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Legal Times, December 4, 2006

 

 

From Renter to Owner; Special Report; How one company helps first-time homeowners make it all happen


By Erik Bolog

In Washington, D.C., the streets of Georgetown, the U Street corridor, and Dupont Circle have become known for exclusive boutiques and restaurants, brick town houses, and high-end lofts and condos. Less known -- but equally valuable to an understanding of the District's evolving real estate scene -- are the low- to middle-end condominiums that have been converted from rental units. These work-force housing opportunities keep vital city workers, such as police, fire, and hospital professionals, in the city. They are made possible by a District law that allows tenants the opportunity to purchase their homes.

The District's special approach to tenant rights -- mandatory statutory rights of tenants to purchase the building in which they live when the apartment-building owner contracts to sell it -- has provided a stepping stone to a new business model that assists renters in becoming first-time homeowners. My company, Tenacity Group, a D.C.-based consortium, is an incarnation of this business model, assisting tenant associations across the city in purchasing their buildings through affordable financing and construction services. Tenacity Group incorporates eight separate real estate companies -- from tenant conversion and mortgage services to real estate development and title work -- that help tenant associations purchase the condos. When tenants use our company, they are guaranteed the right to purchase their unit and are typically guaranteed a mortgage. The company then sells the unpurchased units at market price, generating investment returns.

In years past, numerous companies and agencies in the District worked with tenant groups to help them take advantage of the D.C. Code for real property, yet no single company provided a comprehensive approach to tenants that would aid them in retaining their rental housing after conversion. What we discovered is that by offering tenant associations seeking to take advantage of their right to match any offer (called the right of first refusal) all of the various services through one company, we could cut through many of the obstacles these associations faced and speed the process by which tenants could purchase their buildings and become first-time condo owners.

TYPICAL SCENARIO

How does a business such as this work? In a typical situation, tenants will approach a developer and say, "We've received notice that our building is for sale -- and that a contract buyer has offered $20 million. Our landlord has informed us that he is triggering the statute that allows us up to 360 days to match this price if we wish to purchase the building ourselves. We don't have $20 million, nor do we have the know-how to get through the purchase process, so can you assist us?" When Tenacity Group gets such a call, we immediately look at the building and send construction teams around to assess the infrastructure and report back on the cost of future renovation.

These teams check on everything relating to the physical condition of the building. We then negotiate a development agreement that is satisfactory to the tenant association. This agreement includes pricing of building units for an amount that is well below the market value, in some cases 30-50 percent of the market value. That price is based on several factors: the total number of units, the estimated number that can be sold to nontenants, and the overall condition of the building.

Interestingly, despite the slowing of higher-end condominium sales in Washington and other cities, demand for work-force housing in the $150,000- $350,000 price range remains extremely strong. Because we usually guarantee mortgages to all tenants who seek to purchase, we have found that many government workers -- and first responders such as police and firefighters -- are able to afford their apartments. Indeed, in many cases, their monthly mortgage is nearly identical to what they were paying in rent. In the meantime, the units that are being sold to outside purchasers are moving extremely quickly, defying the cooling condo sales picture that has developed for more expensive homes across the region.

Building owners have found that developers and tenant conversion specialists can operate on the behalf of work-force tenants without the building owner being subjected to the requirements of the D.C. Tenant Opportunity to Purchase Act. Because this statute requires building owners to allow tenants the right of first refusal, and because tenants can exercise this right up to one year (precisely, 360 days) after the outside offer is made, many building owners are forced to wait out this period -- and risk losing the sale. The Tenacity Group can enter the picture early, provide tenant-association financing, and relieve the building owner of the one-year waiting period with all of its risks.

Tenants' rights laws have allowed Washington, D.C., to stand out as a niche market for this type of real estate development. Replication is possible in other jurisdictions around the country that have or are considering similar tenant-protection statutes. In fact, although Washington can boast one of the strongest such statutes, Takoma Park, Md., Los Angeles, Chicago, and communities in southern Florida have or are contemplating comparable legislation.

With this range of services, tenant association members can typically purchase their homes, regardless of their credit and financial wherewithal. There is substantial value in these buildings, enough value to support mortgages for tenant purchasers and profit on units that can be offered at market rates. At the same time, landlords should be pleased to give these buyers a vital and valuable seat at the table, a move that benefits the buyer, the seller, and the community as a whole.

Erik Bolog is managing partner of the Tenacity Group, based in Washington, D.C.

Copyright 2006 ALM Properties, Inc. All Rights Reserved.