What is the difference between "Right of First Offer" and "Right of First Refusal?"
Right of First Refusal typically refers to a process in which a property can solicit offers on the open market. When an offer is received, the owner must go to the designated party that has the right of first refusal to see if they want to meet or beat the offered price. In this scenario, the owner has the opportunity to maximize the sales price.
In a Right of First Offer, the owner does not have the opportunity to go out to the open market to see what price the market might bear. Rather, they must offer the designated party the first opportunity to make an offer for purchase. This makes it more difficult for the owner to maximize the sale price. Berkeley's TOPA proposed both a Right of First Offer along with a Right of First Refusal.
The ordinance states "Before an Owner of a Rental Housing Accommodation may offer it for sale to, solicit any offer to purchase from, or accept any unsolicited offer to purchase from, any Third Party Purchaser, the Owner shall give the Tenant of the Rental Housing Accomodation the first opportunity to make an offer."
What is the time frame for selling a property under TOPA?
The time frames vary depending on type of property (i.e. single family home, duplex, multi-unit building) and how the tenants/nonprofits respond to the process. There are four components to the process: Time for Statement of Interest; Time to Submit Offer; Time to Secure Financing; and Time to Close.
Time for Statement of Interest - 20-45 days
Time to Submit Offer - 21-120 days
Time to Secure Financing - 30-160 days
Time to Close- 14 days ith "reasonable extension granted if diligently pursuing close"
All-in-all, the total amount of the entire process could be 160 days or more.
How is the price of sale determined?
In a standard selling scenario, the owner will place the property on the open market and solicit offers. At the end of the day, the price the property sells for is the sales price. But in TOPA's Right of First Offer scenario, the price determined is more complex and could be lower than what the market might bear. The first step in the TOPA process is for the owner to notify the tenant of the sale and present an offer price. Or the tenant may come back to the owner with their own offer price.
What if the owner rejects the tenants/nonprofit's sales offer?
If the owner refuses the tenant/nonprofit's offer, the owner may immediately offer the Rental Housing Accomodation for sale to third parties. However, the Right of First Refusal Process must still take place after the owner receives a third party offer. At that point, the tenant/nonprofit will have anywhere from 10-30 days to decide if they want to meet the offer. Since most offers from third-party buyers comes with an expiration date of no more than 72 hours, the buyer may not want to stick around to see if the tenant/nonprofit refuses their opportunity to purchase. This is especially true in scenarios where a third-party buyer may need to activate a purchase quickly, such as in a 1031 exchange.
How does the appraisal process referred to in the ordinance work?
When an offer of sale is made to the tenant/nonprofit, they may "challenge the offer of sale as not being a Bona Fide Offer of Sale." This results in the request of an appraisal to determine the "fair market value" of the property. The tenant/nonprofit will have the right to choose an appraiser from a list of city-maintained appraisers. The city, tenant/nonprofit and owner will split the cost of the appraisal. The tenant(s) will have the right to give information relevant to the valuation of the property, to the appraiser.
What happens once the appraisal comes back?
The ordinance states that "the determination of the appraised value of the Rental Housing Accommodation...shall become the sales price of the Rental Housing Accomodation." In other words, if the appraisal comes back at a price lower than what the owner offered it to the tenant for, that price becomes the sales price.
What if the appraisal price is different than the price the owner wanted to sell it for?
The owner may elect to withdraw the offer of sale altogether, however the owner will then be precluded from proceeding to sell the Rental Housing Accomodation to a third-party buyer without honoring the First Right of Purchase to the tenant/nonprofit.
What if an owner needs to sell the property quickly to access cash?
Quickly is not a term associated with TOPA. Regardless of who the owner ends up selling the property to, the amount of time given to the tenant and nonprofits to respond to their rights will slow down the sales process, making it virtually impossible to access cash quickly.
What if the owner wants to sell their property to an aunt, nephew, cousin or "chosen family" member?
These types of sales are not exempt from the TOPA sales process. The tenant and nonprofit get a first bite at the apple -- not your nephew.
FACT: If the tenant or nonprofit wants to purchase the property and the property does not go out on the open market, then the "fair market price" is never really determined. The fair market price is the price the market will bear. This fully disrupts the normal process of sale of residential real estate.
FACT: Tenants currently have a chance to buy the property they occupy. In fact many times they have a direct line into the owner to request negotiating to sale --something the standard marketplace does not. But securing financing is difficult andr many times tenants will not have the financing they need to compete in the marketplace. Remember, TOPA does not provide tenants with financing. It only provides them with a lengthy amount of time to figure out if they can secure financing.
Tenant occupied multi-unit properties often remain on the market for long periods of time in rent-regulated cities. They will on average, sell below listing price. Nonprofits and Land Use trusts can easily buy these properties on the open market using subsidies from the City, along with the state's infusion of money aimed at affordable housing.
FACT: Berkeley is a highly-regulated, rent controlled city with strong protections given to tenants. The idea that tenants will lose their housing, or that their housing will automatically become unaffordable due to a change in ownership is untrue. Any new owner will also be subject to rent control and their tenants will have eviction protections.
FACT: TOPA will cost the City of Berkeley more than $1m annually just to administer. That's money that could be used for rent assistance, homelessness services or a myriad of other housing-related needs.
FACT: TOPA has been in existence in Washington D.C. for 40 years. D.C.'s population is 705,000 with a homeless population estimated around 6,000. Oakland has a population around 420,000 with an estimated homeless population of 4,000. Berkeley has a population of 122,000 with an estimated number of homeless at 1,100. The ratios between the three cities are remarkably the same. There is no proof TOPA has reduced the homeless population in D.C.
FACT: From 1980-2002, there is no data showing any rental housing was acquired by tenants or nonprofits under TOPA. In 2002, the program received an infusion of funding which allowed for the "preservation" of 3,500 units (that's units, not properties) from 2002-2018. In that scenario it is clear that funding was the key contributor to the ability to purchase -- not TOPA.
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