Photo by Ted Eytan via Flickr, CC BY-SA 2.0
In July, Julie Gilgoff reported on several municipalities that are exploring legislation that would give tenants the first right of purchase to preserve affordable housing. The proposed legislation is based on Washington, D.C.’s Tenant Opportunity to Purchase Act (TOPA), which was enacted in 1980. As manager of a TOPA program at a D.C.-based organization, I want to discuss factors that will facilitate or hinder the implementation of a program that allows tenants to cooperatively purchase their homes. In addition to purchasing a building, in most cases, the tenants will undertake a full development process, as most buildings purchased under TOPA in D.C. need moderate to substantial rehab.
From 2004 to 2019, Mi Casa Inc. has helped 19 tenant groups form limited-equity cooperatives to purchase and redevelop their buildings, permanently preserving over 500 units of affordable housing, most of which are affordable to households at or below 30 percent of the area median income (AMI). While TOPA can be an effective tool for affordable housing preservation and community control, the fact that it took 15 years of struggle to complete those 19 projects means that major challenges still inhibit its implementation.
Background
Fernando Lemos, now the executive director of Mi Casa Inc., worked at Ministries United to Support Community Life Endeavors (MUSCLE) in the early days of TOPA. He ascribes the success of the early projects to the close working relationship between MUSCLE, University Legal Services (ULS), and the city’s Department of Housing and Community Development (DHCD). MUSCLE functioned almost as a development arm of the city. “We submitted a feasible plan which met city requirements,” Lemos says. “But the city acted as a collaborator and it was understood that they would fund the vast majority of projects and once they agreed to lend, they would be very flexible and adjust their terms in order for the projects to succeed.” ULS and other attorneys used limited-equity cooperatives to finance multi-family ownership. “Almost no one in the city was bankable and we needed a way to convert rental property to community ownership. This continues to be the case for many of our residents.”
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Now, 40 years later, the city’s support for TOPA isn’t what it used to be. “That earlier sentiment, to ensure the long-term success of a project from purchase to renovation, is just not there,” Lemos says. In the 1970s, city leaders were fighting to stabilize the city and protect the lower-income tenants who stayed while wealthier residents fled. Decent, affordable housing was a primary objective. While still supportive of TOPA, the district’s housing policy changed as the city started to gentrify in the 1990s. City leaders are still concerned about preserving affordable housing but funding now must compete with other priorities of the changing population. And since co-ops are home to more low-income residents, they require more investment. The D.C Fiscal Policy Institute wrote that “First Right Purchase projects typically require a larger share of the development costs to come from DHCD . . . largely due to the fact that ownership projects typically cannot access Low-Income Housing Tax Credits and that often the tenants have very low incomes.” This means that the city chooses between building fewer units or reaching fewer of the city’s lowest-income residents.
D.C.’s TOPA process kicks off when an owner distributes a notice of sale to the city and its tenants. The tenants have 45 days to form an association and file their notice of intent to buy, unless a tenant association already exists, in which case this period is reduced to 30 days. During this time, housing counseling organizations reach out to tenants to explain their rights, help them form the association, and facilitate the conversation of how to move forward. After their notice of intent to buy is filed, tenants have 120 days to negotiate a contract with the owner. This is the period in which the tenant association completes its due diligence and determines the feasibility of proceeding to purchase. Once the contract is signed, the association has another 120 days to purchase, with an extension of 120 days if a lender indicates in writing that the tenants are on track to receive a loan. ULS once served as the primary initial contact for tenants. Today, housing counseling groups like Housing Counseling Services (HCS) and Latino Economic Development Center (LEDC) collaborate to contact tenants living in buildings that are for sale and who are at risk of displacement. These organizations provide them with information on their rights and options for moving forward. These groups are often on the front lines of organizing, as D.C. legislation requires that they receive a copy of every notice of sale for multifamily buildings and that the contact information for each organization be listed on the notice sent to tenants. Not all tenant groups actively reach out for help, so counseling groups divide the responsibility of contacting the tenants among themselves. If tenants form an association, the housing counseling group will continue to work with them to provide additional information and help the association decide how they want to respond to the notice.
As future owners of the building, the tenant group makes all decisions regarding development. Therefore, organizing work and preparation for acquisition and renovation occur in tandem. Information should be provided in an accessible format so collective decisions can be easily made, and so that a skilled organizer with knowledge in housing development is available as a guide and source of information since tenant groups face a number of obstacles in getting control of their building.
The Challenges Unique to Purchasing as a Cooperative
Tenants purchasing their building through TOPA face the same challenge as all community-based affordable housing organizations: trying to meet the needs of low-income households in a market-driven industry. The first right of purchase takes a small step in leveling the playing field. However, tenant groups attempting to exercise this right face hurdles that are not easily foreseen in an analysis of proposed TOPA legislation in California and New York, including:
- Establishing shared ownership—The impetus for most shared ownership is to form an intentional community. In many multifamily buildings, tenants may know and even support one another, which provides a good start to forming an association. But for tenants receiving a notice of sale, they must do so while under threat of displacement. Successfully completing the TOPA process will require the engagement of the majority of the tenants.
- Lack of experience—For many tenants, this is likely the first and only real estate project they will undertake. In a short time, they must prove to lenders that the project is feasible and that they have the capacity to finance the acquisition and complete any renovation needed. These are goals that even experienced community development organizations struggle to accomplish.
For this reason, TOPA will be most successful in communities that already have engaged and built networks of residents with a variety of community groups active in housing policy, community organizing, and affordable housing development. This includes community-based development groups, lawyers, and organizations like the Community Network on Housing and Economic Development, which sponsors a TOPA working group for organizations to plan joint advocacy. Tenant groups will have to partner with these organizations to gain the technical information and support needed to build a community capable of group decision-making.
A housing counselor from one of the community organizations listed earlier works with the tenant association as they talk with an attorney and decide whether to form a cooperative and self-develop, or to assign their rights to a nonprofit or private developer. If there is interest in forming a cooperative, the group may also talk to a development consultant at this time. Most of this work occurs during the 45 days following the notice of sale. Given this relatively short period, housing counselors typically advise the tenant group to register their interest in purchase which gives them time to get deeper into the details.
Mi Casa and other development consultants start working with tenant associations after the notice of interest in purchase has been submitted. Mi Casa has developed a series of interactive workshops designed to facilitate decision-making at each step of the process. The first several months of work focuses on giving tenants an understanding of housing finance, both development and operations, and then using that knowledge to establish a development plan, which is completed in time to give the association a chance to reassess their risk before making a final decision to self-develop as a cooperative or consider other options. It also forms the basis for financing proposals and thus serves the dual purpose of confirming the association’s decision on ownership and moving forward with the development process.
Consideration of Key Issues in Designing Legislation
Assigning Rights—Municipalities looking at TOPA legislation have considered whether there should be controls on a tenant’s ability to assign or sell their rights to a third party. All of them allow some form of rights assignment, illustrating how not all groups of tenants are interested in self-development and that some need the support of a development partner to obtain financing.
As Julie Gilgoff reported in Shelterforce, Berkeley, Oakland, and other jurisdictions are requiring third parties to be vetted and to commit to permanent affordability and democratic resident control. D.C. organizations working as the Tenant Purchase Working Group sponsored by the Coalition for Nonprofit Housing and Economic Development have discussed whether it is possible to add some restrictions to the current process for rights assignment. Establishing mandates in the legislation regarding level and term of affordability, limiting increases in rent for current residents, and requirements for meaningful tenant participation are among the options considered. Narrowing assignment to only certain developers such as nonprofit affordable housing developers and/or private developers who agree and are held to the mentioned mandates would result in a program that facilitates the goal of housing justice while broadening the options for tenants.
More controversial is the process in which a tenants’ association assigns its rights to a developer in exchange for a payment (buyout) to individual tenants, which is permitted in D.C. In fact, as reported by Gilgoff, Berkeley has chosen to exclude the right to accept buyouts because it runs counter to the intent of the legislation. This was seen in the early 1990s when Washington, D.C., was hit by an aggressive wave of urban gentrification. Private developers offered buyouts to tenants—usually around $20,000 but in some case as high as $80,000 or $100,000 per unit—if they signed over their TOPA rights and moved out. Despite organizations’ best efforts, many tenant associations opted to sign over their rights during their 120-day period of contract negotiation. Some developers have used shady tactics to achieve this, like offering buyouts to individual tenants in exchange for their vote to assign the right to purchase. Once developers have enough votes in their favor, no more buyouts are offered. This may scare some tenants to take the buyout before the offer drops lower.
Once the developer buys the building, current occupants can stay as tenants, but some developers may find ways to make their lives miserable. Tenants who continue to fight for their right to purchase may find themselves forced to move without a financial benefit. The best possible outcome of a buyout is that the tenant association agrees only if the developer will provide the same buyout to everyone who chooses to take one. At the height of gentrification, this led to a dramatic loss of low-income buildings to private developers. Today, resident leaders who lived through the displacement of the 1990s realize that the short-lived benefit to a few residents is less important than guaranteeing affordability for the future.
Affordability—One weakness of the TOPA legislation in Washington that Gilgoff points out is that it does not require permanent affordability except when co-ops receive public funds. In practice, this has not been a major problem since most TOPA projects use public funding, which comes with a 40-year affordability restriction. Still, writing these requirements into the legislation would complement those that come with financing and provide another level of protection for tenants. This would strengthen the legislation’s ability to preserve affordable housing, but it must be matched with sufficient funding. The early advocates of D.C.’s TOPA program pushed for an unambiguous commitment by the District government to dedicate funding for TOPA efforts. As a result, a TOPA financing program was established with funding allocation, most of which came from the District of Columbia Housing Trust Fund, which mandates that funds serve a range of income levels: 40 percent to households below 31 percent of AMI, 40 percent to below 51 percent and 20 percent to below 81 percent.
As with all affordable housing programs, TOPA legislation reflects the political climate and public policy goals of the times in which it was enacted. The lack of permanent affordability requirements and the provision allowing tenants to assign their rights in exchange for individual payments weaken the effectiveness of the legislation in helping to achieve housing justice in today’s political and economic climate. When viewed in the context of the late 1970s D.C., however, it is possible to see the logic behind decisions that today seem like weaknesses. Back then, the city was devastated by disinvestment and depopulation. Rick Eisen of Eisen and Rome was the co-chairman of a committee of young lawyers and law school students in 1979 and 1980 when he worked for Metropolitan Washington Planning and Housing Association and drafted the original D.C. TOPA legislation. Rick states that “the primary purpose of the comprehensive legislation in 1980 was to grant bargaining power to tenants so that they would have a strong say in fundamental changes to their rental buildings—sale, demolition, conversion, and the discontinuance of use as rental housing. This comprehensive approach, together with the extensive network of housing counselors, attorneys, development consultants, and city government financial resources, has been critical in making TOPA a successful tool.” Within that context, vesting power in the tenants on a building-by-building basis made sense; unfortunately, when gentrification hit D.C. in the 1990s, individual tenants sometimes benefited at the expense of the affordable housing stock in the city as a whole.
Programs and legislation must change with changing times. Affordable housing development is only effective when it is practiced with ongoing grassroots participation and action.
Timing—Owners and real estate agents will always fight to limit the time given to tenants to organize, so the legislation should require that owners provide notification of the sale in multiple languages, distribute it to tenants and community organizations, and provide proof of notification. D.C. allows 45 days for tenants to form an association from the day the building owner provides a notice of sale and distributes it to the tenants. However other bills, such as that of Massachusetts, have a dramatically shorter deadline of 15 days, which may be insufficient time for tenants to form a tenants’ association. Several organizations such as HCS and LEDC support tenants in responding during the window for matching a private offer, and they receive public and private grant support for the work.
From the date that a purchase agreement is signed in D.C., a tenant association has 120 days to reach a settlement, with an additional 120 days upon showing progress. Because of the time needed to form a tenant association, establish a development plan, decide and form a new ownership structure—usually a limited-equity cooperative—and apply for financing, it is almost impossible to also plan for the renovation needed. This means most TOPA projects are usually developed in two phases: acquisition and then renovation.
Phased development requires flexibility from all involved in a TOPA purchase: co-op members, the development team, and lenders. Co-op members realize that most building improvements must wait for an indeterminate amount of time. Development consultants and attorneys usually defer a portion of their fees. Public subsidy must be provided at the beginning of the process and the development plan must show that the renovation can be supported at least substantially by a private loan. Recently, DHCD has allowed co-ops to include funds for some immediate repairs in the acquisition loan. Private lenders underwrite loans with a level of trust that the city will follow current policies and meet its preliminary commitments.
The TOPA process has a relatively short timeline in which tenants must organize, learn the basics of real estate development, and secure financing. Complaints from the opposition that this is unfair must be balanced against the goal of housing equity. Unless a city has a robust program of organizational and financial support for first right of refusal, enacting legislation with a timeline any shorter than that of D.C.’s is setting the tenants up for failure.
Application Process—Since cooperatives lack the financial resources and proven track record possessed by private and nonprofit developers, measures must be put in place to ensure that TOPA projects are competitive for scarce resources. Recent changes to the application process for loans in Washington, D.C., have meant that cooperatives seeking public financing must compete with all other developers. This has been detrimental to co-ops because they lack many of the characteristics on which projects are measured: previous experience, financial assets that a developer would have, and an established relationship with lenders. The Tenant Purchase Working Group has advocated for a more balanced system and DHCD has added some points to the scoring matrix that favor TOPA projects. For example, an application will get an extra point if it is a TOPA project and can get additional points if the development is affordable to people with the lowest incomes. And this has made a difference: 2 of 10 projects funded in the last Notice of Fund Availability were limited-equity TOPA loans for renovation. Cooperatives often apply up to three times before they receive funding. Given that the TOPA process requires phased financing this means that they must manage buildings in sub-optimal conditions for more than five years with only the income provided by monthly carrying charges. A more intentional scoring matrix will help but a set-aside or designated fund is necessary for TOPA to be an effective tool for preservation.
Once cooperatives are awarded financing, flexibility and consistency is needed in the city’s underwriting and policies. Because of the unique ownership structure and the phased development process, city loan officers often do not understand cooperatives and the challenges they face, leading to difficulties in evaluating loan applications. Even though the acquisition application includes a full development plan, some loan officers will treat the underwriting of the construction loan as if it is an entirely new project. For example, loan officers expect to see regular reserve deposits when analyzing financial statements, but if the building was in poor condition when purchased and the co-op has been seeking financing for renovation for years, tenants are lucky if operations break even. Loan officers may see a high vacancy or delinquency rate and not realize that these are hard to address while managing a building in poor conditions with few resources. Unlike other developers, tenants under TOPA have only one option in terms of buildings they can buy; and they inherit all the problems of previous management when they purchase. The long period between acquisition and renovation makes underwriting co-op loans unique.
One of the early managers of DHCD’s TOPA program was the president of a tenant association that had successfully developed its building using TOPA. Since then, several DHCD loan officers have become knowledgeable on TOPA and are skilled at matching city requirements to the unique structure. Unfortunately, that knowledge is not institutionalized and is lost when the person leaves. One way to address this is to have one or more loan officers specifically designated to underwrite TOPA projects.
In one example that illustrates how serious this issue can be, a cooperative purchased a building in 2006 with a bridge loan, which is a short-term loan made based on a commitment for other funding which won’t be received in time for a deadline. This happens a lot with TOPA because D.C.’s Department of Housing and Community Development often has trouble completing the underwriting and approval process in time to meet the TOPA requirements. A community lender, in this case Enterprise Community Partners, then takes out a short-term loan based on the city’s agreement to provide the permanent financing later.
But two years after the city issued a letter of intent to pay off Enterprise’s loan, they came back and said they would only be able to pay off half of the bridge loan. This made it impossible for the co-op to get additional private funding for renovation. The city also required the co-op to switch its development plan from a limited-equity co-op to mixed-income condominiums in hopes that revenue from the market rate condos would go to repay DHCD’s loan. When DHCD loan officers were replaced by new staff members, this history was lost and DHCD required the co-op to go back and redo steps that were only required if they had continued to proceed as a limited-equity coop. The entire process took 13 years and the original co-op members were forced to purchase under new terms, which ultimately made it impossible for them to buy.
In the early days, the city often financed 100 percent of many TOPA projects. Given the pressure on city leaders to satisfy the priorities of a population dramatically changed by gentrification, this is no longer feasible, and cooperatives must look to private financial institutions for at least some of the debt. CDFIs like the Local Initiatives Support Corporation and the National Housing Trust Community Development Fund provide predevelopment, bridge funding, and limited-permanent funding. United Bank in Washington, through its work with community-based development organizations, has become a consistent supporter of co-ops and tenant purchase. “There is a learning curve for both sides,” says Joe LeMense, United Bank’s managing director of community development and nonprofit banking. “Our familiarity with the community groups serving as consultants helps a lot. But this is still a unique property ownership structure and we underwrite these requests carefully. Once we’re comfortable with the underwriting, there is additional work involved in coordinating with DHCD. Our loans to co-ops perform well overall, but when there have exceptions, it’s generally in the areas of timely financial reporting and the maintenance of sufficient replacement and maintenance reserves. Professional third party financial and property management of a co-op is very important to us.”
Forty years after TOPA was enacted in D.C., there is still strong opposition; almost annually there is some attempt to weaken or eliminate TOPA. Thanks to the ongoing strength of the low-income tenant movement, these efforts have mostly failed. By the same token, these four decades have helped build strong support for TOPA not only in the low-income community but also among city administrators, politicians, lenders, and real estate lawyers. In D.C., TOPA has made a significant contribution to preservation and housing equity. However, when measured against the struggle needed for each small achievement and against the unfettered success of market housing as a vehicle for speculation and profit, we need to do better. In the municipalities currently looking at TOPA, the political environment exists for the deeper discussions and struggles needed for the resources to make TOPA a truly meaningful tool for housing equity.
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