Colorado governments could insert themselves into apartment sales to preserve affordable housing

Colorado could become the first state to require that local governments get a first crack at buying any substantially sized multifamily housing complex that goes up for sale — a proposal that both proponents and opponents said could have major impacts on housing affordability.

House Bill 1190, sponsored by Democratic Reps. Andy Boesenecker of Fort Collins and Emily Sirota of Denver, passed out of the House Transportation, Housing and Local Government Committee on a fully partisan, Democrat-led 9-4 vote Tuesday. But the approval didn’t come before attorneys and developers responded to proponents’ claims of the bill’s creativity by labeling it an unconstitutional taking and an “embarrassing bill for the state of Colorado.”

The measure would create a right of first refusal for local governments to match any offer that the owner of a residential or mixed-use multifamily property receives to purchase it — a right that is employed by some local governments across the U.S. but not by any whole states. As written currently, HB 1190 would apply to any property of at least five units in an urban area or any property of at least three units in a rural or resort area.

Sellers of properties would have to notify local governments of a pending transaction, and cities or counties then would have 14 days to preserve a right of first refusal, an additional 90 days to match the existing offer and an additional 180 days beyond that to close on the property. HB 1190 originally couched all those time periods as “business days,” which could have delayed pending sales by 411 days, but an amendment Tuesday changed it to 284 calendar days.

A “Catastrophic” Proposal or a Needed One?

Still, developers and real-estate brokers called that an absurd amount of time for a local government to potentially stall deals that often transact now in seven days or less. A nine-month delay could nix any real-estate deal based on changes in the market, and imposing such a potential waiting period likely will chill interest in Colorado property sales, which in turn could lead to a reduction in multifamily construction at a time when the state desperately needs to churn out more units to bring down the cost of housing, opponents said.

“This is the worst bill — it’s catastrophic for the real-estate industry — that I have ever reviewed in 15 years,” said Tyler Carlson, the managing principal for Evergreen Devco Inc. who was testifying too for NAIOP, the commercial real estate development association. “This is an embarrassing bill for the state of Colorado … It is the most extreme piece of legislation that has ever been considered by this committee.”

But proponents — including local-government leaders, housing authorities and organizations seeking to expand affordable-housing options — say the proposed move is necessary because local governments can’t compete now in trying to keep lower-cost housing that way. National and international real-estate investment trusts swoop in to buy properties offering below-market leases, sometimes for cash, then fix them up and increase rents by 25% or more, leading to evictions and gentrification, said Jack Regenbogen, deputy executive director of the Colorado Poverty Law Project.

Jody Shadduck-McNally, chairwoman of the Larimer County Board of Commissioners, said that local governments don’t have the funds to compete often with the marketplace, even were HB 1190 to pass, and would be “very selective” about properties on which they use their new right. But with 60% of renters and 20% of homeowners in the home county of Fort Collins spending at least 30% of their income on housing, officials need more options to increase affordable-housing stock, fellow commissioner Kristin Stephens said.

“The need in our community often feels overwhelming, and we need tools like the first right of refusal,” Stephens said. “People in our community should not live in fear. And stable affordable housing should be reality, not a dream.”

Part of a Bigger Discussion

HB 1190 is just one of a wide range of bills that legislators are considering to try to address the state’s affordable-housing crisis, ranging from government-centric tools like optional rent-control laws to more incentive-based solutions like a tax credit for employers who pay into funds to help workers buy houses. Gov. Polis is expected to unveil a centerpiece proposal in the coming weeks that would remove local-government regulations on some types of building, such as transit-oriented development and accessory dwelling units on developed properties.

While legislators debate the merits of those policies, discussion in Tuesday’s hearing on HB 1190 turned quickly to its constitutionality, however.

Melinda Pasquini, a partner at Holland & Hart LLP and immediate past chairwoman of the Colorado Bar Association’s real estate section council, said the bill amounts to an illegal taking by local governments because the massive slowing of potential transactions will knock down their prices. She also questioned whether the program would create an unfunded mandate for local governments, including small towns and counties that would have to hire staff to track and examine potential sales and determine whether to go after properties.

Regenbogen and others, however, argued that the bill does not represent a taking because the local governments would have to pay fair-market value and would not be using authority such as eminent domain. And officials from local-government organizations, such as Colorado Municipal League legislative and policy advocate Meghan MacKillop, said local governments would love to have a tool that allows them to compete on price and then partner with private sellers, as they can’t move quickly enough now to stop the purchases by out-of-state entities.

Despite such statements, committee Democrats showed no signs of bucking the idea, though chairwoman Rep. Meg Froelich, D-Greenwood Village said she’d like the sponsors to consider exempting more small complexes and shortening the timeline.

The one break in party votes came when Rep. Ruby Dickson, D-Greenwood Village, opposed an amendment that would give local governments the option to not renew leases of tenants in the complexes they purchase if those tenants’ incomes exceed a certain threshold. But that amendment still passed, as Boesenecker argued that the goal of the bill is to generate more below-market-rate housing units, since finding market-rate units has rarely been a concern for people who can afford them.

HB 1190 moves next to debate before the full House. Boesenecker said that he’ll continue to discuss potential changes to the bill with opponents but would not entertain “any amendments that will gut the bill,” such as a suggestion he received from some apartment leaders to exempt any properties of 50 units or less.