As of August 7, 2024, owners of for-rent affordable housing properties in Colorado consisting of five units or more and owners of for-rent market-rate multifamily properties in Colorado consisting of between 15 and 100 units have a new law to comply with when pursuing a sale, HB 24-1175 (the “Act”). Currently, the Act has a sunset date of December 31, 2029.
The goal of the Act is to provide local governments with additional means to preserve and create affordable housing for their communities.
This Alert describes the local governments’ quasi-right of first refusal and quasi-right of first offer under the Act and provides practical tips for property owners, property buyers, and real estate agents when navigating the Act.
Right of First Refusal-Affordable Housing
The Act provides local governments in Colorado with a quasi-right of first refusal (the “ROFR”) to purchase multifamily residential or mixed-use rental properties that consist of five or more units and are subject to a restrictive covenant that imposes affordability restrictions on the property’s units (an “Affordable Property”). The local government has rights to assign its ROFR to a housing authority that serves its jurisdiction or the Colorado Housing and Finance Authority (“CHFA”). In the event of such an assignment the ROFR procedures apply to the assignee. The Act authorizes the local government to waive its ROFR in total.
The Act requires the owner of an Affordable Property to send notices to the local government and CHFA no less than two years before the expiration of the last of the restrictive covenants that imposes affordability restrictions on the property’s units (a “Restrictive Covenant”) and again no less than six months before the expiration of the last Restrictive Covenant. However, the ROFR is not triggered until the first of any of the following events (each a “Trigger Event”) occurs regarding the Affordable Property:
- An owner made a representation in the six-month notice described above that either owner desired to continue to operate the Affordable Property as affordable or desired to retain the property and let the affordability restrictions expire, but now desires to sell it;
- An owner signs a letter of intent or option to sell the property;
- The property is listed for sale; or
- An owner conditionally accepts an offer for sale of the property.
No later than 14 days after the first Trigger Event, the owner of the Affordable Property must provide a notice to the local government and CHFA describing the property and universal price, terms, and conditions of an acceptable offer that the owner has received and desires to accept or has conditionally accepted (or would accept, if received), and any sale terms which, if not met, would result in the owner rejecting an offer (a “ROFR Notice of Sale”). If the owner has entered into a contingent purchase agreement, the notice must also include a copy of the purchase agreement.
Upon receipt of a ROFR Notice of Sale, the local government has 14 days to either preserve or waive its ROFR by providing written notice to the owner. If the local government does not provide the owner with notice of its preservation of its ROFR within such 14-day period, the local government is deemed to have waived its ROFR. If the local government elects to preserve its ROFR, it then has an additional 30 days to make an offer to purchase the Affordable Property. If the local government’s offer is equal to, or better than, an offer the owner desires to accept, has conditionally accepted (or would accept, if made), then the owner must accept the local government’s offer. That said, the owner is prohibited from considering the following aspects of a local government’s offer when reviewing the offer: (1) the time period for closing, (2) the type of financing or payment, (3) whether the offer is contingent on financing or payment (so long as the local government has secured the financing or demonstrates approval of the financing), or (4) whether the offer is contingent on appraisal, title review, title insurance, or other general customary conditions for similar sales. If the local government’s offer is accepted, the local government must close 60 days after its offer is accepted and a purchase agreement is signed (or if the competing offer is an all-cash offer, the same closing period as was offered in the competing offer).
If there is a material change in the terms of sale contained in a ROFR Notice of Sale, including, but not limited to, a reduction in purchase price by five percent or more, then the owner must send a new ROFR Notice of Sale to the local government and CHFA within seven days of such changes and the ROFR process starts over.
If the owner is not required by the Act to accept the local government’s offer, then the owner can reject an offer from a local government but must provide a written explanation of the rejection and include terms and conditions that must be included in a subsequent offer for the owner to potentially accept the offer. Following an initial rejection, the local government may submit one subsequent offer within 14 days of the initial rejection. The owner must accept or reject the subsequent offer within 14 days. If an owner rejects such subsequent offer, the ROFR is terminated.
The Act requires the local government to execute and record a certificate of compliance demonstrating an owner’s compliance with the Act.
The Act provides a number of transactions that are not subject to the ROFR, including, but not limited to, sales to government, related-party sales, foreclosure sales, and mobile home park transactions.
Right of First Offer-Market-Rate
The Act also grants local governments a quasi-right of first offer (the “ROFO”) for multifamily residential or mixed-use for-rent properties consisting of between 15 and 100 market-rate units that have had a certificate of occupancy (or similar approval) for at least 30 years (a “Market‑Rate Property”). The local government has limited rights to assign its ROFO to a housing authority or CHFA. In the event of such an assignment, the ROFO procedures apply to the assignee. The Act authorizes the local government to waive its ROFO in total.
Before an owner of a Market-Rate Property can engage a real estate agent to sell the property or otherwise list the property for sale, the owner must provide notice to the local government of its intent to sell the property (a “ROFO Notice of Sale”). The local government then has seven days from receipt of notice to respond that it either (1) is interested in receiving due diligence information on the property, or (2) waives the ROFO. If the local government requests due diligence materials, the owner then has five days to provide specific due diligence information as required by the Act. Following receipt of such information, the local government then has 14 days to either make an offer to purchase the property or waive the ROFO. If a local government does not respond, the ROFO is deemed waived.
An owner may reject the offer and negotiate alternative terms with a local government. Additionally, if an owner fails to respond to an offer, it is deemed rejected. Similar to the ROFR, a local government must execute and record a certificate of compliance in the real property records to evidence an owner’s compliance with the Act.
If an owner provides a ROFO Notice of Sale, but the sale of the Market-Rate Property does not close within 12 months after the local government’s waiver of its ROFO or the owner’s rejection of the local government’s offer to purchase (or such longer period, as is provided for under a purchase agreement for the Market-Rate Property that the owner has entered into), then the owner must provide another ROFO Notice of Sale, if the Market-Rate Property is still being marketed for sale.
The Act provides a number of transactions that are not subject to the ROFO, including, but not limited to, sales to government, related-party sales, foreclosure sales, portfolio sales in which not all properties are in the same local jurisdiction, and mobile home park transactions.
Enforcement/Penalties
If an owner fails to comply with the Act, Colorado or the local government (or its ROFR or ROFO assignee) may bring a civil lawsuit against the owner. The sole remedies under the Act are limited to monetary damages and statutory penalties against the owner. If a court finds an owner in material violation of the Act, a first offense is subject to a statutory penalty not less than $10,000. Subsequent offenses are subject to statutory penalties not less than $30,000. No statutory penalty for an offense can exceed $100,000. These penalties are in addition to any damages a court may award. The court also has the right to award the prevailing party attorney fees. Buyers do not have liability under the Act.
Considerations for Property Owners, Buyers, and Real Estate Agents
Owners of multifamily projects should determine early in the sale process if a property may be subject to either the ROFR or ROFO. Both the ROFR and ROFO require notice to the government be sent once the property is listed for sale. The ROFO also requires a notice to the government be sent before a real estate agent is engaged for the sale.
Similarly, real estate agents interested in representing owners of properties that trigger the ROFR or ROFO can add value to their clients immediately by making sure their (potential) client sends out the correct notices at the correct times to avoid stiff penalties and potential damages.
With regards to the ROFR, the process is set up in a way that an owner can enter into a contingent purchase agreement with a buyer, subject to the ROFR being exercised. In order to create the contingency in the purchase agreement, specific language needs to be added to the purchase agreement. This language is not included in the standard Colorado Real Estate Commission purchase agreement. From a buyer’s perspective, the contingent nature of the purchase agreement sets the stage for a situation in which the buyer may incur substantial due diligence and financing costs, only to have the purchase agreement terminated because the ROFR has been exercised and the owner is required to sell to the government. To avoid this situation, buyers should consider including cost reimbursement language in the purchase agreement requiring the owner to reimburse the buyer for such costs in such situation. Owners and buyers should note that purchase agreement amendments that materially change the terms of the deal will require the sending of a new ROFR Notice of Sale and the restarting of the ROFR process.
Many municipalities around Colorado, including Denver, have established their own version of the Act. In the event a municipality has a similar law in place, the Act requires owners to comply with the law more beneficial to the local government in the event of a conflict. Owners should check with the applicable municipality as to whether a similar law may apply.
