New affordable housing rule, government has first right of refusal on properties

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.  On the surface, the new proposal sounds innocuous, but the devil is always in the details.  One item in the proposal would radically alter the real estate landscape.

What is in the 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.
2. Once a property is under contract, governments have two weeks to exercise their right of first refusal, then 90 days to make an offer, then another 180 days to actually close
3. Basically governments could tie up any multifamily property for 9.5 months with no penalties, fees, etc… if they do not close

The proposal as it is written could 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 90 business days to make an offer and another 180 after that to close the deal.

Those timelines are delays that will make developers leery of shifts in the economy like interest rates, Marion said.   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 9.5 months to buy a property as a bank will not lock in rates that long and allot can change.

Furthermore an almost 10 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 9.5 month delay it drastically alters those plans.

How should  the bill be written:

The first right of refusal should be exactly as the other offer in regards to timing, price, etc… There should not be a 9.5 month window that the government can tie up any multifamily property.  This power could be greatly misused by the government.

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 9.5 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 9.5 months.

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 9.5 months  is ridiculous. This proposal will radically alter multifamily construction as no builder wants to build a property and then sit with it tied up for 9.5 months before they can actually sell it, furthermore, there is no guarantee that after 9.5 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.

Additional Reading/Resources

1. https://www.denverpost.com/2023/02/09/colorado-affordable-housing-right-of-refusal/

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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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