Can the state of Colorado grant itself a first right of refusal on your property? They just did! This new law allows state and local governments the first right of refusal on most multifamily property and requires notice to the government of any intent to sell prior to listing with huge fines for enforcement. This proposal was defeated last year, but once again came back to life and passed. Is the government taking private property in this new proposal? Can the government require you to grant a right of first refusal before listing your property?
What is in the first right of refusal proposal
- Property owners must provide notice of their intention to sell to local governments before listing
- For multifamily rental properties that are existing affordable housing consisting of not less than five units , a local government has a right of first refusal to match an acceptable offer for the purchase of such property, subject to the local government’s commitment to using the property as long-term affordable housing.
- Once a property is under contract, governments have two weeks to exercise their right of first refusal, then 30 days to make an offer, then another 60 days to actually close
- Basically governments could tie up any multifamily property for 4 months with no penalties, fees, etc… if they do not close
Requires owners of 15+ units to notice the government for right of first offer
Under the proposal, any property of 15+ units and 30 years or older must provide notice to the local government before listing the property to give them an opportunity to buy it:
A seller of such property must provide notice of intent to sell the property to the local government before the seller lists the property for sale. After receipt of the notice, the local government has 7 days to respond by either making an offer to purchase the property and stating an intent to perform due diligence and enter into a contract to purchase the property.
If the local government has requested due diligence information, the seller has 5 days to provide the information to the local government and the local government then has 14 days to make an offer or waive its right of first offer . If a response is not provided in this period, the right of first offer is deemed waived. The seller has 14 days to accept or reject the local government’s offer, and, if the seller does not provide notice, the offer is deemed rejected. If the seller accepts the offer, the parties have 30 days to negotiate and execute a contract for the purchase of the property and then 60 days to close on the transaction, unless both parties agree to other terms.
Note this is a huge change from the original bill that required 3+ units to provide notice.
Huge burden on affordable housing property owners
The bill goes even further by placing huge burdens on affordable housing properties that they must give notice 2 years prior to the expiration of affordability restrictions. Why is this an obligation of a private property owner. This is public information that if the government wants to know and track they have that ability. Furthermore it requires the seller to disclose why they didn’t accept the offer and then allow the government yet another opportunity to purchase the property. It is a huge government overreach as this bill allows local governments to bully property owners into selling their property.
The bill requires the seller of such property to give notice to the local government at least 2 years before the first expiration of an existing affordability restriction on the property and again when the seller takes certain actions as a precursor to selling the property. Upon receiving the notice indicating intent to sell the property or of a potential sale of the property, the local government has 14 calendar days to preserve its right of first refusal and an additional 60 calendar days to make an offer and must agree to close on the property within 120 calendar days of the acceptance of the local government’s offer. If the price, terms, and conditions of an acceptable offer that has been communicated to the local government materially change, the seller must provide notice of the change within 7 days and the local government may exercise or re-exercise its right of first refusal. If the residential seller rejects an offer by the local government, the seller must provide a written explanation of the reasons and invite the local government to make a subsequent offer within 14 days.
If you do not tell the government before listing you are subject to huge fees
Not only is the government now requiring property owners to notify them of sales, but is allowing various organizations the opportunity to sue property owners for violating the right of first refusal that they never granted. Essentially the government is granting itself a right of first refusal and allowing various organizations to have standing in a court that nobody ever paid for.
The bill also requires the attorney general’s office to enforce its provisions and grants the attorney general’s office, the local government, or a mission-driven organization standing to bring a civil action for violations of the right of first refusal or first offer established by the bill. If a court finds that a seller has materially violated the law with respect to the right of first refusal or first offer, respectively, the court must award a statutory penalty of not less than $30,000.
The proposal as it is written will radically alter the real estate landscape
As the bill’s written, qualifying unit owners would have to provide notice to local authorities that they plan to sell their property. Those authorities would then have two weeks to decide whether they planned to exercise their right of first refusal. If they do, they have 45 business days to make an offer and another 60 days after that to close the deal.
For example, is someone is selling a property and gets an offer, the prospective buyer is put into a predicament as they might not want to wait almost 4 months to buy a property as a bank will not lock in rates that long and allot can change.
Furthermore an almost 4 month delay could put the seller in a situation. Let’s assume they are selling because they have another property in mind or need the cash. With a 4 month delay it drastically alters those plans.
The proposed bill might not even be legal
Under this bill the government is granting itself a right without paying anything for it, essentially taking something of value from private property owners. The right taken is the ability to sell a property in a timely fashion. There is considerable value in time that must be compensated. Even if this bill is passed I think it will eventually be defeated by the courts as it is not constitutional for the government to take private property rights without consideration.
Furthermore, I don’t believe it is legal for the government to require property owners to disclose confidential information on the sale of their property without a subpoena from a court. This proposed law quickly goes down a very slippery slope and there is no end in sight.
Unintended consequences of this affordable housing bill
This new bill would make any developer of affordable housing leery to embark on a new build due to the huge delays if they ever wanted to sell for whatever reason. This will ultimately lead to less construction and a targeting of higher end properties. Furthermore, it increases costs/uncertainty for existing long term rental property owners, and they are more likely to exit the business.
Summary
The right of first refusal sound innocuous on the surface, but after digging into the details the impacts will be far reaching. I understand the premise of a first right of refusal, but allowing the government to tie up a property for 4 months is ridiculous. Furthermore, the government is paying no consideration for this right and for all intents and purposes taking private property rights.
Along with tying up a property for 4 months, the government is granting itself a disclosure requirement that property owners must notify local governments of their intention to sell before even listing.
Additionally, this proposal will radically alter multifamily construction as legislative uncertainty will dissuade new construction. The current proposal for the right of first refusal is a bad idea that will have unintended consequences for the market and ultimately lead to less construction of multi family housing along with less long-term rentals.
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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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