In order to sell a rental property of five or more units to a third party buyer, TOPA mandates that the owner first provide each tenant with a copy of such third party offer. If not already in existence, the tenants are afforded 45 days from receipt of the offer to form a tenant association and provide the owner with a statement of interest to purchase the property, if applicable. The tenant association will then have a minimum of 135 additional days to negotiate and enter into a purchase contract with the owner on the same material terms of such third party offer. Upon entering into a purchase contract with the owner, the tenant association is then given an additional 120 days to obtain financing. If the owner and tenant association are unable to close the transaction within 360 days from delivery of the third party offer, then the TOPA process must begin again with the owner's receipt of a new offer.

As a result of this TOPA structure, the original buyer may have to sit on hold for at least 300 days waiting to see if the purchase contract with the tenant association falls through before such buyer may proceed with the acquisition. Moreover, the original buyer and owner would have to close before the 360 day TOPA deadline has passed. The original buyer will also likely have already expended funds on due diligence, legal fees and other costs during the course of its negotiations with the owner.

While the TOPA process is unfolding, the tenant association also has the right to simultaneously negotiate the assignment or sale of its TOPA rights to other interested buyers in hopes of receiving better project facilities, onsite programs, rents and/or other monetary benefits. To stay in the game, the original buyer may decide to compete with other third party buyers by offering a more substantial bid to the tenant association. It is also important to remember that the original buyer will continue to incur additional costs associated with such negotiations.

Due to this timely and costly process, it is of no surprise that interested buyers are likely to forego the traditional negotiation process with LIHTC property owners. Instead, third party buyers will often wait until such properties are already in the TOPA process, and then step in to quickly strike a deal directly with the applicable tenant association. D.C.'s Department of Housing and Community Development seems to have accepted this approach through its publication of weekly reports identifying the latest TOPA related filings on their website.

Although breaking into the LIHTC property market in Washington D.C. may be desirable, potential investors should work closely with their legal advisors to formulate an entrance strategy taking into account the additional time and costs under TOPA.

[1] “Going, Going, Gone: DC's Vanishing Affordable Housing”, Wes Rivers, DC Fiscal Policy Institute, March 12, 2015. Available at: http://www.dcfpi.org/wp-content/uploads/2015/03/Going-Going-Gone-Rent-Burden-Final-3-6-15format-v2-3-10-15.pdf

[2] LIHTC Database Access, HUD, Available at: https://lihtc.huduser.gov/

[3] Department of Housing and Community Development, Rent and Income Program Limits. Available at: https://dhcd.dc.gov/service/rent-and-income-program-limits

With demand for affordable housing in Washington D.C. on the rise, investors have shown interest in breaking into the Low Income Housing Tax Credit (LIHTC) market in the D.C. area. That is according to Linda Rangel and Michael C. Polentz of Manatt, Phelps & Phillips LLP. In the exclusive commentary below, Polentz, who is co-chair of the real estate and land use practice group in the Palo Alto, CA, office, along with Rangel, an associate in the group's Orange County office, say that due to D.C.'s Tenant Opportunity to Purchase Act (TOPA), doing so has not been easy.

The views expressed in the commentary below are Polentz' and Rangel's own.

Between 2002 and 2012, the number of low income units in Washington D.C. fell from 58,000 to 33,000 units.[1] Currently, there are only 169 LIHTC properties located in Washington D.C.[2] This declining trend appears to be continuing as developers aim their efforts on market rate projects.

Despite the shortage of affordable housing, the low income population remained mostly unchanged. In 2016, HUD set LIHTC income limits at $48,900 (which is 50% of the average median income) for a household of three persons living in Washington D.C.[3] According to American Community Survey data, on average, approximately 40% of total households in the D.C. area fell at or below this income threshold between 2010 and 2015.[4] Based strictly upon the foregoing data, opportunities for investment in affordable housing in Washington D.C., particularly LIHTC properties, clearly exist; provided an investor interested in making an offer to buy a LIHTC property is capable of satisfying the requirements of TOPA.

In order to sell a rental property of five or more units to a third party buyer, TOPA mandates that the owner first provide each tenant with a copy of such third party offer. If not already in existence, the tenants are afforded 45 days from receipt of the offer to form a tenant association and provide the owner with a statement of interest to purchase the property, if applicable. The tenant association will then have a minimum of 135 additional days to negotiate and enter into a purchase contract with the owner on the same material terms of such third party offer. Upon entering into a purchase contract with the owner, the tenant association is then given an additional 120 days to obtain financing. If the owner and tenant association are unable to close the transaction within 360 days from delivery of the third party offer, then the TOPA process must begin again with the owner's receipt of a new offer.

As a result of this TOPA structure, the original buyer may have to sit on hold for at least 300 days waiting to see if the purchase contract with the tenant association falls through before such buyer may proceed with the acquisition. Moreover, the original buyer and owner would have to close before the 360 day TOPA deadline has passed. The original buyer will also likely have already expended funds on due diligence, legal fees and other costs during the course of its negotiations with the owner.

While the TOPA process is unfolding, the tenant association also has the right to simultaneously negotiate the assignment or sale of its TOPA rights to other interested buyers in hopes of receiving better project facilities, onsite programs, rents and/or other monetary benefits. To stay in the game, the original buyer may decide to compete with other third party buyers by offering a more substantial bid to the tenant association. It is also important to remember that the original buyer will continue to incur additional costs associated with such negotiations.

Due to this timely and costly process, it is of no surprise that interested buyers are likely to forego the traditional negotiation process with LIHTC property owners. Instead, third party buyers will often wait until such properties are already in the TOPA process, and then step in to quickly strike a deal directly with the applicable tenant association. D.C.'s Department of Housing and Community Development seems to have accepted this approach through its publication of weekly reports identifying the latest TOPA related filings on their website.

Although breaking into the LIHTC property market in Washington D.C. may be desirable, potential investors should work closely with their legal advisors to formulate an entrance strategy taking into account the additional time and costs under TOPA.

[1] “Going, Going, Gone: DC's Vanishing Affordable Housing”, Wes Rivers, DC Fiscal Policy Institute, March 12, 2015. Available at: http://www.dcfpi.org/wp-content/uploads/2015/03/Going-Going-Gone-Rent-Burden-Final-3-6-15format-v2-3-10-15.pdf

[2] LIHTC Database Access, HUD, Available at: https://lihtc.huduser.gov/

[3] Department of Housing and Community Development, Rent and Income Program Limits. Available at: https://dhcd.dc.gov/service/rent-and-income-program-limits