TOPA’s Red-Headed Stepchild

In Legislation, Real Estate by Richard Bianco

In 2008, the Council passed the District Opportunity to Purchase Act (DOPA). As the name suggests, DOPA gives the District the right to purchase residential buildings, in certain circumstances, where the owner seeks to sell to a third party. The 2008 Act left many open questions for the Agency to resolve by promulgating regulations. On December 22 2017, only nine (9) years later, DHCD has finally answered the bell, and published proposed regulations.

If you own a rental building, here is what you need to know.

First, the law does not apply to every rental building. DOPA only is triggered in the sale of a 5 or more unit building in which 25% of the units are “affordable.”

Well, what is “affordable?”

The the regulations mirror the statutory language defining affordable as a unit in which the rent plus utility costs is 30% or less of the income of a Household which earns 50% of the Area Median Income.(AMI)

In 2017, the AMI for a family of 4, in DC, is $110,300.00. So taking a Household of four (4) as an example, if their collective income is $55,150 (50% of AMI) and the rent is $1,378 or less (30% of $55,150= $16,545 / 12 months = 1,378.00) the Unit qualifies as “affordable” for purposes of DOPA. If 25% or more of the rental units that you are trying to sell meet that criteria, then DOPA applies.

The language defining “affordable” is ambiguous and may be fertile ground for a legal challenge which will cost an unwitting owner precious time and money. Specifically, is an affordable unit one in which the rent is 30% or less of half of AMI for the household size? Or, does it mean that the rent is 30% or less than the income of the household occupying the unit, provided their income is below the threshold? Potentially a big difference.

I believe that the District intends the former, but, it’s not clear from the regulations as written. To be fair to the Agency, the definition of “Affordable” is pulled directly from the DOPA statute, and is not something they came up with on their own. However, among the purposes of promulgating regulations is to interpret and clarify statutory requirements. Here The Agency opted to ‘copy and paste’ the Council’s language, instead of elaborate on how it will be applied.

Now, let’s assume that you are selling a building that falls within the purview of DOPA. What happens next? Essentially, you deliver a DOPA Notice to the District at the same time you deliver a TOPA Notice to the tenants. The DOPA process, overlaps the TOPA process and the time periods run simultaneously as follows: After delivery of TOPA and DOPA notices, the District has 30 days to respond by expressing an interest in purchasing, in writing. The tenants, on the other hand have up to 45 days, to organize, form a tenants association, and respond in writing.

Assuming that both the District and the tenants respond within their respective timeframes, the parties enter into a negotiation period, during which time they are expected to negotiate a purchase contract “in good faith.” The negotiation period under TOPA is 120 days, and under DOPA, is 150 days.

For tenants, at the end of the negotiation period, they have a 15 day right of first refusal, to match the price and material terms of any third party contract presented before or during the negotiation period. Since so many TOPA notices are served with a third party contract already signed, in practice, the 120 day negotiation and 15 day right of first refusal period, is basically a 135 day period for the tenants to match the contract and raise a 5% earnest money deposit.

The DOPA negotiation period, tracks the tenants’ negotiation + right of first refusal period. Technically, it’s 15 days longer, but, remember, the tenants had an additional 15 days at the beginning to express an interest in purchasing-so it’s essentially a wash. However, the regulations specifically give the District an additional 15 days to negotiate a contract where the tenants also express an interest in purchasing. So the District has up to 165 days to “negotiate” or match the existing contract as the case may be.

At the end of the negotiation periods, assuming a contract is signed, additional problems may arise. Under DOPA the District has 60 days to close. A tenant association, on the other hand, has potentially, up to 240 days to consummate settlement upon signing. So, what is the practical effect of this disparity?

Do the regs contemplate the District entering into a “backup” contract if the tenants succeed in raising a deposit and matching the third party contract? Well, if that’s the case, and the District only has 60 days to close, what happens when the tenants closing extends beyond the first 60 days of their potentially 240 day closing time?(which it always does). On the 61st day does the District’s “backup” contract become void?

Moreover, what happens if the tenants fail to close by the 240th day? Or abandon efforts on the 61st day for that matter? The regulations require the owner to inform the District if the tenants fail to close (among other things), but there is no provision reviving the District’s backup contract or otherwise allowing the District to re-engage. So at that point is the owner free to close on the third party contract? Will title insurers underwrite without an express provision or indication from the District that DOPA has expired?

In TOPA cases insures have been resistant even where the owner can demonstrate strict compliance with the statute, to go forward if the tenants have failed to act. They frequently have required owners to go above and beyond the statutory requirements to insure a transaction. For example, I have handled TOPA cases where the insurance company demanded that we prove actual delivery of a TOPA notice to the tenants instead of merely sending the notice by certified mail, which is all the statute really requires. In some cases we have actually had to hire professional process servers to hand deliver the notices and sign affidavits of delivery to satisfy a title company of compliance. What additional extra-statutory hoops will owners be required to jump through as a result of imprecise regulations? Unfortunately, we may not find out until after the final version of the regulations are implemented.

In the meantime, the proposed regulations are subject to a required 30 day public comment period, which closes on January 22, 2018. Hopefully, the Agency will listen to the public and think through some of these issues before they are finalized.

If you have questions about how the impending DOPA Regulations might affect you, call or make an appointment now.