It has been said that "nothing travels faster than light, with the possible exception of bad news, which follows its own rules." If this is true, news of the expansion of California's affordability preservation laws should spread through the multifamily housing community faster than, well, the speed of light. Here's why.
California's affordability preservation laws initially emerged in the late '90s in response to the imminent expiration of affordability restrictions agreed to by multifamily developers in past decades. Upon expiration of affordability restrictions, multifamily development owners often could choose to renew or extend assistance (and concurrently extend affordability), or to convert their properties to market rate rental housing. Given California's tight rental market, it was not surprising when many owners chose the latter. Consequently, the preservation statutes were enacted to minimize the impact of displaced tenants and to give local communities an opportunity to preserve the affordability of rental units.
California's existing preservation statutes, however, do not have widespread applicability. In fact, the preservation statutes are currently limited to developments which received certain federal subsidies -- such as tax credits under Section 42 of the Internal Revenue Code, loans under Section 515 of the Housing Act of 1949, and loans under Sections 221(d)(3) and 236 of the National Housing Act. The owners of such "assisted housing developments" are required to take affordability preservation measures prior to the termination of affordability restrictions resulting from a prepayment of subsidized financing, a termination of a subsidy contract, an expiration of rental restrictions, or a sale of a project (see California Government Code Sections 65863.10 and 65863.11). Required preservation measures include (i) providing affected tenants and public entities with a notice of intent to terminate affordability restrictions at twelve and six months prior to the expiration, (ii) providing a "notice of the opportunity to offer to purchase" to certain qualified entities, such as tenant associations and nonprofits, and (iii) giving qualified entities a right of first refusal in connection with a sale of the project.
The bad news for the multifamily housing community is that on July 1 of this year, California's preservation laws will no longer have limited applicability. On that date, California's preservation measures described above are required from not only projects receiving the aforementioned federal subsidies, but also from properties which have received any assistance from a comprehensive list of additional federal, state and local programs. For example, the statutory definition of an "assisted housing development" will expand to include a development financed with tax-exempt bonds. The same holds true for projects assisted by tax increment financing, or for developments that received a density bonus, fee waiver, or variance in exchange for affordability restrictions. California Government Code Sections 65863.10 and 65863.11 more fully outline the widened scope of the preservation measures.
California's expanded preservation statutes will create tolerable administrative burdens for some developments, and intractable obstacles for others. For instance, as the statutes currently read, an owner of an assisted housing development in which there will be an expiration of rental restrictions must provide an opportunity to qualified entities to make purchase offers regardless of whether or not the owner has an intent to sell. The confusion, controversy, and unnecessary cost related to an owner marketing a property for sale without an actual intent to sell is self-evident.
The expanded statutes also provide that an owner of an assisted housing development may not sell, or otherwise dispose of, its development at any time within five years prior to the expiration of rental restrictions or within five years of owner's eligibility for prepayment or termination of assistance, unless the owner provides qualified entities an opportunity to purchase the property. For the first 180 days, an owner can accept offers only from qualified entities. Thereafter, for an additional 180 days, the qualified entities must be given a right to purchase the property on the same terms and conditions of any offer accepted by the owner. The owner of an assisted housing development could, in short, be required to wait one full year before selling the property. The weight of this right of first refusal could certainly capsize otherwise viable deals.
California's expansion of the affordable housing preservation statutes will have myriad effects on the multifamily housing community. The effects will vary depending upon the characteristics of each development, although careful planning and strategy can make the preservation statutes more palatable. However, owners of developments with existing and soon-to-be expiring affordability restrictions are advised to be wary. Spread the news.
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