Right of First Refusal Act in Prince George's County, Md., Impacts Multifamily Rental Properties

by Holland & Knight LLP
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  • Prince George's County Council recently passed CB-27-2013 (Conversion of Rental Housing), to regulate the sale of multifamily rental housing under certain circumstances to protect quality low- and moderate-income affordable rental housing in the county.
  • The bulk of the act is laid out under §13-1113, which states that an owner of a multifamily rental facility (which is any building composed of 20 or more rental dwelling units) is required to offer the Department of Housing and Community Development the right to buy the property before selling it to another party (Right of First Refusal).

Summary of the Right of First Refusal

Prince George's County Council recently passed CB-27-2013, known as the Conversion of Rental Housing (the "act"), regulating the sale of multifamily rental housing under certain circumstances through a process of notifications and reviews, as well as penalties for violations of the act. The act became effective on Sept. 23, 2013, and is codified under County Code §13-1110 through §13-1120.

Under §13-1110, the purpose of the legislation is to protect quality low- and moderate-income affordable rental housing in Prince George's County (the "county") by giving the county, through the Department of Housing and Community Development (the "department"), the right to purchase property to preserve the tenancies of certain multifamily housing (Right of First Refusal). The bulk of the act is laid out under §13-1113, which states that an owner of a multifamily rental facility (which is any building composed of 20 or more rental dwelling units (§13-1111(a)(6))) is required to offer the department the right to buy the property before selling it to another party. The seller of the property must give the department written notice of the sale within five days after the seller enters into a contract to sell to a third party. In addition, the seller must provide written notice of the sale to each tenant in the property, post it in public areas of the property and provide a copy of the notice to the director of the department.

Once the department receives written notice of the sale and the offer to buy the property under substantially the same terms and conditions as the pending sale contract between the seller and the third party, the department must notify the seller within seven business days whether it will exercise its right of first refusal or waive its right. If the department chooses to exercise its right of first refusal, the offer must remain open for 60 days. In addition, the seller must give the department information about the property and access to the property for inspection. Under the department's right of first refusal, the seller must sell the property to the department subject to substantially similar terms and conditions in the sale contract between the seller and the third-party buyer. The department has the right to condition its acceptance of the offer on obtaining financing within 180 days from the offer date. Unless the seller agrees to an extension, the sale under the act must be completed within 180 days after the offer date. The department may only accept an offer to purchase the property with written approval from the municipality in which the property is located. If the department chooses to waive its right of first refusal, the seller may complete its sale to the third-party buyer, but must do so under substantially the same terms and conditions offered to the department.

Covenants in Lieu of Right of First Refusal

Under §13-1114, an owner may sell an otherwise qualified multifamily property without providing the right of first refusal if the owner has entered into a written covenant with the department whereby:

  • The buyer would be prohibited from converting1 the property for at least three years after the sale; or
  • At least 20 percent of the units in the property will be reserved as rental units for 15 years for households that do not exceed certain low and moderate income levels; and
  • The covenant is received by the department from the prospective buyer at least 30 days before the sale.2 (§13-1114(a)).

Under this exception to the department's right of first refusal, the department may approve or reject a covenant with the prospective buyer after considering these factors:

  • the physical condition of the property
  • the tenants' ability to afford rent increases
  • the need to preserve quality low- and moderate-income rental housing (§13-1114(b))

Transfer Exemptions from the Right of First Refusal

Under §13-1114, certain transfers are exempted from the right of first refusal without having to seek approval of an agreement from the department, which are transfers:

  • of multifamily rental facilities with less than 20 rental dwelling units
  • under a bona fide mortgage or deed of trust (i.e., foreclosure)
  • to a mortgagee in lieu of foreclosure or other proceedings
  • under court order or judicial sale
  • from one co-tenant to another co-tenant by operation of law
  • under a will or descent or intestate distribution
  • to the state or a local government
  • to a spouse, son or daughter
  • made according to liquidation of a partnership, limited liability company, or corporation
  • into a partnership, limited liability company or corporation wholly-owned by the person(s) contributing (§13-1114(c))

Under §13-1120, the regulations listed above apply only to properties located in areas specifically designated by the County Council as a way of further limiting the scope of the act. Currently, the County Council has not established which areas will be subject to the act under §13-1120.

"Convert and Conversion" Clarification

In §13-1111(a)(1), "convert and conversion" is defined as changing the use of the property from a rental housing property to a condominium or a nonresidential use. However, the act does not mention whether a conversion by the owner would trigger the department's right of first refusal. The only reference to conversion is in §13-1114(a)(1), which gives a potential buyer of the property the chance to receive approval from the department for the sale, without having to give the department the right of first refusal if the buyer agrees to be prohibited from converting the subject property for at least three years after the sale. As the act stands currently, a mere conversion of a rental housing property to a condominium does not appear to trigger the right of first refusal.

Right of First Refusal Interim Advisory Notice

According to the Prince George's County Housing and Community Development's Right of First Refusal Interim Advisory Notice on Dec. 2, 2013, the department will propose areas in the county where the act will apply by July 1, 2014. In addition, the county has decided that prior to the department promulgating regulations by Jan.1, 2014, all owners of multifamily rental facilities must follow the notice rules of the act. Therefore, all owners of multifamily rental facilities must provide written notices of the sale to each tenant of the property and the director of the department within five days after the owner enters into a sale contract with a third-party buyer. In addition, notices of sale must be posted in public areas of the property.

The notification to the director must be in the form of a notarized affidavit that is signed by the owner of the multifamily rental facility within five days of signing a contract of sale for the property and include certification that:

  • the owner of the property has provided each tenant with the notice of sale within five days of signing the contract of sale
  • identifies the method of delivery of the notice of sale
  • affirms that the notice of sale was conspicuously posted in the public areas of the property

After the director of the department receives the affidavit, within seven days, if the director is satisfied with the notification, he or she will issue a certificate of compliance.

The result of the interim advisory notice is that if the owner's property falls under the act and does not qualify under an exception, the owner will have to follow the notice of sale procedures under the act — regardless of where in the county the property is located — until at least July 1, 2014.


Notes

1 "Conversion" is defined as (i) subjecting the property to a condominium regime, (ii) changing the use from multifamily to a non-residential use, (iii) demolishing at least one-third of occupied units in a 12-month period, (iv) displacing tenants from at least one-third of occupied units in a 12-month period by raising rents or preparing to rehabilitate the property, and (v) any other act that ends the use of the property from a multifamily rental facility.

2 The regulations will likely require the covenant to be recorded at closing and that the covenant will be conditioned on the closing actually occurring.  


To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

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