Can future nonprofits profiteer from San Francisco's COPA regulations?

You might be thinking of Barry Manilow and Copacabana, but we are talking about San Francisco’s newly minted Community Opportunity to Purchase Act, legislation that gives “qualified nonprofits” the right of first offer on multi-unit unit residential buildings when the owner intends to sell the property. Moreover, the qualified nonprofit has the subsequent right to match any offer.

The sweeping new law applies to buildings with three or more rental units or a vacant lot zoned for at least three units. To get a background, please consult our page on the nascent ordinance. 

A rather exclusive club at the moment

For those of you investors and real estate brokers who are savvy, you can conceivably get a strategic advantage over your competitors by simply starting a nonprofit and gain access to properties before they go on the open market, right? 

We are sorry to burst your bubble, but organizations who participate in COPA will have to meet a high threshold before the city will grant status of a qualified nonprofit. The criteria is rather rigid. 

• The organization has demonstrated a commitment to the provision of affordable housing for low- and moderate-income City residents, and to preventing the displacement of such residents,· 
• The organization has demonstrated a commitment to community engagement, as evidenced by relationships with neighborhood-based organizations or tenant counseling organizations; 
• The organization has demonstrated the capacity (including, but not limited to,the legal and financial capacity) to effectively acquire and manage residential real property at multiple locations in the city;
• The organization has, within the previous five years, acquired or partnered with another housing development organization to acquire at least two residential buildings using funding provided by the Agency, or has acquired or partnered with another nonprofit organization to acquire at least two residential buildings.

So as we can see, successful candidates must not only have the wherewithal to purchase multi-unit properties, but a prior history of managing affordable housing, a short list that amounts to an oligopoly. 

To put this number in perspective, take a look at San Francisco’s Small Sites Program, whose stated mission is to protect tenants living in properties vulnerable to market pressures by removing the buildings from the speculative market and converting them into permanently affordable housing. The number of nonprofit participants stagnate in the double digits, and we would similarly expect to see an abysmally low number of groups to get the badge of a qualified nonprofit, perhaps less than 10 - we will have greater clarity when this list is published by the Mayor’s Office of Housing and Community Development (MOHCD) on September 3. 

Qualified nonprofits will say “no thanks” to many multi-unit properties, at least at the outset of COPA

When a qualified nonprofit raises their hand and expresses an interest in a multi-unit property, it triggers the new regulatory regime of COPA, with its attendant layers of added complexity and delays in the sale of the building. After the qualified nonprofit is given notice that the seller intends to unload the property on the open market, there is a five-day window for the organization to signal an interest in the property.

We predict that three, four, or five unit buildings will at least initially be likely to be overlooked by qualified nonprofits because it seems that these organizations want to do the greatest amount of good for the most amount of people. The smaller fish of duplexes, triplexes, fourplexes and the like do not serve this charter on its face.

When the seller does their due diligence and engages the qualified nonprofit in good faith and the five-day period expires, sellers and brokers can exhale a sigh of relief and treat the transaction as a traditional sale, but what if the qualified nonprofit decides to arbitrage the ordinance? This is one concern Bornstein Law has that seemed to go unanticipated in the crafting of the law.

Rife for potential abuse?

The quintessential goal of COPA, of course, was to improve the stock of affordable housing in San Francisco by giving qualified nonprofits the first shot at purchasing eligible properties, but this assumes the organization is genuinely interested. 

This large assumption can be a stretch. While sellers are required to act in good faith, there is no corresponding obligation of the nonprofit to do the same. Perhaps it is naive to believe that every qualified nonprofit will avail its newfangled status for the stated objectives of COPA. 

It’s entirely possible that the qualified nonprofit may indicate an interest in every single multi-unit property about to go on the market, so that they can track the progress of each and swoop in at the 11th hour to match or beat an offer from a private buyer, whether or not the property is appealing on the front end. 

With its newfound status as an organization entitled to preferential treatment, the qualifiednonprofit can conceivably cloak itself in the new ordinance only to gain a strategic advantage by getting an unprecedented glimpse into properties that are unlisted, unpublished and unknown to the buying public. We do not expect any bad actors to emerge at first as only the most studious nonprofits with a stellar reputation are chosen by the Mayor’s Office. Indeed, after working firsthand with nonprofits who are sure to make the roster, Bornstein Law can attest to their integrity.

However misplaced today, this may be a concern down the road, as a new throng of nonprofits - some of them perhaps opportunistic - make their way onto the list as the program evolves. 

Whether or not this premonition comes to pass, you can rest assured that COPA will introduce more cumbersome rules to an already convoluted process of selling a multi-unit home, an undertaking best journeyed with Bornstein Law.