Legislature Gives Local Governments Right of First Refusal on Affordable Housing and Right of First Offer on Certain Market Rate Multifamily Properties
On the final day of the legislative session, the state legislature passed House Bill 24-1175 (the “Bill”). If signed into law by Gov. Jared Polis, the Bill would give “local governments”—including a city, town or county, as applicable—certain purchase rights on a large portion of the state’s privately held multifamily properties. More specifically, the Bill affords local governments both a quasi-right of first refusal on the sale of qualifying affordable properties and a right of first offer on the sale of qualifying market rate properties in each case before the property can be sold on the private market. Proponents touted the Bill as a way to preserve or create affordable housing in the state. The local government’s right on affordable housing is noted as a “quasi” right of first refusal because the way the Bill is structured is not a traditional right of first refusal; instead, it is a right for the local government to negotiate material terms for the purchase of multifamily affordable housing properties.
Opponents worry that it will significantly impact Colorado’s multifamily transactional market, decreasing the buyer pool, property values and the associated tax base. Brownstein extensively lobbied for changes to this Bill in both the House and the Senate and will be tracking it as it makes its way to Gov. Jared Polis’s desk. More specific details regarding the right of first refusal and the right of first offer are provided below.
Right of First Refusal on Affordable Housing:
Qualifying Properties
The right of first refusal applies to any multifamily (including mixed-use) property that:
- has five or more units (excluding mobile home parks and accessory dwelling units); and
- is subject to a restricted use covenant or similar recorded agreement on or after June 1, 2024, which agreement was recorded against the property as a condition of a loan, grant, equity, bond or tax credit provided to support the creation, preservation or rehabilitation of affordable housing.
In sum, the Bill creates a permanent right of first refusal on any qualifying property, even if its affordability restrictions have expired at the time the owner goes to sell the property. If a property is subject to a restricted use covenant that is not tied to funding (e.g., a property complying with Denver’s expanding housing affordability requirements), it is not subject to the right of first refusal.
Process
If a property qualifies for the right of first refusal, the Bill requires the owner to send a notice to the government on three separate occasions: first, two years before the expiration of the property’s final affordability restriction; second, at six months before the expiration of the property’s final affordability restriction; and third, when the owner either:
- materially departs from a representation made in the six months’ notice described above;
- signs a letter of intent, option to sell or buy, or other conditional written agreement with a potential buyer that contains the estimated price, terms and conditions of the proposed sale or transfer, even if subject to change;
- lists the property for sale; or
- conditionally accepts an offer for the sale or transfer of the property.
When the first of the foregoing four events occurs, the owner must send a notice to the local government containing a specific list of information, including a description of the property, the price, terms and conditions of an acceptable offer, and any terms or conditions that, if not met, would be sufficient grounds, in the owner’s discretion, to reject the offer. Note that, if at any point in the sales process, the purchase price decreases by 5% or more or there is a material change in the terms and conditions the owner noted would be sufficient grounds to reject the offer, the owner must restart the right of first refusal process and give the local government another opportunity to negotiate for the purchase of the property. Brownstein anticipates the ambiguity of “material change” and difficulty of providing a complete list of terms that an owner would not accept in a contract will force an owner to reoffer the property to the local government any time there is a material change in the contract terms, which will further delay and complicate transactions.
The local government then has the right to respond and indicate whether it intends to exercise its right of first refusal and, if it does, has 30 days to make a “matched offer.” If the local government fails to timely provide its notice of intent or to make an offer with the required terms, the owner may proceed with the sale of the property to the other buyer (subject to the obligation mentioned above to reoffer it to the local government if there is a material change). Note that, although the Bill requires in some instances that the local government certify the owner is in compliance with the Bill (so that title insurance may be obtained), the Bill does not require such certification if the right is deemed waived due to the local government’s failure to respond. Brownstein anticipates that title companies, third-party buyers and lenders may require express assurance from the local government in those instances that the right of first refusal has been deemed waived, even if not required under the Bill.
The “matched offer” referenced above is an offer for the price and other material terms and conditions (such as earnest money, representations, warranties, property description and performance) at least as favorable to those in a third-party offer the owner received or, if there is no such offer, those comparable to which the owner would sell, and a willing buyer would buy, the property. However, in determining whether an offer is a “matched offer,” the owner cannot consider:
- the time period for closing;
- the type of financing or payment method;
- whether or not the offer is contingent on financing or payment method; or
- whether or not the offer is contingent on an appraisal, inspection or review of title, obtaining title insurance or other customary conditions for the sale of similar property.
Because the Bill prohibits an owner from considering these material terms, the local government’s right under the Bill is not a traditional “right of first refusal” in large respect but, instead, a right to negotiate for the purchase of a property on terms (except for purchase price) that may be materially different from those that the owner has received from a third-party buyer. Additionally, if an owner intends to sell its property subject to existing financing, the Bill arguably allows the local government to reject that term with no obligation to pay any prepayment penalties, which will substantially disrupt any sales involving a loan assumption, further impacting the affordable housing market and impairing investors’ and lenders’ desires to invest in Colorado’s affordable housing market.
After the local government makes its offer, the owner may reject the offer by sending a notice to the local government that describes why it rejected the offer and lays out the terms upon which it would have accepted the offer. The local government then has the right to make a subsequent offer, and the owner can then again respond rejecting that offer with an explanation of the rejection, in which case the process purportedly ends (subject again to the owner’s obligation mentioned above to reoffer if there is a material change). Note, however, that this structure is likely to cause litigation regarding whether an owner has properly rejected the local government’s offer, especially relative to the owner’s obligation in its initial notice (noted above) to tell the local government which provisions would be sufficient for the owner to reject the offer. In other words, if there are any differences between the provisions the owner noted in its initial notice versus in its notice rejecting the local government’s offer, the court will need to decide if the owner is acting in good faith.
Of note, the Bill also gives local governments the right to enact their own right of first refusal laws and requires owners to comply with whichever provisions are “more favorable to the local government.” It is unknown if any local governments will pursue this option and, if so, it will likely leave owners questioning which provisions in the local government’s law versus in the Bill with which it must comply.
Exemptions
Although the Bill exempts a number of sales and transfers from the right of first refusal, there are other key sales and transfers that are not exempt but should be exempt. For example, the Bill does not exempt short sales or transactions involving multiple properties in different local government jurisdictions, which will leave owners having to deal with competing rights of first refusal from local governments.
Right of First Offer on Market Rate Multifamily Properties:
Qualifying Properties
The right of first offer applies to the sale of any multifamily (including mixed-use) property that:
- is not subject to the right of first refusal (i.e., market rate);
- is 30 or more years old at the time the owner lists the property for sale; and
- has between 15 and 100 units (excluding mobile home parks and accessory dwelling units).
Process
If a market rate property qualifies for the right of first offer, the owner must give notice to the local government before entering into a listing agreement with a broker or otherwise listing the property for sale on the multiple listing service. The Bill then sets forth a timeline of various deadlines by when the owner must provide certain information to the local government and then the local government must respond, with the local government deemed to have waived its right if it fails to respond (though, as noted above, instead of being able to rely on the local government’s failure to act, the title companies, lenders and third-party buyers will likely require an express certificate of compliance that is not required by the Bill). Note that the owner has the right to reject the local government’s offer at any point during this process and proceed with a third-party buyer (subject to a condition that, if the other transaction does not close within the greater of the duration of the third-party contract or 12 months of the owner’s rejection of the local government’s offer, the owner must reoffer the property to the local government), making the right of first offer far less intrusive and far more workable than the right of first refusal. If the local government acquires the property, it must preserve or convert the market rate units to affordable housing or mixed-use.
Exemptions
The right of first offer’s list of exemptions is more robust than the right of first refusal, and although it too is missing short sales, it does exempt transactions involving the sale of multiple properties in different jurisdictions, making the right of first offer portion of the Bill far more workable.
Five-Year Sunset
The Bill (including both the right of first refusal and right of first offer) automatically terminates on Dec. 31, 2029, allowing the legislature to evaluate the impacts, good or bad, of this legislation before reenacting it or allowing it to be repealed entirely.
Enforcement
The Bill may be enforced by the Colorado Attorney General’s office, the local government and the local government’s assignee (which is limited to local, regional or state housing authorities). If a court finds that a property owner materially violated the Bill, it must award a penalty of at least $10,000 for the first offense and at least $30,000 for subsequent offenses, but in no event can the total penalty exceed $100,000, although there is a reference to the local government being able to seek both “monetary damages and statutory penalties.” The court may also award attorneys’ fees and costs to the prevailing party.
Next Steps
Gov. Jared Polis vetoed a much broader version of this Bill last year, providing specific direction with his veto letter. Real estate industry advocates will be requesting a veto again, raising the complexity and uncertainty in the Bill, and the continuing concern about the message this sends to the broader national market deterring multifamily investment in Colorado.
Given Brownstein’s extensive involvement in the drafting of amendments to this legislation, the authors are in a unique position to be able to help its clients navigate the Bill’s complexities and avoid hefty fines and clouds on title for failure to do so. Brownstein will continue to monitor as the Bill advances to the governor’s desk and advise clients accordingly. For further clarification or assistance regarding HB24-1175, please reach out to one of the authors.
This document is intended to provide you with general information regarding House Bill 24-1175 in Colorado. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.