In the first quarter of 2020, the Minneapolis City Council issued a request for proposals for policy guidelines on TOPA. Currently, considerations are being made to determine whether or not TOPA should be implemented in Minneapolis.
What is TOPA?
The Tenant Opportunity to Purchase Act is also referred to as the Opportunity to Purchase (OTP) by Minneapolis City Council members. The purpose of this act is to give tenants the first opportunity to buy when their landlord chooses to sell the property. This Act has been around for years and is currently implemented in Washington D.C., San Francisco and Berkeley, CA. The goal of TOPA is to create tenant ownership opportunities, prevent involuntary displacement, and preserve housing stability.
Twin Cities LISC Presentation
When MPLS City Council requested proposals, the vendor they chose was Twin Cities LISC, who provided strategy options and know-how information to the city council to help guide them on policy. Twin Cities LISC proposed three options for Minneapolis to consider if they choose to implement TOPA.
Option #1 focused on tenant’s rights and anti-displacement. This option provides residents with the greatest discretion in choosing development options and the future of their community. When a property is going to go up for sale, the tenant could assign or sell their right of refusal to a third party. In this option, the tenant (if property is single-family) and tenant organization (multi-unit properties) both have the right to exercise TOPA.
Option #2 focuses on the same priorities as Option #1, but also includes tenant protections, and rent stabilization. In this option, tenant organizations (multi-unit), tenants (single-unit), and qualified organizations have the right to exercise TOPA. In this option, tenants may assign or sell their right to a third party.
Option #3 focuses on anti-displacement, tenant protections, and rent stabilization. In this option, only qualified organizations that have met criteria for owning and managing affordable rental housing accommodations set by the City may exercise rights. Rights cannot be assigned or sold in this option. This option also minimizes the time needed to complete a transaction, which TOPA would drastically increase.
Timeline for Transactions
TOPA would add more steps to the sale of a rental property. First, when the landlord wants to sell, they must inform tenants that they are intending to sell the property and notify them that they have the first right of refusal. The tenant then has 45 days to submit a statement of interest. After the statement of interest is received, the tenant and owner have 120 days to negotiate. Once negotiations are complete, there is 120 days to secure financing, plus 40 days if there is a lender letter. After that, it will be 15 days to closing. In option #2, in multi-unit properties, the tenants have the opportunity to form an LLC and run the building as a co-op or condo. This would require legal assistance and is supposed to be completed within the initial 45 days. Option #3 would only have 20 days for the registration of tenant interest, and 60 days for negotiations opposed to 120. You can see the detailed timeline below.
Realtors from the Minneapolis Area Association of Realtors were consulted to give feedback on the Twin Cities LISC presentation. The consensus was that OTP has several drawbacks and unintended consequences. One of which being that this Act does not function as the giving of a new right to the tenants, but taking away the right of the sellers. Some agents worry that this Act would interfere with free transfer of real estate, which is fundamental to private property rights.
The timelines are too long. OTP would delay the sale of a property from 31 days (average) to 285 days.
The assignability/salability of the first right of refusal has already proven to be highly susceptible to exploitation. Options #1 and #2 both allowed for tenants to sell or assign their rights to others. This could put the tenant and owner at-risk to be taken advantage of by predators.
Agents also worry that the application of OTP will restrict the supply of affordably priced rental housing by disincentivizing owners from offering rental properties. Because OTP adds more time to the sale and complicates the transfer of the property, landlords may choose not to rent out their property.
OTP is unnecessary for single-family homes. In Minneapolis, 57% of all rental property inventory are single-family homes. The current home sale process easily facilitates and is the most effective means for tenant or non-tenant purchase. Tenants in single-family homes are already protected by state-law, if their dwelling is sold during their lease, the current lease period must be honored. Tenants already generally get notified early in the sale process, which affords them the option to submit an offer to purchase, often on a pre-market basis.
There is no financial advantage when comparing OTP and the current home sales process. Both require the purchaser to be credit qualified when submitting an offer.