Rights and wrongs of first refusal
As I detailed earlier this year in The Production Paradox, the very same local bodies that aggressively resist injection of proposed affordable housing into their community come to see existing affordable housing as an important community asset, so much so that they feel they should have a right to step in and buy any affordable property, leading these interesting developments, as detailed in this story from the Washington Post:
There goes the affordable housing stock
In a move to protect the county’s shrinking stock of affordable housing, the Montgomery County Council has expanded the county’s authority to buy apartments before they are converted into high-end rentals.
Portrait of a council expanding its authority
As I’ve posted before, housing policy innovation is bubbling up from localities:
The law, spearheaded by
“I’d like to get the county much more actively involved,” Leggett said. “We have to be an active player in this.”
Whacking market conversions before they start
The bill, approved last week (link in .pdf), expands the county’s right of first refusal for the purchase of apartments that could be turned into more expensive rentals.
Significantly,
· Any rental housing complex:
· Of four or more units
· Built up to
· Is under contract for sale to a developer,
three parties — the county, a tenant organization and the Housing Opportunities Commission, which develops affordable housing and manages public housing — have the opportunity to match the price and buy the property.
As usual with prohibitions, this one started small and extended its grasp.
The new law extends the right of first refusal to the more than 25,000 multifamily rental units built after
‘Right of first refusal’ (ROFR, pronounced rowf) is a term much bandied about and usually used imprecisely by people who each take it to mean something different. Affordable housing generally recognizes three flavors:
Right of first refusal: a range of definitions
· Right-to-match. Owner puts the property on the market, receives, negotiates, and signs an offer, then gives the government’s designee a window of time to match the offer by ’stepping into the shoes’ of the buyer.
· Right of First Offer (ROFO) or exclusive right to negotiate. Owner has a defined period in which it can entertain offers only from the preservation buyer, no market buyers.
· Eminent domain taking. Government or its designee takes the property, based on a ‘just compensation’ value to be determined judicially (appraisal first, trial if disagreement).
You mean I can exercise my right to match?
Wikipedia’s entry lists literally a dozen different variables that can be encompassed in a particular ROFR,
Pick any flavor of ROFR you like
and concludes with this accurate if discouraging warning:
Many other variations are possible. A fully drafted ROFR addresses all of these types of issues and more, and in the case of valuable or complex transactions is subject to negotiation and review by business transaction attorneys. However, many ROFR are not completely specified. Even the best drafted ROFR agreements suffer a high risk of dispute and litigation because they are anticipating future transactions and contingencies that are unknowable at the time the ROFR originates.
Not only are the contracts tricky, the game theory of rights of first refusal is complex and in some cases counterintuitive. Additionally, ROFR’s created by government for benefit of unnamed preservation groups can be used simply as a procedural obstruction intended to discourage and deflect an owner. Sometimes they are consciously designed not to consummate an equitable preservation transaction but rather to handle down the price through death-of-a-thousand-cuts valuation, adjudication, and hobbling or alternatives. No wonder that most real estate people, me included, generally loathe them in a commercial context and think they inhibit transactions.
Have you read the right of first refusal provision?
As you might expect, I have pretty strong views about what constitutes a good ROFR versus a bad ROFR — but they’ll be the subject for another future post, as we have few details of
This option has been exercised 12 times since 1981, ensuring that more than 700 units remain affordable, housing officials said.
Thomas Cowley, a member of Action in Montgomery, an organization of religious congregations working on housing issues, said it is important to empower the residents of those units. Action in
“Tenants, unfortunately, are sometimes left as mere victims, never having the opportunity to compete in the marketplace and not having a contribution [to] what will be done with their housing,” Cowley said.
Well, they are tenants, not owners.
Council members are considering additional measures, such as expanding the right of first refusal to the county’s remaining mobile home park in Germantown. Council member Valerie Ervin (D-Silver Spring) said she might introduce legislation to prohibit tenant groups from selling their right of first refusal.
See, here’s the problem with targeted rights that give some people judicial standing: once you favor a group, you create an economic asset, and because markets always clear,
From 2003 to 2005, the county lost 11,591 apartments with rents of $999 per month or less, according to the National Housing Trust, as complexes were torn down or converted into condominiums.
NHT does very good work, particularly in data compilation and dissemination; I tend to trust their figures.
You can trust their counts
The county’s expanded right of first refusal will be a useful instrument during negotiations with developers who might not otherwise include affordable units in their projects, said Richard Y. Nelson Jr., director of the county Department of Housing and Community Affairs.
I’ve known Rick for a decade and a half (we’re both senior fellows at the University of Maryland School of Public Policy, Office of Executive Programs) — he’s one of the good guys.
Nelson, who co-chairs the affordable housing task force, said the right of first refusal “gives us another whole bunch of properties that we can be influential on.”
Nelson wants to be influential for affordability
“There is no single answer” to providing housing, he said. “We really need to have a bag of tools.”
In this, Rick is absolutely right; it takes a robust ecosystem to respond to the wide variety of challenges.
Among the other possibilities is building affordable housing on vacant county-owned land.
Residences also could be built on top of libraries or fire stations, or incorporated into commercial areas, Nelson said.
Higher density, because zoning is destiny.
“It’s looking at all the different possibilities you have,” Nelson said. “You’re maximizing the use of land.”
He emphasized the importance of keeping county-owned sites available for families with a wide range of incomes, such as two proposed developments in Olney and Bethesda, that would combine workforce and market-rate housing with units affordable for those earning 65% of the median income. Workforce housing is defined as being affordable to people who make between 80 and 120% of the local median income.
“Because of limited new development, there’s an interest on our part to help preserve the existing stock,” Nelson said.
A task force appointed by Leggett has been studying how to deal with the problem and is to make recommendations in the fall.
Will there still be affordable housing when we grow up?
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