In September, the California Legislature approved AB 1482, the Tenant Protection Act of 2019. Governor Newsom signed the bill on October 8, making California the third state this year to impose statewide residential rent control, behind Oregon and New York. The legislation also includes “just cause” eviction provisions.

Until its repeal date of January 1, 2030, AB 1482 limits rent increases for many residential buildings. For covered buildings, during any 12-month period, the bill prohibits a landlord from increasing a tenant’s rent by an amount that is the lesser of: (a) 5% plus the percentage increase in the cost of living based on the regional CPI (for the Bay Area, roughly 4% or a total of about a 9% increase based on the 2019 CPI), or (b) 10%. The cap applies to rent increases imposed after March 15, 2019, and for existing tenants, a landlord may not increase the rent more than twice in a 12-month period.

In an effort to address the impacts of the rent cap on new construction, the Legislature included an exemption for housing constructed in the past 15 years. AB 1482 also exempts certain affordable housing, college dormitories, single-family homes, and owner-occupied duplexes and condominiums (except where the owner is a REIT, corporation or limited liability company where at least one member is a corporation). The bill does not apply to housing that is already subject to local rent control measures. The City of San Francisco currently imposes rent control on buildings constructed before June 13, 1979. The San Francisco Rent Ordinance caps annual increases in residential rents based on a specific formula tied to the regional CPI. Since the 1980s, the effective rate cap has ranged from 0.1% to 7.0%, and the current cap in effect through February 29, 2020 is 2.6%. These protections will continue to apply. The AB 1482 rent cap provisions will apply to buildings that received certificates of occupancy between June 13, 1979 and December 31, 2004. A building constructed in or after 2005 will not be subject to the new AB 1482 rent caps until the building is at least 15 years old.

The legislation also imposes “just cause” eviction procedures, which apply to tenants who have continuously and lawfully occupied a residential property for at least 12 months (or at least 24 months in the case of one or more new adult tenants), unless the eviction results from an “at-fault” or “no-fault” just cause, as defined in the bill. For a “no-fault” eviction, such as an owner move-in or substantial renovation, the landlord must provide tenants with relocation assistance or a rent waiver in the amount of one month’s rent. The exemptions are similar to those for rent caps, and also include dormitories for K-12 schools, housing associated with a nonprofit hospital, religious facilities, extended care or licensed residential care facilities, hotels, and individual rooms or accessory dwelling units rented out by a homeowner. Local just cause ordinances such as San Francisco’s prevail, provided they were either in effect on or before September 1, 2019, or are adopted thereafter but are more protective than the state legislation.

The bill faced substantial opposition, led by the California Apartment Association – which ultimately dropped its opposition – and the California Association of Realtors. Opponents raised concerns that the bill would chill housing production, curtail economic development, and complicate the eviction process.

While many tenants’ rights groups supported the legislation, others remain critical of certain provisions, including the lack of vacancy control and longer-term tenant protections. Bay Area Mayors London Breed, Libby Schaaf and Sam Liccardo endorsed the measure.

Costs for many non-residential developments in San Francisco are poised to increase. On September 19, 2019, the Planning Commission approved a proposed ordinance that would more than double the City-wide Jobs Housing Linkage Fee (JHLF) rate for office and laboratory development. The ordinance now moves to the Board of Supervisors for consideration.

The key provision is a substantial hike in fees for office and laboratory development. The ordinance would increase the JHLF rate per gross square foot (gsf) for office uses from $28.57 to $69.90 and for laboratory uses from $19.04 to $46.43. With the proposed changes, a 100,000 gsf office building would be required to pay a nearly $7 million JHLF.

The proposed ordinance does not include a grandfathering clause so pipeline projects and certain approved projects would be subject to the JHLF changes. The JHLF is normally calculated and due at the time of issuance of the first construction document for a project, which is typically a site or building permit. The proposed ordinance provides that certain projects approved by the Planning Commission (or Planning Department, if applicable) on or before the end of the year (December 31, 2019) will be subject to the higher fee. This applies only if the proposed ordinance is in effect when the JHLF is normally due or a condition of approval is imposed requiring payment of any higher JHLF rate in effect prior to issuance of either the certificate of occupancy or final completion for the project. Such a condition was imposed on at least one already approved Central SoMa project in anticipation of the proposed ordinance.

The proposed ordinance would also change the options for developers to satisfy the JHLF requirement. Compliance through payment to a residential developer would no longer be allowed, but land could still be dedicated in lieu of payment of the JHLF (or in combination therewith) if specified requirements are met. That option would be expanded under the proposed ordinance to all projects, not just Central SoMa projects.

Under state law, the development impact fee must bear a reasonable relationship or “nexus” to the actual impacts of new development and the costs of mitigating those impacts. The City retained consultants to prepare a May 2019 Jobs Housing Nexus Analysis (“Nexus Analysis”) and a June 2019 Jobs Housing Linkage Fee Update Development Feasibility Assessment (“Feasibility Assessment”). The Nexus Analysis examined the connection between employment growth and affordable housing demand in the City and concluded that for each job created, the demand for housing and cost of producing it is substantially higher than what was identified in the original 1997 nexus analysis. It did not include a maximum recommended rate. The Feasibility Assessment examined various office development prototypes and concluded that for some product types and under certain conditions, a JHLF increase of up to $10 per gsf would be feasible. The Feasibility Assessment did not address laboratory space.

The staff report to the Planning Commission recommended approval of the proposed ordinance with modifications to conform to the Feasibility Assessment: a $10 per gsf increase for office uses, and no increase for laboratory uses. The Planning Commission considered testimony regarding the proposed rates and analysis and, in deliberations, generally expressed support for the ordinance while acknowledging that additional work needed to be done to confirm the appropriate maximum increase. The approval was in support of the ordinance without modifications.

We will continue to track this proposed ordinance. It has not yet been scheduled at the Land Use and Transportation Committee of the Board of Supervisors, which is the next step before final consideration by the full Board.

San Francisco’s Community Opportunity to Purchase Act (COPA) became effective earlier this month but the Mayor’s Office of Housing and Community Development (MOHCD) has clarified that sellers of multi-family residential rental properties and certain vacant lots in San Francisco will not be required to comply until September 3, 2019 (90 days after the effective date). That date is the deadline for MOHCD to release a formal implementation program, including a list of “Qualified Nonprofits” that have been granted certain rights of first offer and first refusal under COPA.

MOHCD has also confirmed that it will not require COPA compliance if a property owner has entered into a “binding contract for sale” prior to September 3, 2019. That term is not defined, but appears from the COPA legislation to include not only a binding purchase and sale agreement but possibly also other forms of contract, e.g., an option to purchase.

Although not addressed in the legislation, MOHCD has also provided guidance for property owners that list property subject to COPA for sale prior to September 3, 2019, but have not entered into a “binding contract for sale” prior to that date. Under that scenario, the yet-to-be-identified Qualified Nonprofits must be given a right of first refusal (ROFR), but not a right of first offer. Because the ROFR would be the seller’s first contact with “Qualified Nonprofits” they would presumably have 30 days (rather than five days) to respond; however, that wasn’t specified by MOHCD. The ROFR process is summarized in our March blog post and this graphic.

As reported in our May blog post, the San Francisco Apartment Association has stated that it believes the legislation is “illegal and unconstitutional,” and has indicated it plans to bring litigation against the City this year. We will be monitoring any legal developments surrounding the legislation.

The Chair of the Senate Appropriations Committee announced that Senator Wiener’s SB 50 is now a two-year bill, which means that it will not be eligible for vote until January.   We will continue to track the status of SB 50 and any future amendments or successor legislation that may be introduced.

On April 24, Senator Scott Wiener’s SB 50 passed the Senate Governance and Finance Committee with bipartisan support, incorporating amendments that limit the bill’s scope. It is scheduled to be heard by the Senate Appropriations Committee on May 13. As previously reported, SB 50 mandates a combination of “equitable communities incentives” and a streamlined, ministerial approval process designed to promote housing production for qualifying projects on eligible sites. The amendments are part of a compromise agreement with Senator Mike McGuire and incorporate provisions from his previously competing measure, SB 4.

As amended, SB 50 continues to require that local agencies grant certain “equitable communities incentives” when a project sponsor seeks to construct a residential development that meets specified criteria such as being a “transit-rich” or “jobs-rich” housing project, as defined in the legislation, and complies with tenant protection and other requirements. The incentives limit local agencies’ ability to impose density limits and minimum parking requirements on qualifying projects. For projects within 1/2 or 1/4 mile of a major transit stop, the legislation would also impose minimum height limits of 45′ and 55′ (four to five stories), respectively. The amendments to SB 50 would mandate these incentives only for the state’s largest 15 counties, all with a population of over 600,000. The legislation also exempts certain sites, including those with certain historic designations or that contain existing rental housing, or that are located in a very high fire severity zone or in a coastal zone and in a city with a population of under 50,000.

For counties with populations of 600,000 or less, a qualifying project in a city with a population of over 50,000 and within 1/2 mile of a major transit stop would be eligible for different incentives, including an additional one story above the otherwise allowable height, and relief from maximum density and minimum parking requirements. There are additional exemptions related to historic district and floodplain designations.

As before, the legislation delays implementation for designated “sensitive communities” to allow time for planning efforts directed at affordable multifamily housing.

The legislation would also create a statewide streamlined ministerial process to convert vacant land and homes to multifamily buildings of up to four units. Qualifying conversions could not propose substantial exterior alteration and would be required to meet certain local land use controls such as height, setback, and lot coverage as they existed on July 1, 2019.

SB 50 has a number of co-authors and early supporters, but continues to face opposition from some cities and counties, principally over loss of local land use control, and housing advocates concerned with gentrification and displacement.

Owners of multifamily residential properties in San Francisco will soon have to extend purchase offers to certain nonprofit organizations, before making or soliciting offers to sell those properties to anyone else—and will have to give those nonprofits the right to match any offer received from a potential buyer—under new legislation that is poised to become effective in June 2019.

In the meantime, potential buyers and sellers of multifamily properties should familiarize themselves with COPA’s key provisions, which we covered here, and the applicable timelines, which we’ve illustrated in the downloadable graphic here.

Community Opportunity to Purchase Act

As we explained in a prior post, San Francisco Supervisor Sandra Fewer introduced the Community Opportunity to Purchase Act (COPA) which would give “Qualified Nonprofits,” vetted by the City, both a right of first offer (ROFO) and right of first refusal (ROFR) over multifamily properties.  This applies to buildings (existing or under construction) of three or more units, as well as privately owned vacant lots where three or more units could be constructed.  On April 23, the Board of Supervisors unanimously approved the legislation, which the Mayor signed on May 3, the last possible day.

What happens now? 

Assuming the new legislation goes into effect (barring voter referendum or judicial intervention), it will raise significant legal and practical questions about buyers’ and sellers’ rights and obligations concerning multifamily properties in San Francisco.

After the effective date of June 2, the Mayor’s Office of Housing and Community Development (MOHCD) will have 90 days to promulgate rules to implement COPA.  MOHCD must also screen potential Qualified Nonprofits—generally, established organizations that have demonstrated a commitment to and experience in providing housing to lower-income City residents—and following certification, must publish a list of Qualified Nonprofits on its website.  The legislation doesn’t give MOHCD a specific deadline to publish an initial list, which will presumably trigger the requirements for sellers to comply with the ROFO/ROFR process.

Although COPA has been hailed by various low-income housing organizations, the San Francisco Apartment Association has stated in public comments that it believes the legislation is “illegal and unconstitutional,” and has indicated it may bring litigation against the City.  We will be monitoring any legal developments surrounding the legislation.

What does COPA mean for multifamily transactions?

For multifamily properties that are already in contract to be sold as of COPA’s effective date, the legislation “shall not be construed to impair” any such contract, or to affect property interests held by anyone other than the seller (including existing security interests, options to purchase, or rights of first offer or refusal).  However, for buyers and sellers that have engaged in preliminary negotiations but have not entered a formal purchase and sale agreement as of the effective date, these protections may not apply.

COPA appears likely to affect a broad range of transactions in San Francisco, including not just asset sales but also certain corporate transactions and transfers in interests held by trusts.  (The Budget and Legislative Analyst’s report to the Board of Supervisors estimated that approximately 112 transactions valued over $5 million may have qualified under the terms of COPA in 2018, although it is unclear how closely this figure lines up with the range of transactions contemplated by the legislation).  In very general terms, the most likely immediate effects for sellers of covered properties may be transactional delays, and associated costs, especially as parties adjust to compliance with the new regime.  Additionally, sellers may face new liabilities, as COPA confers new private enforcement rights on Qualified Nonprofits and subjects sellers (and parties that have “colluded” with sellers) to monetary damages, possible civil penalties, and attorneys’ fees.

COPA raises a number of significant questions (e.g., what exactly constitutes an “offer,” what is the standard for expressing a “desire to accept,” and in the context of a third-party offer, how to interpret whether it is on “materially different” terms than were offered to Qualified Nonprofits), some of which could be addressed in the MOHCD regulations.  The Washington D.C. programs on which COPA has been loosely modeled (the Tenant Opportunity to Purchase Act and District Opportunity to Purchase Act, or TOPA and DOPA respectively) have been the subject of numerous lawsuits and controversy since enactment in 1980.  San Francisco’s new legislation may prove to be similarly fraught, and it will be crucial for sellers and buyers to carefully consider the legal aspects of their proposed multifamily transactions as COPA begins to take shape.

 

Pending legislation introduced by San Francisco Supervisor Fewer would amend the City’s laws to give certain qualified non-profit organizations certified by the City (“Qualified Nonprofits”) the first right to purchase multi-family rental properties and certain vacant lots in San Francisco. 

Highlights are as follows:

• The legislation applies to any residential building with at least three rental units or a vacant lot zoned for at least three units.
• Sellers subject to the new law would be required to notify all Qualified Nonprofits of the intent to sell before putting a qualifying property on the market.  Qualified Nonprofits would have five days to respond, triggering an obligation for the seller to provide information about building tenants.  Qualified Nonprofits would then have an additional 25 days to make an offer to purchase the building.  The seller could reject an offer made, and if no Qualified Nonprofit makes an offer, or if the seller rejects any Qualified Nonprofit offers, the seller could offer the building to the general public.
• If a seller is prepared to accept an offer from a buyer other than a Qualified Nonprofit, then it would be required to give all of the Qualified Nonprofits the right of first refusal on the same terms and conditions and Qualified Nonprofits would have five days to accept or reject that offer (or 30 days if the seller is responding to an unsolicited offer).
• Qualified Nonprofits would have the right to institute a civil action against any non-compliant sellers, with the potential for damages as specified in the legislation.
• The legislation includes protection for existing tenants.  It also requires that a property purchased by a Qualified Nonprofit remain rent restricted, meaning that the value of all rents paid in the building could not exceed 80 percent of Area Median Income (AMI) and the gross household income of new tenants could not exceed 120 percent of AMI.
• Certain sales would be excluded, including but not limited to transfers made under a mortgage, deed of trust, or deed in lieu of foreclosure and transfers between certain family members.  Seller incentives are also contemplated, which could include a partial City transfer tax exemption, if ultimately adopted by the Board of Supervisors, and federal tax benefits, if available.