible Purchasers via certified mail and/or e-mail, and/or posted at conspicuous locations at the rental property. The Notice of Intent to Sell must contain, among other things, the following:
• Statement that the Seller intends to sell the rental property; • A list of units by address and the rent due for each unit; • Instructions for submitting a Statement of Interest;
• Under a TOPA policy, a statement describing the rights of the tenants and deadlines to exercising those rights.
b. Statement of Interest: Prior to the expiration of the Notice Period set in the ordinance, the Potential Eligible Purchaser may deliver a statement of interest to the Seller of the rental property (“Statement of Interest”) via mail and/or email. The Statement of Interest notifies the Seller of the Potential Eligible Purchasers interest in exercising the Right of First Offer and/or Right of First Refusal. It also notifies the Seller if the Potential Eligible Purchaser is seeking to assign their Right of First Refusal to another Potential Eligible Purchaser.
c. Right of First Offer: The Potential Eligible Purchaser that submits a Statement of Interest has a right to make an offer to purchase the rental property prior to its listing or marketing. The Potential Eligible Purchaser may deliver an offer to purchase the property at any time prior to the expiration of the Notice Period. The Seller may accept or reject any offer received from the Potential Eligible Purchaser(s). There are preferences set for which Potential Eligible Purchaser’s offer should be considered first. Upon (1) rejection of all offers to purchase made, (2) the expiration of the Notice Period, or (3) the failure to close the transaction within the time period set forth in the Ordinance, the Seller may list and market for sale the rental property and may solicit and conditionally accept offers from a Third-Party Purchaser, subject to the Ordinance’s Right of First Refusal requirements. d. Right of First Refusal: Any Potential Eligible Purchaser that submits a valid Statement of Interest may exercise a right to match a Third Party’s offer. To exercise its Right of First Refusal, the Potential Eligible Purchaser must accept all the same terms and conditions of the Third Party’s offer within the time period specified by the Ordinance (within 5 days for single-family homes). If the Potential Eligible Purchaser wishes to match, the Seller must proceed to sell the rental property to the Potential Eligible Purchaser, and the Potential Eligible Purchaser will be obligated to purchase.
e. Extended Timelines: Each OPA policy has extended timelines for each stage of the process, giving Potential Eligible Purchasers reasonable time to organize, educate, express interest, submit an offer, secure financing, and to close, while also considering the Seller’s needs. If the Potential Eligible Purchasers do not exercise their rights within these timelines, the Owner may proceed to sell on the open market. OPA policies extend the timelines to level the playing field for the tenants, qualified nonprofits, and/or jurisdictions who want to purchase property and keep it in the community.
EPA OPA Terminology
• ROFR: Right of First Refusal
• SFHs: Single-family homes
• Third Party Offer/“Qualifying Market Offer”/“Accepted Offer”: An offer made by a purchasing party which is not a rightsholder.
• Potential Eligible Purchasers or Purchasers: Tenants living in the residential building about to be sold, affordable housing providers who are qualified based on specific criteria, or the City may be eligible to make a First Offer under EPA OPA, and are therefore referred to as “Potential Eligible Purchasers” or “Purchasers.”
• First Offer: Offer made by a Potential Eligible Purchaser during the Right of First Offer Period after a Statement of Interest is submitted. • Seller: A property owner who is not exempt from OPA based on specific criteria, and who is initiating the process to sell their property.
Changes to Housing Preservation Landscape
Since the last City Council discussion on March 1, 2022, there have been a few major developments in the housing preservation landscape. Firstly the market has cooled down substantially, transaction times have extended to take longer than they had been earlier in the year, and demand may not sustain at the levels that it held in Spring/Summer of 2022. A cooler market offers an opportunity to help first time homebuyers complete their first purchases while competition is less intense. Secondly, the Affordable Housing Preservation funding landscape has further developed, and regional and state resources for affordable housing preservation expected to come online in 2023 position EPA to compete for those resources. Demonstrating political and economic commitment, in the forms of the recently approved Gross Receipts Tax and an approved Opportunity to Purchase Act, can make EPA a competitive applicant for those resources. Additionally, efforts to bring a Grants Coordinator to support the Housing Department can help ensure that applications for funding are submitted as early and as often as possible.
Preservation as a vehicle to add affordable units to the housing stock is likely to be critically important in coming years. Currently, the City is at a disadvantage because it has been designated as “low” or “moderate-resourced,” making it less competitive than other cities in receiving funding for new affordable housing development. The City has signed on to an appeal letter to challenge that characterization on the grounds that EPA is in fact an area with high resources despite historic underinvestment; but until that decision is reversed it does likely encumber affordable housing production to some degree. Preservation of affordable housing through acquisition and rehabilitation offers a distinct tool to renovate housing stock and decelerate blight, add affordable units to the system, and enable tenant residents of EPA to become homeowners. Staff recommend using the EPA OPA to leverage current and forthcoming affordable housing preservation resources from state and regional agencies.
Partnership for the Bay’s Future
PBF is a collaborative effort working to advance racial and economic equity in communities throughout the Bay Area. PBF works to produce and preserve affordable housing and support protections for renters. Because the housing affordability crisis requires comprehensive, multi-pronged solutions, PBF pairs policies with investment to change the systems and policies that have put the Bay Area beyond the reach of too many individuals and families. On the policy side, PBF’s Policy Grants provide local governments and community partners with much-needed capacity and expertise to implement grassroots equity-centered affordable housing policies. This process ensures those usually excluded from the policy process are at the center of efforts for change.
Breakthrough Grant: On February 1, 2022, the City of East Palo Alto was announced as one of 11 Partnership for the Bay’s Future 2022-2024 Policy Grant recipients, with the primary goal of assisting the City in implementing EPA OPA if adopted. The PBF Policy Grant Fellow, Benjamin Toney, joined the City in June 2022 to add staffing capacity to complete the grant scope in a two-year timeframe. The community partners assisting to complete the grant scope include: Community Legal Services in East Palo Alto (CLSEPA), East Palo Alto Community Alliance Neighborhood Development Organization (EPACANDO), Youth United for Community Acton (YUCA), and Preserving Affordable Housing Assets Longterm, Inc. (PAHALI).
Exemptions (taken from March 1, 2022 draft Ordinance)
14.26.040 Exemptions
A. Exempt Residential Property. Residential Property not subject to the requirements of this chapter:
1. Owner-Occupied Single-Family Dwellings, including those with an Accessory Dwelling Unit(s) (inclusive of any Junior Accessory Dwelling Unit) when the Owner has occupied the Single-Family Dwelling or the ADU as the Owner’s Principal Residence for at least one (1) year or more.
2. Non-Owner-Occupied Residential Property owned by an East Palo Alto resident, when the Owner has occupied a Residential Property within East Palo Alto as the Owner’s Principal Residence for at least one (1) year or more. This exemption shall not apply to any Residential Property owned by:
a. A real estate investment trust, as defined in Section 856 of the Internal Revenue Code;
b. A corporation; or
c. A limited liability company in which at least one member is a corporation.
3. Owner-Occupied Condominiums when the Owner has occupied the Condominium as the Owner’s Principal Residence for at least one (1) year or more.
4. Any Owner-Occupied Duplex with or without any Accessory Dwelling Unit(s) (inclusive of any Junior Accessory Dwelling Unit) when the Owner has occupied any Dwelling Unit on the property as the Owner’s Principal Residence for at least one (1) year or more.
5. Any Owner-Occupied Triplex with or without any Accessory Dwelling Unit(s) (inclusive of any Junior Accessory Dwelling Unit) when the Owner has occupied any Dwelling Unit on the property as the Owner’s Principal Residence for at least one (1) year or more.
6. Residential Property owned by the local, state, or federal government.
7. Residential Property subject to resale price control under Chapter 18.37 of East Palo Alto’s Municipal Code.
8. Residential Property owned by and operated as a hospital, convent, monastery, extended care facility, convalescent home, or dormitories owned by educational institutions.
B. Exempt Transfers. Transfers of Residential Property not subject to the requirements of this chapter:
1. An inter vivos transfer, whether or not for consideration, between spouses, domestic partners, parents and children, siblings, and/or grandparents and grandchildren.
2. A transfer for consideration by a decedent’s estate if the consideration arising from the transfer will pass from the decedent’s estate to, or solely for the benefit of, charity.
3. A transfer of legal title or an interest in an entity holding legal title to a Residential Property pursuant to a bona fide deed of trust or mortgage, and thereafter any transfer by foreclosure sale or deed in lieu of foreclosure pursuant to a bona fide deed of trust or mortgage. This exemption does not supersede any rights to purchase afforded to Potential Eligible Purchasers under California Civil Code Sections 2924(f)-(h), 2924(m)-(n), or 2929.3.
4. A transfer of bare legal title into a revocable trust, without actual consideration for the transfer, where one or more transferors is a current beneficiary of the trust.
5. A transfer by devise, descent, or operation of the law upon the death of a natural person.
6. A transfer pursuant to court order or court-approved settlement.
7. Any transfer to a public agency, including but not limited to a transfer by eminent domain or under threat of eminent domain.
8. Any transfer of a fractional interest in a Residential Property that is less than fifty percent (50%) of an undivided interest in the Residential Property.
9. Any transfer in which the transferee receives a low-income housing credit pursuant to 28 U.S.C. § 42.
10. A transfer of a Residential Property with no more than four (4) Dwelling Units made for the purpose of either: (a) paying for imminently necessary health care expenses of an Owner of the Residential Property, or (b) an emergency circumstance placing the Owner in financial hardship and at imminent risk of foreclosure or bankruptcy and the Owner has occupied the Residential Property as the Owner’s Principal Residence during the prior year. For purposes of this subsection only, “Owner” shall be limited to a natural person having an undivided interest in the Residential Property of at least fifty percent (50%). An Owner may claim this Exempt Transfer within one (1) year of having vacated the Residential Property where the Owner demonstrates the existence of the conditions set forth in this subsection.
Estimates of Qualifying Transactions for Periods 2007-2011, 2017-2021 Per the David Rosen & Associates Report (2022, page 6): An average of 28 absenteeowned single-family homes and 4 absentee-owned condos sold per year, which equals the average sales rate for all absentee-owned single-family homes and condos in the City between 2017 and 2021 based on analysis of parcel-specific data from Property Radar. This is an increase from the rate of 8 absentee-owned homes and 4 condos sold per year during the 2007 to 2011 period. Using total absentee-owned units overestimates the result because non-owner occupied units owned by East Palo Alto residents are exempt from the OPA.
Potential Funding Sources for EPA OPA
Figure 2: Funding Sources for EPA OPA
Funding Source Funding Type Eligible Uses Max Financial Assistance
Golden State
Acquisition Fund
Below market debt Acquisition $13,950,000
Foreclosure
Intervention Housing
Preservation Program
(FIHPP)
Grants, debt Predevelopment,
acquisition,
rehabilitation, temporary
relocation. operating
subsidy
$500,000 per unit
Project Homekey Grants Acquisition,
rehabilitation, of eligible
dwelling types and
operating support
Varies
HOME Investment
Partnerships Program
Varies Acquisition,
rehabilitation
Varies
Community
Development Block
Grant (CDBG)
Grant Acquisition,
rehabilitation
Affordable Housing
Fund
Below market debt Predevelopment,
acquisition, rehabilitation
$100,000 per unit or the
amount needed for
project financial
feasibility
Community Housing
Fund
Below market debt Variety of loan products;
predevelopment through
permanent financing
$15,000,000
Supportive and
Transitional Housing
Varies Acquisition,
Predevelopment,
Construction, MiniPermanent
$6,000,000 with larger
loan size sizes
evaluated on a case-bycase basis
Affordability
Preservation and
Production
Varies Acquisition,
Predevelopment,
$6,000,000 with larger
loan size sizes
Construction,
Rehabilitation
evaluated on a case-bycase basis
Workforce Housing Varies Acquisition,
Predevelopment,
Construction
$7,500,000 with larger
loan size sizes
evaluated on a case-bycase basis
Enterprise-Level Line
of Credit
Varies Revolving Line of credit
for acquisition,
predevelopment,
working capital allowed
with acquisition or
predevelopment
$6,000,000
Bay Area TransitOriented Affordable
Housing (TOAH) Fund:
Predevelopment Loan
Below market debt Predevelopment costs
for acquisition of Eligible
Properties
$750,000
Bay Area TransitOriented Affordable
Housing (TOAH) Fund:
Acquisition Loan
Below market debt Acquisition $10,000,000
Community
Development Financial
Institutions (CDFI's)
Varies Varies by program;
predevelopment,
acquisition, bridge
financing, some limited
permanent financing.
Varies
Regional Early Access
Planning 2.0
Below market debt Acquisition $250,000 per unit
List of OPA and Preservation Implementation Experts
The following is a list of practitioners and experts who were interviewed by the PBF Policy Fellow and shared about best practices on OPA and preservation implementation.
• Richard Hurlburt – IMPACT (Realtor/Broker facilitating COPA transactions) • Fernando Marti – Council of Community Housing Organizations (Policy Design) • Keith Cooley - San Francisco Community Land Trust (COPA purchaser) • Somaya Abdelgany - Preservation Program Coordinator at Bay Area Housing Finance Authority (Preservation Funding)
• Caroline McCormack – Former Preservation Program Director Enterprise Community Partners (Preservation Funding and Implementation) • Geeta Rao Current Preservation Program Director Enterprise Community Partners (Technical Assistance)
• Jose Garcia, Preservation Program Manager at Mission Economic Development Agency (Project Identification and Tenant Education)
Local Community Partners are also involved in the South Bay Preservation Lab – a convening of housing affordability, anti-displacement, cooperative ownership and mission driven developer organizations sharing information, best practices, and resources to strategically deploy affordable housing preservation tools.
The California Community Land Trust Network, which provides strategic and technical support for mission driven development and cooperative housing, can also offer training and best practice resources.
EPACANDO has received a grant and placement in Enterprise Community Partners’ Preservation Next Academy, a program to provide capacity building and implementation expertise for organizations to support acquisition/rehabilitation preservation. Further research has also revealed preservation best practices from government agencies, financial intermediaries, and expert practitioners.
Property Tax Revenue/Welfare Tax Exemption Discussion
Welfare Tax Exemption: In California, the Welfare Tax Exemption is available for property of organizations that are organized and operated exclusively for qualifying charitable, hospital, religious or scientific purposes. Charitable causes may include the provision of low-income rental housing. The organization must submit a claim form and be approved for the Welfare Tax Exemption.1
David Rosen & Associates Findings on Property Tax Revenue: The David Rosen & Associates consulting firm investigated trends in the local and regional real estate market, finding the following regarding property tax revenue:
a) The residential market in East Palo Alto has seen significant housing price appreciation in recent years, particularly since the Great Recession, with a 261% increase in single family home sales prices from 2012-2021. A lack of housing supply and continued growth of the Bay Area economy drive housing sales prices and rents in East Palo Alto, and these trends are expected to continue.2 b) The potential property tax revenue decrease associated with the purchase of (nonexempt) single-family homes and condominiums by nonprofits in a “worst case” scenario is estimated at $67 million, or 1.8% of the City’s total assessed valuation, over 5 years. However, this “worst case” calculation assumes that all non-exempt single family dwellings in East Palo Alto are sold to nonprofits and that all of those units are exempt from all property taxes as qualifying low-income rental units. This 1 See “Welfare Exemption for Low Income Rental Housing and Supplemental Clearance Certificate Requirements for Limited Partnerships,” California State Board of Equalization, available at:
https://www.boe.ca.gov/proptaxes/welfarelowinc.htm. 2 See Page 3 (Packet Page 58), David Rosen & Associates Report:
http://eastpaloalto.iqm2.com/Citizens/FileOpen.aspx?Type=1&ID=1422&Inline=True expectation is unreasonable because the scale of subsidy which would be required to facilitate that scale of purchase is unlikely to be available.3 c) The total subsidy required to purchase and make affordable (at 80% AMI or below) all non-exempt single-family dwellings and condominiums in East Palo Alto sold over the next five years is estimated to be $97 million to create owner housing and $115 million to create renter housing. Lowering the income targeting to 50% AMI increases the subsidy required to $131 million to create affordable owner housing and $145 million to create affordable renter housing. It is likely that only fractions of these amounts will be available, limiting the number of transactions per year.4 d) Reduction in property tax revenue due to subsidized purchases of qualified singlefamily homes is offset by an increase in assessed valuation in the City from the resale of existing owner-occupied units, estimated at $138 million over the next five years from the point of study, in addition to $560 million to $800 million over the next five years estimated from the City’s pipeline of market-rate units. In summary, the expected property tax impact of EPA OPA is slim,5 and may be evaluated net of funding and financing resources brought to the City as well as the efficacy of antidisplacement. 3 See Page 6-7 (Packet Page 61-62), David Rosen & Associates Report:
http://eastpaloalto.iqm2.com/Citizens/FileOpen.aspx?Type=1&ID=1422&Inline=True 4 See Pages 6-8 (Packet Page 61-63), David Rosen & Associates Report:
http://eastpaloalto.iqm2.com/Citizens/FileOpen.aspx?Type=1&ID=1422&Inline=True. Per-unit costs at 50% 80%, and 120% AMI are summarized in Table 4. 5 See Pages 6-8 (Packet Page 61-63), David Rosen & Associates Report:
http://eastpaloalto.iqm2.com/Citizens/FileOpen.aspx?Type=1&ID=1422&Inline=True. Per-unit costs at 50% 80%, and 120% AMI are summarized in Table 4.
Welfare Tax Exemption Sample Case Study
1031 Exchanges
1031 Exchanges allow for deferment of capital gains and related federal income tax liability and only apply to the sale of an investment property and replacement purchase of another like-kind investment property of equal or greater value.