There is yet another proposal in the statehouse on affordable housing.  This new bill would allow governments the first right of refusal on basically any multifamily property and require 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 is coming back to life and even worse than the last bill.   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 Colorado first right of refusal proposal

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

Requires owners of 3+ units to notice the government before listing

Und the proposal, any property of 3+ units in rural resort areas or 5+ in metro 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 14 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 within 45 days of the date that the residential seller’s notice was received or waiving its right to purchase the property. The local government’s offer is subject to the property being used or converted for the purpose of providing long-term affordable housing or mixed-income development. If the local government does not provide a response in the 14-day period, the right of first offer is waived and the residential seller can proceed with listing and selling the property to any third-party buyer. The residential seller has 14 days to accept or reject the local government’s offer and, if the offer is accepted, the local government has 30 days to close the transaction.

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 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 120 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 8 months to buy a property as a bank will not lock in rates that long and allot can change.

Furthermore an almost 8 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 8 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 will 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 also 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.

How should  the bill be written:

If the government desires a right of first refusal then they should have to pay for that right to all property owners.  It is not right that they can just grant themselves a property right without compensation.  Furthermore, the first right of refusal should be exactly as the other offer in regards to timing, price, etc… There should not be a 8 month window that the government can tie up any multifamily property.  This power could be greatly misused by the government to bully property owners into only selling properties to them.

Let’s assume that a property owner dies, and their heirs need funds for whatever reason.  The owners list the property and price it for a quick sale.  The government comes in and says they will match the offer, but not close for 8 months.  They could use this to further negotiate with the seller and put the seller in a precarious position due to the time lag.  Furthermore, many buyers will likely get scared away knowing that their closing could be delayed for 8 months.

Summary: Colorado Right of First Refusal

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 8 months  is ridiculous.   Furthermore, the government is paying no consideration for this right and for all intensive purposes taking private property rights.

Along with tying up a property for 8 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 no builder wants to build a property and then sit with it tied up for 8 months before they can actually sell it, furthermore, there is no guarantee that after 8 months the government will even buy the property which will scare away prospective buyers.    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.

 

Additional Reading/Resources

 

 

1. https://leg.colorado.gov/bills/hb24-1175#:~:text=For%20multifamily%20rental%20properties%20that,as%20long%2Dterm%20affordable%20housing
2. https://coloradohardmoney.com/new-colorado-housing-bill-drastically-alters-property-owners-rights-strs/

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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.

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