It has been quite the session with a ton of bills that have huge ramifications for property owners throughout Colorado.  The proposals ranged from increasing taxes on nightly rentals, evictions protections, habitability, right of first refusal and various others.  The overwhelming majority passed and will have huge impacts you need to know about.  What passed and failed in the legislature and where do we go from here?  Note, I am going to be doing a series of blog posts over the next several weeks looking in depth on the biggest changes in this legislative session that will impact property owners the most.

Underlying theme, Californianization of Colorado

Regardless of your political affiliation, it is crystal clear from this legislative session that we are drifting considerably closer to California.  This shift is most profound in the housing proposals that put considerable burdens on property owners to solve the housing crisis that the Colorado front range is experiencing.  Unfortunately regardless of these proposals, we have seen that this strategy has not worked in California as homelessness increases and affordable housing continues to be a top issue.

 

What happened to the housing bills in this Colorado legislative session?

Below is a summary of the top 5 bills I have been watching this session.  I also put links back to blogs with more information on each one.

1. Nightly rentals as commercial property (Failed)

The proposal would tax vacation homes like hotels and motels, which are subject to a higher assessment, on the days they are being rented and deliver the extra revenue to public schools, fire departments, libraries and other districts that rely on property taxes. State Sen. Chris Hansen, a Denver Democrat who sits on the powerful Joint Budget Committee and is leading the push for the legislation, said the idea is to boost revenue for local communities.

“There’s a really strong need for us to stabilize our property tax system and increase our local share,” said Hansen, referring to the rising education funding burden on the state budget. “If this is something we don’t get ahead of, it’s going to spiral out of control for the state”.

Here are some highlights of the bill as it is written today.

• Properties rented nightly rental more than 30 days a year are subject to commercial property tax rates for the days they are rented.
• The commercial property tax rate is 29% while the residential rate is 6.9%

 

2. Habitability bill: (Passed)

The bill would set a seven- or 14-day deadline for landlords to repair certain issues after being notified. Landlords would be required to document all communication with tenants.

The 42-page bill would also require landlords to pay for hotel rooms in certain cases and allow tenants to withhold rent if repairs are not made.  There is a lot in the 42 pages, here are some highlights:

1. Minor items like a plumbing back up even if it is due to the tenant are catastrophic for the property owner: In the case of a violation, the tenant must be awarded statutory damages equal to the tenant’s actual damages and the higher amount of either three times the monthly rent or five thousand dollars, as well as any other damages, attorney fees, and costs that may be owed.
2. The bill does not differentiate between minor and major items and the cause of the items. For example, the bill emphasizes mold from moisture.  If the tenant continues to take a shower and doesn’t properly operate a fan then mold could occur and the owner is liable for damages.
3. 42 pages of minor items: For example, the bill focuses on electrical, if an outlet is overloaded because a tenant plugs in two hairdryers at the same time, the owner is now on the hook for damages as the unit is no longer habitable.

 

3. Just Cause for Eviction (Passed)

The bill prohibits a landlord from evicting a residential tenant unless the landlord has cause for eviction. Cause exists only when:

• A tenant or lessee is guilty of an unlawful detention of real property under certain circumstances described in existing law, as amended by the bill; or
• Conditions exist constituting grounds for a “no-fault eviction”.

On the surface this bill sounds pretty innocuous until you get into the details.  The real driver behind the bill is to try to prevent redevelopment and conversion into short term rentals and Selling of Properties

 

4. HOA collections/fee caps (Passed)

What is in “Real Property owner unit association collections”?

Here are the highlights with details below:

1. Associations can only collect 50% of their legal fees (the members of the association have to eat the other 50%)
2. In order to collect past dues, the association must obtain a personal judgment and go through a civil action (which costs considerably more in legal fees along with time)
3. Bill creates a right of redemption for 6 months if the HOA must foreclose out a lien on a property. Note this is after foreclosure so best case for an HOA to collect funds is well over a year after initiating legal action.

 

5. Right of first refusal (Passed)

   1. Local governments would have the right of first refusal on any development with three or more units in rural-resort settings or five or more units in urban areas that are 20 years or older
   2. Once a property is under contract, governments have two weeks to exercise their right of first refusal, then 60 days to make an offer, then another 120 days to actually close (on smaller properties they must close within 45 days)
   3. Property owners must provide notice of their intention to sell to local governments before listing
   4. Basically governments could tie up any multifamily property for 8 months with no penalties, fees, etc… if they do not close

 

Biggest theme  in Colorado housing bills

Property owners will have huge impacts from the new legislation.  Unfortunately the objective of the new housing legislation is to try to increase the supply of affordable housing, these bills will do just the opposite as property owners are more cautious about who they rent to as the eviction process is more expensive and lengthy.  Furthermore, less supply of affordable housing will be built as a result of the new legislation and current property owners will be hesitant to long-term rent which will further decrease supply.  We have seen this play out throughout California that has similar policies that have clearly failed as homelessness has exploded in most large cities.

Small property owners forced out

It is difficult if not impossible for small property owners to keep up with and comply with all the legislative changes.  I have spoken with many property owners of long term rentals and the common theme is that many are planning on selling their units as it is no longer profitable or worth the hassle to manage them.   All of this legislation will force longer term rentals into more corporate ownership that will focus on the most profitable markets, the middle and higher end markets.  This will further exacerbate the shortage of affordable houses.

A good example is the habitability bill  that puts a nail in the coffin of affordable rentals as minor problems can now be blown up by tenants.  It is no longer profitable to longer term rent these older units due to the huge legislative changes.

 

Summary

The goal of this legislative session was to push through housing objectives as individual bills as opposed to one large bill.  The legislature succeeded with this approach with huge changes to real estate coming down the pipe.

Unfortunately, the Colorado Legislature has missed a basic economics lesson that increasing expenses and huge regulatory burdens will ultimately decrease supply. They have also failed to recognize an even more basic lesson that money does not grow on trees.  Economics is a zero sum and costs will be passed through to the end user.   Furthermore, regulatory uncertainty will further reduce supply as it is difficult to plan for this.  A good example is in NY as they increased regulations, the number of units built has dropped precipitously.  Colorado is heading down the same path.

I don’t see any changes in future sessions other than more emulation of NY and CA where we have seen firsthand how the policies have failed in real life.  If you own property in Colorado, brace for more changes that will make it more difficult and expensive to own long term rental properties.   Furthermore with the new rules it will be even harder for less than perfect tenants to obtain housing which is polar opposite of the intent.

 

One note as the legislature wrapped up, I’m still weeding through other bills that could have large impacts on real estate and will update as I find more information.  If there is anything I missed, send me an email and I’ll do a follow up post.

 

Additional Reading/Resources

 

• https://leg.colorado.gov/bills/hb24-1175#:~:text=For%20multifamily%20rental%20properties%20that,as%20long%2Dterm%20affordable%20housing
• Right of first refusal
• HOA collections/fee caps
• Nightly rentals as commercial property
• Just Cause for Eviction (Passed)
• Habitability bill: (Passed)

 

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Written by Glen Weinberg, Owner Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

Glen resides in Colorado, lends in Colorado, owns property in Colorado, and services loans in Colorado which provides a unique real estate prospective of what is actually happening on the ground both in Denver and throughout Colorado.  My goal from this blog is to provide an honest assessment of what I see happening in Colorado real estate and how it will impact real estate owners, buyers, realtors, mortgage professionals, etc…

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