Four years ago, when her apartment building at 1921 Kalorama Road NW in Washington was up for sale, Natalie Marra, a resident for more than 30 years, was determined to stay in the home she loves.
“It took almost two years of tough negotiating, but there was a core group of seven of us in the tenant association that worked with a lawyer to make sure our rights were protected,” Marra says. “We negotiated the right to live in our apartments under rent control for the rest of our lives. Believe me, none of us ever plan to move now. Why would we? We have great renovated apartments and low rent.”
Marra and her neighbors benefited from the Tenant Opportunity to Purchase Act (TOPA), a provision in the District that provides strong protection for tenants to avoid a forced move. Elderly and disabled renters receive additional protection under local laws to shield them from eviction or excessive rent increases.
“TOPA was created back in the 1970s to protect tenants from displacement when there was a surge of developers converting apartments to condos,” says Steve Schwat, principal at Urban Investment Partners (UIP) in Washington. “The rule gives tenants the right to buy their building or to assign their right to a third party.”
Tenants can decide on their own whether they want to buy their building even before an offer is made, but more commonly, a notice is delivered to all tenants when a developer wants to purchase their building. Nonprofit organizations that support low- and moderate-income tenants and seek to preserve affordable housing are notified by the D.C. government when a TOPA notice is sent to tenants.
“A lot of tenants ignore those notices, so we distribute fliers and hold a tenant meeting so they understand their TOPA rights,” says Anita Ballantyne, program director of the multifamily/tenant services department at Housing Counseling Services in Washington.
Tenants who do nothing in response to a TOPA notice will not necessarily lose their homes, she says.
“Renters don’t have to move in D.C. when their building changes ownership, but their leases are transferred to the new owner,” Ballantyne says.
A total of 218 apartment buildings in the city have changed ownership since January 2010, says William Rich, a senior vice president of Delta Associates, a Washington company that tracks commercial real estate sales. (But the company does not track how many of the 214 buildings were converted to condominiums.) Yearly sales rose to 43 in 2013 from 29 in 2010, then dropped to 35 in 2014. Between January and September this year, 31 apartment buildings were sold, Rich says.
“We’re seeing a lot of rental buildings in D.C. changing hands, but they’re not all converting to condos,” says Matt Dewey, vice president of sales with Urban Pace in Washington. “The market for apartment buildings was dead from 2008 to 2011, but we’ve seen an increasing number of high-dollar sales in recent years because the demand for rentals and condos is there. Developers are also more able to obtain financing now than during the recession.”
Dewey says many developers find it easier financially to keep buildings as apartments, renovate them and charge higher rents rather than convert them to condos.
TOPA rules vary according to the size of a building, although all renters have the right of first refusal under D.C. law. The main difference in the rules is that buildings with five or more units have extra time to negotiate before a sale.
If you receive a notice that your building is up for sale, the first step is to form a tenant association and register it with the D.C. government, says Eric Rome, an attorney with Eisen & Rome in Washington. At least 51 percent of the building’s tenants must sign an agreement to form the association.
Ballantyne says tenants have 45 days after the notice of sale to incorporate their association and register their intent to purchase the building. Tenant associations that are already incorporated have 30 days to register their intention to purchase.
“Registering their intent to purchase the building doesn’t commit the tenants to an actual purchase,” Ballantyne says. “However, it’s an essential step to begin the process of negotiating with the person or company who has made an offer on the building and with other potential purchasers.”
Ballantyne says the tenant association should hire a lawyer or a nonprofit organization as soon as it has submitted its intent to buy. The tenant association has four months from the date of registering an intent to purchase the building to sign a contract for the sale and make an earnest-money deposit of 5 percent or less of the purchase price. She says the funds for the deposit can come from a developer hired by the tenants or from a nonprofit organization.
Legal fees are typically part of the bargaining between the tenant association and the developer.
“We interviewed four or five developers and chose UIP because they seemed the most willing to work with us,” Marra says. “We were as democratic as possible and voted on everything.”
Rome says most tenant associations interview two to five developer candidates and make a choice in four to six months.
“Tenants have the option to ask for any improvements they want, and they can invite in more than one potential buyer,” says UIP’s Schwat. “A lot of the older apartments in D.C. were built before or just after World War II and still have the original single-pane windows, radiator heat and old electric wiring, so they don’t come close to meeting modern fire code and construction standards.”
Marra and her neighbors persuaded UIP to keep their apartment layouts intact rather than have the interiors become open floor plans. She says the tenants also insisted on keeping the public laundry room in addition to the washer-dryers installed in each apartment and even negotiated individually on customizations such as larger showers instead of combination tubs and showers.
Tenants typically hire an attorney or third-party management company to represent their interests, but they can also work directly with a developer, Dewey says.
“If possible, it’s best to be on the same page as your neighbors, because if one person decides to hold out for more money or a better deal, it can ruin the entire deal,” Dewey says.
In some cases, an extensive renovation will require residents to move into other units or out of the building entirely, Rome says. In that case, the developer typically provides relocation assistance.
Rent control laws in the District mean that rents can be raised above the capped percentage only if a landlord petitions for an increase on the basis of capital improvements, financial hardship or a substantial renovation. But Schwat says that because tenants can challenge a landlord’s petition, the result is typically a year or two of litigation.
One way an owner can avoid petitioning the government is through a voluntary agreement signed by 70 percent of the tenants. A typical voluntary agreement allows the new owners to raise the rent on certain units, usually only as the units become vacant, Schwat says.
“A voluntary agreement can add value for tenants during negotiations, particularly if it’s an older building with very low rents,” Rome says. “It can be a bargaining tool for the tenants and makes it easier for a developer to get financing for the purchase and renovations based on future rents.”
Rome says there is a debate about whether voluntary agreements are good or bad for the city, but he says it’s in tenants’ interest to sign one. Ballantyne says the city has lost some affordable housing units because of voluntary agreements, but she says sometimes an agreement can be the right thing for some tenants.
“We provide tenants with counseling, information and support so they can make the best decision for themselves,” Ballantyne says. “The philosophical debate is whether current tenants should be able to take vacant units out of rent control with a voluntary agreement.”
Schwat says that although the law requires that 70 percent of tenants sign a voluntary agreement, UIP requires 75 percent of tenants to sign the agreement before moving forward with a transaction.
“Developers don’t actually take advantage of tenants as long as the tenants exercise their rights properly,” Rome says. “There’s a synchronicity of interests between tenants and developers. Good developers have learned that they can get a better deal with the cooperation of tenants rather than [with] hostility.”
In the past, tenants could negotiate to have rental and condominium units in the same building, but the new rules for financing condos limit the number of rental units allowed in a condominium building, Rome says. Also, he says, the purchase price for a building plus renovation costs often makes a conversion to condominiums too costly. However, Rome says it’s easier to convert smaller buildings, those with 12 to 40 units, to a condominium than a building with 80 to 200 units because most of the tenants need to be willing and able to buy units.
“Most long-term tenants prefer to stay in a low-cost, rent-controlled unit, and many younger, newer residents in a rental prefer to take a cash buyout and move to another rental unless the price point is low enough to make the condo more affordable,” Rome says.
Tenant associations typically have the following options:
•Renovated rentals with rent control: Tenants can end up with nicer apartments for the rent they pay now. “Longer-term renters are likelier to stay through a renovation because their rent-controlled apartments are often significantly less expensive than anything they can find at current market rents,” Schwat says.
•Condo conversion: Renters can become homeowners if they can qualify for loans to buy units in their building. “Some people prefer a buyout because they don’t want to buy a home, but usually, the discount for current tenants on the purchase of a condo will be better than the buyout,” Urban Pace’s Dewey says.
•Tenant buyout: A developer can offer to buy out the lease of tenants and give them cash, which can then be used to subsidize a move to another rental or for a down payment on a home purchase. The size of the buyout depends on a variety of factors, including the size of the unit. The typical amount is $15,000 to $25,000, but sometimes the buyout can go as low as $2,500 or as high as $50,000 or even $100,000, Rome says.
“More recent residents often prefer to take a buyout because they can often find another apartment with a similar rent, and then they don’t have to live through the renovation,” Schwat says.
Ballantyne, the housing counselor, cautions that not all options are available in every situation, so sometimes buyouts are not offered. Even when they are, not all renters will benefit from accepting the offer.
“While being handed a large sum of money seems great, it’s important to think about where you will move and what your new rent will be,” she says. “If you have to pay a higher rent, then how long will that buyout last? Also, people often forget that they have to pay taxes on a buyout, which reduces the amount you actually have to spend.”
“Whether you decide to stay as a renter, buy a condo or take a buyout, you should look at the purchase of your building as a unique opportunity,” Dewey says.
Michele Lerner is a freelance writer.
•Take steps to form a tenant association and register it immediately if you receive a notice that your building is for sale.
•Get legal help, either through a nonprofit organization or pro bono legal-assistance group, or by hiring a lawyer to represent the tenant association’s interests. Typically, the legal fees are part of the negotiation and are paid by the eventual purchaser.
•Negotiate as a group through the tenant association for maximum power. Be as inclusive and democratic as possible during the process.
•Have realistic expectations of how much a developer will pay you if you opt for a buyout.
•Be patient and prepared for extensive tenant association meetings to come to an agreement about the developer, options for tenants and prioritizing renovations.
Maryland’s housing laws vary by county. In Montgomery County, for example, the government and tenant groups have the right of first refusal on a rental property that could be sold to a developer, says Robert Goldman, president of Montgomery Housing Partnershipin Silver Spring.
“If a rental building is expected to be sold and converted to a condo or more expensive rentals and that would cause displacement of the residents, the county can step in and buy it to protect the tenants,” Goldman says. “There are also provisions in place to guarantee a three-year tenancy for some tenants and a lifetime tenancy for seniors to prevent displacement.”
Renters can also form an association and negotiate to buy the building if they can arrange the financing.
“The right of first refusal is important because it gives tenants leverage when negotiating for their right to stay in their homes and to keep them affordable,” Goldman says.
He recommends that renters whose building may be sold immediately get legal help and form a tenant association.
Virginia is one of a handful of states that follow “Dillon’s Rule,” which means that local and county jurisdictions can make their own rules only with the approval of the state’s General Assembly, says Dipti Pidikiti-Smith, managing attorney with Legal Services of Northern Virginia in Fairfax.
Any real estate transactions involving rental homes must abide by the Virginia Residential Landlord and Tenant Act.
“Renters must be notified if their building will be sold, and they have the right to stay in the apartment for 120 days,” Pidikiti-Smith says. “If they haven’t left after 120 days, renters typically have 30 more days before they [can be] evicted if they are on a month-to-month lease. Renters on a year lease will be granted 90 days after the initial 120 days to find another place to live.”
Local jurisdictions in Northern Virginia have enacted some regulations to protect tenants, particularly if they have low income or are elderly or disabled.
“There’s nothing in the law that requires rents to be kept low after a building is sold; there’s no rent control in Northern Virginia,” Pidikiti-Smith says. “It can be very hard for people who have lived in a building for a long time to find a new affordable place to live.”
Pidikiti-Smith recommends that renters who receive a notice about a building’s sale contact their local government office on housing to find out whether they can receive financial assistance for the move or help finding new housing. If a building is being converted to a condominium, the renters must be told the price of their homes, but there is no tenant right of first refusal.
“Virginia laws are far more landlord-friendly than the laws in D.C.,” Pidikiti-Smith says.