Housing Complex

Ruling on Case That Changed Tenant Rules is Bittersweet

Tenants at the Barclay may be able to buy their building after all. (Carmel)

On April 14, the D.C. Superior Court handed down a decision in a case that has taken seven years to resolve. Tenant associations at two buildings came out on top—but four of them went through all those layers of appeal for nothing.

Here's the backstory: In early 2004, Harold and Maxine Bernstein decided to sell 11 apartment buildings in D.C. to Carmel Partners for $88 million. In order to avoid the hassle of the Tenant Opportunity to Purchase Act—which stipulates that tenant associations must be given the match the price at which the building is offered for sale—the Bernsteins engineered a complicated transaction transferring 99.99 percent of the consolidated properties to Carmel, and 0.01 percent to another entity created for the purpose of the deal. With the help of Richard Luchs, the most creative and aggressive landlord's attorney in the city, the Department of Consumer and Regulatory Affairs signed off on the non-sale. (City Paper's Ryan Grim chronicled the whole sordid process back in 2006).

Tenants at six of the apartment buildings, clustered in Mt. Pleasant and Columbia Heights, sued over the transparently manipulative transaction. Each of the lower courts that heard the cases granted the Bernsteins summary judgment, agreeing with the DCRA that the transfer didn't qualify as a "sale." The tenants appealed. In his novel defense, Luchs used comma placement in the rent control legislation to argue that TOPA only kicked in if the building had been sold with the intention of demolishing it or turning it into housing for sale—and that even if it wasn't, that the legislation itself was an unconstitutional redistribution of wealth from the landlord to the tenants.

The five-judge panel bought none of that, applying commonsense logic to the question of whether the transaction constituted a sale subject to TOPA (of course it did) and whether the whole law was constitutional (of course it is, as much as a graduated income tax, Medicare, or unemployment compensation). That was enough to reverse the lower courts' decisions on two of the cases—the Lanier and the Barclay apartments. But on four of the cases, the court reluctantly ruled that the tenant associations lacked standing to sue, having not demonstrated that they had more than 50 percent of the building's residents as members.

Since the case initially came to light, Councilmember Jim Graham—an avowed foe of Luchs and his firm, Greenstein, DeLorme, and Luchs—helped pass an amendment to the rent control law that will prevent landlords from skirting TOPA by using a straw minority purchaser (which he crowed about again last week). And legislation last year allowed all registered tenant associations standing to sue without requiring a majority of the building's occupants to be members.

But a failing in the legislation becomes apparent in this case: Smallish tenant associations still don't have a claim under TOPA. So even if they're able to sue, they probably won't win, which means that appellants at the Argonne, Richman Towers, Sarbin Towers, and Marconi Park are out of luck—which highlights the importance of having strong tenant associations in the first place. Tenants at the Lanier and the Barclay, by contrast, will probably get the chance to purchase their buildings, at long last—or at least, those tenants who stuck it out.

Comments

  1. #1

    I feel like there's got to be more to the law that just offering it at the same price. After all, if it was the exact same price, why would the seller be so opposed to selling it to the tenants association? Money's money – it doesn't make sense to pay all these lawyers to try to find a loophole and then fight the case in court if they're not actually losing any money by selling to the tenants. I suspect that the law actually gives the tenants some sort of advantage, and that in truth the prices are not equal.

    ...which I suppose is normal (after all, politicians love passing laws protecting current tenants at the expense of their landlords and future tenants – guaranteed votes, and the market rate tenants who get screwed generally have no idea that anything even happened). But we shouldn't keep pretending that the tenants are paying the fair market price.

  2. #2

    No one is pretending; tenants are required to meet the current offer, which must be fair market price. The whole TOPA law turns on fair market price. What is often objected to by the owner is the time that tenants are afforded to meet the fair market price. They are frequently anxious to sell, and sell quickly, and TOPA deals can take almost a year to finalize as tenants ramp up to the ownership.

  3. #3

    @meanteeth: You nailed the reason why building owners don't like to sell to tenant associations when TOPA is invoked: The time it takes for tenant associations to raise the money. If the tenant associations can't raise the money (and they'll drag it out as long as they can), the original buyer is usually long past wanting to purchase the property.

    Also, building owners can keep the sale deposit if the sale does not go through and then sue for specific performance if the sale does not go through when dealing with another building owner. Hard to sue multiple tenants when the association / owners can't come up with the money to buy after they use TOPA procedures to interfere with the original owner's sale.

  4. #4

    Okay, so in truth they're not offering the fair market price – they're offering the net present value of the fair market price in one year's time (or however long it takes, if indeed the sale ever does actually go through), which, given positive interest rates, will always be less than the fair market value. Not to mention any inflation that occurs during the time period.

  5. #5

    What the city should have done is create a fund that can assist tenants in purchasing buildings in cases such as these, through the transfer tax etc.

    Without the right kind of capacity and support mechanisms, every time these kinds of "opportunities" come up, tenants start way behind, and without financing relatively in place, it's very difficult for tenants to compete.

  6. #6

    Richard: A fund to be used for this purpose would have to involve some sort of additional tax collection (unless you're proposing cuts to existing programs), which would inevitably be levied on real estate transactions. Is it really a good idea, though, to add additional burdens to market-rate housing in what is already one of the most expensive markets in the nation? And from a moral point of view, is it fair for the majority of citizens out there who are market-rate renters to be contibuting to a fund that will benefit only the lucky few who have been long-time renters, have the desire to become owners, and happen to live in a building that they have the opportunity to buy?

  7. #7

    You guys are aware that exactly such a fund exists, right?

    http://www.washingtoncitypaper.com/blogs/housingcomplex/2011/04/20/will-tenant-purchases-continue/

    Not sure if that was sarcasm.

  8. #8

    If the city was serious they would guarantee the purchase on behalf of the tenants.

    Then if the tenants didn't go through with it (which is often the case) then the city would be stuck with the purchase.

    Until then, they are really just paying lip service here, and are sticking private landowners with the bill.

  9. #9

    What governmental purpose does TOPA serve? Jim Graham’s statement said “TOPA was created to give tenants the right to purchase their buildings to preserve affordable rental housing throughout the District of Columbia . . .”, but does it really do that in any real way? Does it preserve affordable housing?

    Tenants do not buy the buildings, hardly ever does it happen. They pretty much use the law to extort payments from the owners to go away; that is what the law is about more often than not. Tenant Associations can push the timeframes out for well more than a year, never having any intention to purchase anything -- more often than not they are looking to be paid not to try to buy. The costs that the landlords incur to deal with that get passed through to tenants making housing less affordable, at least arguably.

    CityPaper loves this TOPA law, but does little to actually check the facts on what happens, on who benefits and who suffers due to this law being in place. I am guessing that well more than a hundred TOPA notices have been lawfully given to tenants over the last decade or so and that maybe a handful of buildings have been purchased by tenants, forget about the buildings that beat the requirement on the 95/5 exception. Is the benefit of this law – a few buildings essentially going directly co-op/condo -- worth the cost? TOPA causes landlords to hold apartments empty when they turnover, it pushes up rents by pushing cores of apartments off the market, because owners have the financial incentive not to lease them due to TOPA requirements. The law keeps prices of apartment buildings (and thus DC property taxes paid) lower. A landlord who lacks the will/economic ability to repair and maintain cannot even sell the place to a new owner who may be willing to improve a property, without first incurring Tens of Thousands of Dollars in legal fees, plus tenant pay-outs to get it done -- so it likely encourages properties to remain in neglect (and that neglect can help get tenants out as they move to better buildings so a poor building might be a good thing if trying to sell it – why should that make sense?). Did bad things or good things happen at those properties Bernstein sold via Luchs and his partners? Is this kind of restriction on property something that a government should be doing in the first place? Does any other jurisdiction have such a law, and if so, does it work there?

    Anyway, the bottom line is that the market is not without regulation and it is not in and of itself evil. At the end of the day, I just don’t see why a group of tenants, who will NOT be kicked into the street should the building be sold to a third party and who will not suffer rent increases or diminished rights if that sale happens, as CityPaper might have you believe, should have the right of first refusal to buy the building.

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