Right of First Refusal Bill Could Chill Multifamily Development in Colorado
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Right of First Refusal Bill Could Chill Multifamily Development in Colorado

Brownstein Client Alert, April 11, 2023

The state legislature is currently considering a bill that would give “local governments,”—including every city, town and county in Colorado—a right of first refusal to buy any qualifying multifamily property before it is sold on the private market. Under the bill, if a local government acquires a property through the right of first refusal, it is required to convert it to affordable housing. While the intent is to provide local governments with another tool to provide new affordable housing, the general consensus in the development and real estate investment community is that the bill will do little to create new affordable units. As passed through the House, it would almost certainly chill investment in new multifamily projects, further shrinking the supply of desperately needed new residential units.

House Bill 1190 was introduced by Reps. Andrew Boesenecker (D-Fort Collins) and Emily Sirota (D-Denver) and is being sponsored by Sen. Faith Winter (D-Westminster) in the Senate. The bill has passed out of the House as well as its Senate committee of reference and is waiting to be heard by the entire Senate, which is likely sometime this week. There were several significant amendments adopted by the Senate committee, but whether they stay on the bill remains to be seen.

Under the bill, each local government is granted a right of first refusal to buy any “qualifying property,” meaning any residential or mixed-use multifamily property. Amendments to the bill have limited qualifying properties to those with 15 or more units in urban counties and five or more units in rural counties, and to only those properties which first received a certificate of occupancy more than 30 years before the property is put up for sale. However, the bill may be further amended to increase or decrease the scope of the properties that are subject to the right of first refusal.

The bill describes 10 “triggering events” that give rise to the right of first refusal, including execution of an agreement with a broker, listing of the property for sale, execution of a purchase and sale agreement, and “tak[ing] any other action demonstrating an intent to sell the Qualifying Property.” Upon the occurrence of any triggering event, an owner of a qualifying property must provide notice to the applicable local government that describes the terms upon which the owner is willing to sell (or is currently selling) the qualifying property.

Upon receipt of the notice, the Local Government has 14 days to provide notice to the owner of whether the local government intends to exercise its right of first refusal. If the local government elects to exercise its right of first refusal, it then has 60 days to send the owner an offer. If the owner rejects the offer, it must send 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 bill states that the local government’s offer must be “economically substantially identical” to what the owner described in its initial notice as acceptable terms for the sale. However, 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.

Many real estate sellers would consider these excluded terms to be material to any transaction. For instance, a seller may be willing to accept a lower purchase price from a buyer who is willing to waive diligence. But, under this bill, an owner would be prohibited from considering these terms when accepting or rejecting the local government’s offer.

If the owner accepts the local government’s offer, the parties will negotiate a purchase and sale agreement, though the bill does not provide a time period for this negotiation nor a process for terminating negotiations. Many local governments have requirements to conduct certain levels of diligence on real property or to obtain a certain level of internal approval (such as from city council), prior to even entering into a purchase and sale agreement, which could substantially delay execution of an agreement. Once the seller and local government execute a purchase and sale agreement, the local government must close on the acquisition within 60 days, to the extent practical, and no later than 90 days.

While the bill provides the foregoing time periods for notice, offer and acceptance, and closing, the bill provides that all of these time periods will toll if there is a “reasonable delay not within the control of the local government or its assignee in obtaining financing or a required inspection or survey of the qualifying property.” Unfortunately, this exception swallows the rule and means that local governments have the right to extend the above deadlines for essentially any reason. As any real estate seller knows, nearly every deal encounters delays with due diligence, financing or other factors that could be characterized as outside the buyer’s control. The parties in a private transaction typically then negotiate the terms of an extension, which could include the deposit of additional earnest money or the payment of extension fees in addition to the purchase price. Under the bill, the local government has unilateral authority to extend these deadlines without any compensation to the seller.

The bill also requires the seller to notify the local government “if the terms of an acceptable sale materially change,” in which event the local government may presumably again exercise its right of first refusal. The bill does not describe what constitutes a material change, leaving a seller at risk of unwittingly violating the statute if it doesn’t consider a change to be material, but the local government does. As described above, the terms of many real estate sales change after the parties are under contract to accommodate deadline extensions, purchase price reductions, seller concessions and similar negotiated changes. Each of these changes could constitute a material change that would require a new notice to the local government and give the local government another bite at the apple to exercise its right of first refusal.

While many local governments may not have the surplus funds necessary to close on qualifying properties on a regular basis, the bill allows for local governments to “partner with a nonprofit entity, a private entity, or another governmental entity to co-finance, lease, or manage the qualifying property,” and even to assign their rights of first refusal to the state, any political subdivision of the state, any housing authority or to the Colorado Housing and Finance Authority, which may provide more local governments the flexibility they need to exercise and close on their rights of first refusal.

The bill is still working through the legislative process, and opponents and supporters alike are offering new amendments. Brownstein has been engaged to lobby on the bill and will be tracking it through the process and advising clients along the way. If it passes and Gov. Jared Polis signs the bill into law, it will substantially change how multifamily properties are bought and sold in Colorado. Many multifamily developers and investors have expressed significant concern that their capital partners and lenders will no longer finance multifamily projects in the state. At the very least, it will chill investment in multifamily projects for some time as developers, capital partners and lenders assess how the bill affects sales and its impacts are absorbed by the market—all precisely when the state needs more housing to fill the existing shortage.

This document is intended to provide you with general information regarding HB 1190 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.

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