Tenant Right of First Refusal

A tenant’s right of first refusal or “opportunity to purchase” would give renters first chance to purchase the property in which they reside, should it come up for sale. By giving renters the right of first refusal, owners necessarily have less freedom to dispose of their property as they see fit.

What Tenant Right of First Refusal Advocates Say

Suppose an owner wants to sell their building. It could be because they are retiring and want to cash out. Or it could be that they can’t operate or maintain the building and need someone more established to take it over. Whatever the reason, there is a good chance that the seller or the new owner will find it best to transact the building empty. Gut renovations, condo conversions, and renter screening can’t take place with existing tenancies in place.

In the absence of a functioning housing market, the renters of this building, especially elderly and low-income families, stand a risk of being displaced far from that neighborhood or community the moment the building is put on the market. A right of first refusal as currently envisioned would ensure that either these renters or a non-profit of their choosing could become the owner of the property ahead of any private investor. Presumably then the current renters would continue to inhabit the premises at the current rents, avoid displacement, and have stability for life.

Advocates for a Massachusetts tenant opportunity to purchase or tenant right of first refusal most commonly say that rents are high and unaffordable. Some blame corporate and landlord greed for this. They say rents would remain low especially for low income and elderly households if only the renters themselves could own and maintain a building.

What we know about Tenant Right of First Refusal

Fortunately for policymakers, we don’t have to guess at the effect a right of first refusal or tenant opportunity to purchase will have in Massachusetts. We can look to Washington, DC, where they have had a tenant opportunity to purchase for many years. In DC, they call this the Tenant Opportunity to Purchase Act (TOPA).

Tenant Right of First Refusal Does not Prevent Displacement

In late 2017, the I-Team investigated whether renters were staying in the apartments for which they had an opportunity to purchase right of first refusal. In fact, they routinely sold this right to the owner and moved out.

One attorney, Andrew McGuire, has based his entire practice around TOPA-chasing. He estimates the market in such shake-downs is $100 million annually.

Tenant Right of First Refusal Does not Protect Leaseholders

Despite the 7,000-word length of the Washington, DC, tenant opportunity to purchase act, it does not define what constitutes a renter. This means live-in nurses, roommates, and many others have legal authority to demand such payment and then are free to take the money and leave, as they would have left anyway. There is no workout to this in Massachusetts, as live-in nurses, roommates and other renter guests have full renter rights.

Washington DC’s Tenant Opportunity to Purchase Act is Failing, was Partially Repealed in 2018

Colin Johnson of the DC Realtors Association told the I-Team investigating TOPA that he had seen payouts to renters as large as $50,000 to $100,000 for single family homes, which are in higher demand than multifamily housing. Since renters were choosing to accept displacement in exchange for the cash payout, Washington DC repealed TOPA as it applies to single family homes.

Elderly and Low-income Renters are Less Able to Maintain their Property than a Landlord

Maintaining a building requires 24/7 responsiveness, difficult work, and access to a lot of capital. Elderly renters and low-income renters, even when banded together, simply do not have the resources to maintain an aged building. We discuss this issue at length in our article, Tenant Right of First Refusal: An Essay on the Merits and Shortcomings as Public Policy.

Nonprofit owners provide less support to the community than for-profit owners

Nonprofits have a veneer of moral authority because they lack shareholders, but in fact nonprofits are equally human and subject to system failures, and unlike for-profits, they pay no real estate tax to make up for their failings. Moving multifamily housing into nonprofit hands will require the tax base to be spread onto fewer and fewer households, including single family owners.

Tenant Right of First Refusal Talking Points

As a public policy, we believe the tenant right of first refusal or opportunity to purchase has several flaws:

  1. It delays the sale of multifamilies and further hampers the rental housing market
  2. It fails to prevent displacement
  3. It is a form of legalized extortion
  4. It reduces the tax base

Flaw 1: Tenant Right of First Refusal Hampers the already Constrained Market

The Right of First Refusal being discussed in Massachusetts provides up to six months for renters to get financing to purchase after a private landlord has made an offer. During this time, nothing can happen to the building. The bills recognize the difficulty of renters forming a tenant’s union and getting financing. They fail to recognize the fact that investors and would-be landlords simply won’t shop for multifamilies in communities with a right of first refusal. No one is willing to conduct all the due diligence required, make an offer, and then wait six months to see whether the renters best it.

According to the 2016 Senate Special Commission on Housing, we need hundreds of thousands of new homes to restore our housing market to efficiency and accessibility. A right of first refusal as currently envisioned will drive the market in exactly the opposite direction, preventing the infusion of new capital into our housing stock.

Flaw 2: Tenant Right of First Refusal Fails to Prevent Displacement

As we have seen in the Washington, DC Tenant Opportunity to Purchase Act, renters can sell their right to anyone and reap a windfall reward. Some Massachusetts versions of the bill eliminate the windfall payout but fail to constrain the successor owner to keeping the renters in place. A nonprofit or a renters union that purchases a property is under no obligation to continue renting to the renters who originally assigned their right to the successor.

Nonprofits routinely have to make difficult funding decisions to fulfill their mission. If push comes to shove, they will readily evict a renter for nonpayment, clear out housing to make needed structural repairs, or terminate a tenancy to enforce federal law and avoid jeopardizing their federal funding (think marijuana usage permissible under MA state law but illegal federally). There is nothing in the bill that actually grants protection from displacement, it’s only possible that it might work out that way.

Flaw 3: Tenant Right of First Refusal is Legalized Extortion

The definition of ownership is the right to use and dispose of property as one sees fit. Under right of first refusal, owners have no choice in whom they will sell to. Owners cannot sell their property into an LLC they own, cannot sell to their irrevocable trust, and cannot sell to their children unless they first secure the right of first refusal to themselves.

In the Washington DC scenario, securing the right of first refusal means cleanly purchasing the right for up to $100,000 per renter or whatever the going rate may be at that time. In the Massachusetts proposal, securing the right would mean creating a nonprofit and inducing the renters to assign their right to your nonprofit as opposed to any other. This still likely requires payment, plus creation of a nonprofit and all the legal compliance that entails.

By preventing disposition of property until a third party has been paid, right of first refusal retroactively eliminates rights of ownership pending payment. It is therefore a form of legalized extortion.

Flaw 4: Right of First Refusal Reduces the Tax Base

For-profit landlords pay real estate tax, often at rates much higher than single family owners. Nonprofit owners do not pay real estate tax and cannot be compelled to make payment in lieu of taxes (PILOT). Few do make their full PILOT’s. Right of first refusal specifically disallows renters from assigning their right to a for-profit, which is to say, guarantees that after the sale is complete, the tax base will be spread across fewer properties.

If right of first refusal were to achieve its aim entirely, such that no multifamily housing remained in for-profit hands, all of the real estate tax for the community would be paid for entirely by single family owners and non-real estate businesses.

2019 – 2020 Session (191st General Court)

2017 – 2018 Session (190th)

Somerville Right of First Refusal

 

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