Mayor Adams Vetoes the Community Opportunity to Purchase Act (“COPA”)

New York City Mayor Eric Adams has vetoed the Community Opportunity to Purchase Act (“COPA”), a bill passed by the New York City Council which would require owners of certain multifamily buildings in the City with four or more dwelling units to allow “qualified” non-profit entities or joint ventures a first opportunity to purchase and right of first refusal to purchase the property before a sale to a third party may proceed.

It will now be up to the incoming New York City Council to decide whether to try to override Mayor Adams’ veto. An override will require a two-thirds vote of the Council.

If the veto is overridden and COPA is ultimately enacted, the law will directly impact sellers and purchasers of covered multifamily buildings and will indirectly impact lenders who make mortgage loans secured by such properties. A summary of COPA is set forth below.

I. Key Definitions

“Covered Property”

A property is a Covered Property subject to COPA if the following conditions are met:

1. The property is a Class A multiple dwelling with four or more dwelling units; and
2. Within the first year of COPA going into effect, the property:
   1. Participates in the alternative enforcement program for at least a year;
   2. Is subject to an in rem foreclosure action;
   3. Is subject to an order to correct any underlying condition for at least a year;
   4. Has been denied a certification of no harassment by the Department of Housing Preservation and Development (the “HPD”) within the preceding 12 months due to a finding of harassment, and there has been no cure for such harassment;
   5. Is subject to an affordability restriction that is set to expire within two years; or
   6. Any other criteria HPD establishes.

Beginning one year after the bill’s effective date, COPA’s scope expands. Properties may qualify as a Covered Property based on hazardous or immediately hazardous housing violations, expiring affordability restrictions, or other criteria established by HPD through future rulemaking.

HPD is required to provide annual notice to owners whose properties are deemed a Covered Property and must also provide owners with an opportunity to challenge such determinations.

“Qualified Entity”

The term Qualified Entity means a not-for-profit entity certified by HPD or any joint venture that includes at least one not-for-profit entity certified by HPD and at least one for-profit entity certified by HPD, provided the not-for-profit entity certified by HPD holds a controlling interest, and further provided that the not-for-profit with the controlling interest is not an affiliate, subsidiary, franchise, or in any other way related to the for-profit entity in such joint venture.

To be certified by HPD, not-for-profit entities must generally:

1. Be exempt from federal income tax under Section 501(c)(3) of the United States code;
2. Have the financial capacity to acquire and manage residential real property;
3. Have the ability to work with governmental organizations and community stakeholders;
4. Have the experience owning and managing residential property, including experience with affordable housing;
5. Have demonstrable experience in and a commitment to the preservation of affordable housing; and
6. Other criteria HPD determines relevant to determining whether such entity should have the right of first opportunity to purchase and the right of first refusal.

Similarly, for-profit entities must generally:

1. Have demonstrated the capacity, including but not limited to the legal and financial capacity, to effectively acquire, rehabilitate, and manage residential real property;
2. Have a demonstrated record of managing residential real property with dwelling units that are subject to affordability restrictions, and maintaining the affordability of such units; and
3. Have demonstrable experience in and a commitment to the preservation of affordable housing.

II. Notice of Intent to Sell Requirements

An owner of a Covered Property is required to provide notice to HPD and all entities certified on HPD’s website of such owner’s intent to sell such Covered Property prior to taking any action to sell.

A notice of intent to sell must include the following information:

1. The name and address of each owner of the Covered Property;
2. All addresses and names of the Covered Property;
3. The total number and type of dwelling units subject to a sale;
4. The date by which a statement of interest must be submitted;
5. Information relating to such property’s income and expenses; and
6. Such other information as HPD may require.

Upon receipt of a notice of an owner’s intent to sell a Covered Property, a Qualified Entity has 25 days from the date of such notice to submit a statement of interest in exercising a right of first offer to purchase such Covered Property to HPD and the owner. During such 25-day period, the owner of a Covered Property may not take any action that will result in the sale of such Covered Property to a person other than a Qualified Entity.

If no Qualified Entity timely responds, the owner is free to proceed with a sale in the open market. However, if a statement of interest is submitted, the owner is prohibited from marketing or selling the property during the 25-day period.

An owner may withdraw a notice of intent to sell, subject to the terms of any accepted offer to purchase or executed purchase and sale agreement, and to applicable statutory and common law remedies. In such event, the owner must give notice of withdrawal to HPD and to any Qualified Entity that submitted a statement of interest to purchase such Covered Property. If the owner decides at any time to offer such Covered Property for sale after withdrawing a notice to sell, the owner must provide a notice of intent to sell again.

III. Right of First Offer to Purchase

Once a Qualified Entity submits a statement of interest, the parties must enter into a confidentiality agreement, after which the owner is required to provide extensive due diligence materials, including:

1. The current rent roll for the Covered Property, including, as applicable, legal rents, preferential rents, and rental assistance;
2. The income and expense report for the preceding 12-month period for the Covered Property, including capital improvements, real property taxes, and other municipal charges;
3. The amount of the outstanding mortgage for the Covered Property;
4. The two most recent inspection reports of comprehensive building-wide inspections for the Covered Property conducted by HPD or the department of buildings, if any;
5. Any pending legal actions involving the Covered Property;
6. Any findings of tenant harassment involving the Covered Property during the preceding five years; and
7. Such other information as HPD may require by rule.

The Qualified Entity then has 80 days, subject to extension by HPD, to submit a bona fide offer. During those 80 days, the owner may not pursue other offers. If an offer is made, the owner has a limited 10-day period to accept, reject, or counter. An acceptance or counteroffer triggers an additional 30-day window to enter into a contact of sale.

A bona fide offer to purchase a Covered Property must include the following information:

1. The name and address of the Qualified Entity who made the offer; and
2. The price, terms and conditions of the offer.

If all offers are rejected, or if a Qualified Entity fails to timely close, the owner may sell the property on the open market to a non-qualified purchaser, subject in certain circumstances, to a right of first refusal (discussed in Section IV below).

If a Qualified Entity that has submitted a statement of interest to purchase a Covered Property does not exercise a right of first offer to purchase within the 80-day period, then the opportunity to exercise a right of first offer to purchase such Covered Property shall be deemed waived by such Qualified Entity.

IV. Notice of Offer Subject to Match

An offer subject to match is a bona fide offer to purchase a Covered Property made by a bona fide purchaser other than a Qualified Entity within a year of (a) the final date on which the owner of such Covered Property rejected the bona fide offer to purchase such Covered Property made by a Qualified Entity exercising its right of first offer,  or (b) the expiration of the time for a contract of sale to be executed after an owner accepted or countered a bona fide offer to purchase made by a Qualified Entity exercising its right of first offer.

If the owner of a Covered Property receives an offer subject to match that the owner intends to accept, the owner is required to provide a notice of such offer subject to match to HPD and to the Qualified Entity that submitted the first bona fide offer to purchase such Covered Property, and such Qualified Entity shall have a right of first refusal with respect to such Covered Property. The owner shall provide such notice no more than 15 days from the date the owner receives such offer subject to match.

The notice of offer subject to match must be made available in English and, if available, Spanish, and must include, at a minimum, the following information:

1. The name and address of the bona fide purchaser who made the offer subject to match;
2. The price and terms and conditions of the offer subject to match; and
3. A statement as to whether a purchase contract with a bona fide purchaser exists for the sale of the Covered Property, and if so, a copy of such purchase contract.

V. Right of First Refusal

If an owner of a Covered Property receives an offer it intends to accept from a non-qualified buyer within one year after rejecting a Qualified Entity’s offer, the owner must provide notice of that offer to HPD and the Qualified Entity that previously submitted a bona fide offer. The Qualified Entity then has 15 days to elect to match the offer and must close on identical terms. If the Qualified Entity declines or fails to close, the owner’s obligations are satisfied.

VI. Exclusions

The requirements set forth under COPA do not apply:

1. To any existing agreement regarding the transfer of a Covered Property to a Qualified Entity in effect on the effective date of COPA, except that any renewal, modification, or amendment of such agreement occurring on or after the effective date of COPA is subject to COPA requirements;
2. To an owner or purchaser who refinances a Covered Property in order to maintain ownership of such property;
3. To any transfer of real property effected by (1) a government entity implementing its powers of eminent domain, (2) a judicial proceeding, including a judicially supervised sale, (3) a bankruptcy proceeding, or (4) other operation of law;
4. To any transfer of real property or an economic interest therein made under a deed in lieu of foreclosure or related agreement related to the repayment of a loan and avoidance of foreclosure;
5. To any transfer of real property or an economic interest therein held by any governmental body;
6. To any transfer of real property or an economic interest therein to any governmental body;
7. To any transfer of real property pursuant to subdivision b of Section 11-412.1 of the New York City Administrative Code (addressing certain tax foreclosures) or Section 695 of New York General Municipal Law (addressing certain sales of properties by municipalities);
8. To any transfer of real property or an economic interest therein requiring the consent of a state or local agency or instrumentality;
9. To any transfer of an interest in real property by devise or intestacy, or any other transfer made in connection with a bona fide effort to pass an interest in real property to a person’s devisees or heirs including, but not limited to, such transfers made in connection with a living trust;
10. To any transfer of an interest in real property between or among spouses, domestic partners, siblings including, but not limited to, half-siblings, step-siblings, and adoptive siblings, parents including, but not limited to, step-parents and adoptive parents or guardians and their children, grandparents and their grandchildren, aunts, uncles, nieces, nephews, great-aunts, great-uncles, grand-nieces, grand-nephews, first or second cousins, or any combination thereof;
11. To a transaction the sole purpose of which is to secure a debt or obligation or a transaction entered into solely for the purpose of returning such security;
12. To any transfer of real property or an economic interest therein from a mere agent, dummy, straw man, or conduit to his principal or from the principal to his agent, dummy, straw man, or conduit;
13. To any transfer of real property or an economic interest therein that effects a mere change of identity or form of ownership or organization to the extent the beneficial ownership of such real property or economic interest therein remains the same;
14. To any transfer of an interest in a partnership or limited liability company that owns a covered property as its sole or principal asset, provided that the sole purpose of the transfer is to admit one or more new tax credit investors;
15. To any transfer of an interest in an entity that owns a Covered Property or a transfer of title to a Covered Property, if each of the following conditions regarding low-income tax credits is satisfied:
    1. The credit period, as defined in subsection (f) of Section 42 of the Internal Revenue Code, as amended, for the Covered Property has ended;
    2. Immediately prior to the transfer the Covered Property is subject to:
       1. An extended low-income housing commitment, as that term is defined in Section 42(h)(6)(B) of the Internal Revenue Code; or
       2. A comparable regulatory agreement as a result of a federal, state, or city program with occupancy, rent, and income requirements at least as restrictive as under Section 42 of the Internal Revenue Code;
    3. Before and after the transfer, the owner of the Covered Property is controlled, directly or indirectly, by the same person; and
    4. Immediately following the transfer, the Covered Property is for a term of not less than 15 years and subject to an existing or new extended low-income housing commitment or a comparable regulatory agreement as a result of a federal, state, or city program with occupancy, rent, and income requirements at least as restrictive as under Section 42 of the Internal Revenue Code;
16. To any transfer of an interest in a partnership or limited liability company that owns a Covered Property as its sole or principal asset, provided that the sole purpose of the transfer is to allow for the exit of one or more tax credit investors;
17. To any transfer of real property at the end of the tax credit period associated with such real property to a not-for-profit entity possessing a contractual right to purchase such real property ahead of any other potential purchaser; or
18. To any transfer of an interest in an entity owning real property provided that before and after the transfer, the controlling interest of such entity is held by the same person.

VII. Penalties for Noncompliance

COPA expressly provides Qualified Entities with a private right of action to enforce its provisions. Owners found to have violated COPA may be subject to civil penalties, injunctive relief, and liability for the Qualified Entity’s attorneys’ fees and expert witness costs.

VIII. Potential Impact on Lenders

While COPA’s most significant impact will be on owners of Covered Properties, the law will also have an impact on banks and other lenders that make loans secured by such properties. The sale of a Covered Property under COPA will potentially be subject to extended delays in order for the seller to comply with the law’s notice, right of first offer, and subject to match requirements. These delays may require extended mortgage commitment periods and put lenders at risk of material changes occurring to the property and the borrower during the commitment period, as well as changes in market conditions.

There is also a potential impact on lenders who have a mortgage on a Covered Property and the loan goes into default. Thankfully, COPA has exclusions for transfers by judicially supervised sale, deed in lieu of foreclosure and other agreements related to the repayment of a loan and avoidance of foreclosure, and bankruptcy proceeding. However, COPA does not appear to address a scenario where a lender acquires title to a Covered Property by foreclosure or deed in lieu of foreclosure and then seeks to sell such property. That subsequent sale would appear to be subject to COPA.

IX. Conclusion

COPA reflects a significant shift in policy in New York City’s approach to affordable housing preservation and open market transactions. If the law is ultimately enacted, owners and lenders will need to understand COPA’s requirements and practical consequences, especially the notice obligations, mandatory delays, and potential for significant penalties for noncompliance.

If you have any questions about COPA, please feel free to contact Daniel Bagatta at (516) 357-3849 or via email at dbagatta@cullenllp.com, Christopher H. Palmer at (516) 296-9127 or via email at cpalmer@cullenllp.com, Joseph D. Simon at (516) 357-3710 or via email at jsimon@cullenllp.com, Elizabeth A. Murphy at (516) 296-9154, or via email at emurphy@cullenllp.com, David Curatolo at (516) 357-3773 or via email at dcuratolo@cullenllp.com, or Gabriela Morales at (516) 357-3850 or via email at gmorales@cullenllp.com.