Attachment G
Informational Memo for Housing Element Program 2.B, Explore the Opportunity for a Right of First Offer Ordinance.
Program 2.B directs the City to consider the opportunity for a right of first offer ordinance, which would allow non-profit affordable housing providers the first offer to purchase properties, granting them an advantage over market rate developers. This program was derived from State Bill 1079, which created a new sale process for foreclosed properties of 2 to 4 units. The bill, effective January 1, 2021, requires foreclosed homes to be sold individually to single buyers, rather than by private corporations in bulk. Once an initial bid is made, the foreclosed property must then be offered to tenants, local governments, and affordable housing developers to expand home ownership.
The City has the opportunity to build off of this law to provide non-profit housing providers the right of first offer on all properties, including those outside of foreclosure, granting them a competitive edge in the land-buying market. This informational memo provides an overview of cities that have adopted variations of right of first offer ordinances including San Francisco, San Diego, and Berkeley.
Right of first offer provides the City an opportunity to preserve the existing housing stock and can be tailored to prioritize the preservation of certain types of units, like San Diego’s proposed ordinance that applies to properties with at-risk deed restricted units set to expire.
Typically, as seen in ordinances proposed by cities like Berkeley or San Diego, right of first offer ordinances require residential landlords to notify a list of predetermined purchasers of the sale before putting a property on the market. In San Diego the list is composed of pre-qualified affordable housing providers. In addition to affordable housing providers, the City of Berkeley also offers existing tenants the right of first refusal.
While these programs may be effective in preserving existing, at-risk affordable housing stock, there is a cost associated with the development and maintenance of such a program. Based on a review of cities that have implemented a right of first offer program, it appears that for an ordinance to be truly effective, the right of first offer must be paired together with significant financial assistance in order to allow affordable housing providers to successfully compete against market rate providers in the landbuying market. Several full-time staff would also be needed to administer the program, which would include tracking for-sale properties and ensuring property sales are being noticed in compliance with the program. A long standing program in Washington, D.C. has shown success with a tenant opportunity to purchase act (TOPA), with one case study pointing to the retention of 140 units within an existing low-income development.
Although this case study maintained the affordability of 140 units and renovated an aging building from ongoing maintenance issues, the investment was significant totaling 2 $1.4M for acquisition and an additional $16.1M for the phase 1 of rehabilitation, excluding any additional costs for staff hours.
Berkeley Case Study
The City of Berkeley is developing an ordinance, the Tenant Opportunity to Purchase Act (TOPA), which empowers existing tenants to purchase any multi-unit rental property of more than four units that is listed for sale. The TOPA program proposes three protections: 1) right of first offer to purchase for existing tenants, 2) right of first refusal to match any market-rate bids, and 3) right for tenants to assign rights to a qualified affordable housing organization.
When a property owner decides to sell a multi-unit property, they are required to notify existing tenants and also the City-developed list of qualified non-profit developers.
Under TOPA, there is a window of time to submit a Statement of Interest to purchase the property. During this time the property owner is prohibited from listing the property for sale on the market. The program requires tenants to form a tenant organization to make the bid, or to formally transfer their rights to a qualified nonprofit to make the bid.
Once these options are exhausted, the seller may list the property on the market. Any offer received on the open market must be disclosed to the list of qualified purchasers, who then have the opportunity to match that bid and become the purchaser of the property. The property owner is incentivized to sell to existing tenants through a 50% transfer tax refund.
The estimated costs associated with this program come mostly from two categories:
staffing and pre-development/project management funds. Berkeley initially proposed 6 full-time employees to manage the program, a cost of approximately $750,000 per year for staff hours alone. Berkely has since reduced the staffing down to one full time employee (FTE) for on-going staffing and management of the program, totaling approximately $220,000 annually. Additionally, Berkeley supports qualified organizations (non-profit housing providers) with $25,000 per project, covering the outof-pocket costs of the project. These costs are expected to be drawn from developer fees. The City also loses 50% of the base transfer tax per property that participates in the program. Berkely also expects a need for initial funds to support ongoing outreach and education on the new program. The updated total expected costs for the program is approximately $373,000 annually.
San Diego Case Study
San Diego has taken a different approach to their right of first offer ordinance. The Affordable Housing Preservation Ordinance requires owners of deed-restricted affordable housing projects who wish to sell their property to provide a notice of intent to sell to the City of San Diego, the San Diego Housing Commission, and a predetermined list of affordable housing developers. 3 The City of San Diego has tailored their ordinance to target at-risk deed restricted affordable units that are set to expire by 2040. San Diego has approximately 13,450 of these units that are slated for expiration in the next twenty years. In an effort to preserve existing affordable housing, the City has created a preservation action plan that includes this right of first refusal ordinance along with the re-direction of the Residual Redevelopment Property Tax Trust Fund (RPTTF) towards affordable housing preservation.
The ordinance proposed by the City of San Diego differs from the requirements of SB 1079 in that the right of first refusal is expanded to include deed restricted properties with 5 units or more. The City has similar noticing requirements to Berkeley’s proposed program, requiring property owners to file a Notice of Intent to Sell to the existing tenants, the local government, and list of qualified developers. The property owner has the option to accept or reject the first offer, at which point they then can put the property on the open market. Any offer received on the market can be counteroffered by the existing tenants, local government, or qualified entities.
Monitoring and enforcement of the program is currently proposed through the court system, where qualified entities may take action against property owners that do not follow the required procedures for noticing. Concerns were raised about the lack of enforcement and the City is continuing to explore alternative means for enforcement.
San Diego staff states that the program has no fiscal impact.
Santa Monica Context
Santa Monica could benefit from a right of first offer program that expands beyond the requirements of SB1079, although such a program would require additional staff and substantial funds to effectively preserve affordable housing for existing tenants. Data from the Housing Element also highlighted that housing costs and by extension, land costs in Santa Monica are among the highest in the nation. This would suggest that the City would need to make a substantial investment into a right of first offer program in order to increase the opportunity for success. Given limited financial resources, the City has instead chosen to commit public land to support the production of affordable housing (in accordance with Housing Element Program 2.E) and continues to support a variety of programs that preserve existing housing. Further, the housing unit replacement requirements of the Housing Crisis Act (SB 330) have appeared to be effective as a housing preservation measure.
Although the staff report on San Diego’s program states that there will be no fiscal impact from this program, research done for the Berkeley TOPA ordinance shows that substantial investment is needed to effectively prevent displacement of existing tenants.
The TOPA program in Washington, D.C., one of the oldest TOPA programs that started in 1980, sets aside a minimum of $10 million from their Housing Production Trust Fund annually, although reports show even more money spent on these programs. In FY 4 2018, the TOPA program was allocated $22.5 million to acquire and rehabilitate about 449 units in 9 projects.
SB1079 currently provides protection for existing tenants in foreclosed multi-unit projects of up to 4 units. Santa Monica may choose to explore an expansion of this program to prevent displacement and protect existing tenants, although significant investments would be needed to effectively ensure the protection of at-risk affordable units.
Sources
1. Legislative Information, Senate Bill Number 1079, 2020.
2. Mayor Jesse Arreguin (Berkeley), Tenant Opportunity to Purchase Act Staff Report, 2022.
3. Mayor Jesse Arreguin (Berkeley), Tenant Opportunity to Purchase Act Staff Report, 2023.
4. Molly Chase, Staff Report to the Land Use and Housing Committee (San Diego), 2023.
5. Steve Glaude, The Role of the Tenant Opportunity to Purchase Act (TOPA) in Washington, DC, 2023.