In 2023, Colorado enacted HB23-1190, titled the "Affordable Housing Right of First Refusal", which was signed into law by Governor Jared Polis on May 12, 2023, therein granting municipalities a right of first refusal (ROFR) and right of first offer (ROFO) on the sale of multifamily residential properties. This legislation, aimed at addressing affordable housing concerns, empowers local governments to intervene in real estate transactions for multifamily housing, preserving these properties for public purposes such as affordable housing. Below is an explanation of the key components of this law, its legal implications, and considerations for both municipalities and property owners.
1. Overview
The law allows municipalities or designated housing authorities to:
- Right of First Offer (ROFO): Before listing a multifamily property for sale, owners must provide a local government or designated housing authority the opportunity to make the first offer. The property owner must negotiate exclusively with the municipality for a limited period before marketing the property to private buyers.
- Right of First Refusal (ROFR): Even if a property enters negotiations with a private buyer, the municipality retains the right to match any accepted offer, thus stepping into the buyer's position and purchasing the property under the same terms.
This dual mechanism provides a safeguard for municipalities to preserve critical housing resources and ensure that potential private transactions do not diminish affordable housing stock or cause displacement of residents.
2. Scope of the Law
The law applies to multifamily properties, typically defined as buildings containing five or more units, though local ordinances may define eligibility criteria more narrowly. The properties may include both privately owned apartment complexes and properties that have previously received public funding or subsidies, which might already be subject to affordability covenants.
3. Procedural Requirements
For a municipality to exercise its ROFO or ROFR rights, certain procedural steps must be followed:
a. Notice Requirements
The property owner must give written notice to the municipality or designated housing authority indicating an intention to sell. This notice must include relevant details of the property, such as:
- The number of units
- Current tenancy conditions
- An asking price or valuation, where applicable
b. Negotiation Period
Upon receiving the notice, the municipality has a defined period (often ranging from 30 to 60 days) to engage in good-faith negotiations with the owner under the ROFO. If the municipality decides not to purchase the property during this period, the owner is free to market the property publicly.
c. Right to Match Offers
If the property is marketed and a buyer is identified, the municipality must be given the opportunity to match the terms of the private offer. The time frame for the municipality to match the offer varies but is usually between 15 to 30 days. If the municipality fails to do so, the sale can proceed to the private buyer.
4. Exemptions and Limitations
The law provides several exemptions that owners and municipalities must be aware of:
- Small Properties: Properties with fewer than five (5) units are typically exempt.
- Sales to Family Members: Transfers within family units or among related entities may be exempt from the ROFR and ROFO requirements.
- Existing Covenants: Properties already subject to affordability restrictions or other covenants may have overlapping or conflicting rights, which municipalities need to navigate carefully.
Additionally, some municipalities may choose not to enact their own ROFO/ROFR ordinances, while others may impose stricter criteria or expanded applicability depending on local housing needs. Make sure to look at your local municipality's language and confirm all requirements have been met before entering into a purchase agreement or engaging a broker.
5. Legal and Economic Implications
a. For Municipalities
This law equips municipalities with a valuable tool to preserve or expand affordable housing stock. By purchasing multifamily properties before they can enter the broader market, municipalities can repurpose the properties for affordable housing projects, preventing conversion to market-rate or luxury units.
However, municipalities must be prepared to engage in rapid negotiations and have funding or financing structures in place to acquire properties within the strict timeframes set by the law. Failure to match private offers or provide timely responses can result in lost opportunities.
b. For Property Owners
Owners of multifamily properties must now factor in additional compliance steps when planning a sale. The notice and negotiation requirements can delay transactions, especially if municipal negotiations are protracted or if offers need to be matched. This may affect overall sale timelines and could potentially reduce the pool of interested buyers, particularly if municipalities frequently exercise their ROFR rights.
However, owners still retain the ability to sell to private buyers if the municipality declines to purchase or cannot match a competitive offer. In this respect, the law seeks to balance public housing interests with property owners' rights to dispose of their assets.
6. Enforcement and Challenges
Given the complexity of implementing ROFO and ROFR rights, legal disputes may arise regarding:
- Whether proper notice was given to the municipality
- Whether the municipality's match of the private offer was equivalent in terms
- Whether the property sale qualifies for exemptions under the law
In such cases, courts will need to interpret the intent of the legislature and assess whether both parties acted in good faith. Currently, this law is so new and undeveloped that most municipalities have chosen not to capitalize on their ROFO or ROFR rights. Indeed, many cities do not even have the funds necessary to purchase the property, even if they wanted to.
7. Conclusion
Colorado's newly established law granting municipalities ROFO and ROFR on multifamily properties represents a significant development in housing policy. It offers a proactive approach to preserving affordable housing and controlling real estate speculation, particularly in markets where multifamily properties are increasingly converted to high-end housing. Both municipalities and property owners must navigate this law with diligence, ensuring compliance with its procedural requirements while balancing competing interests of public benefit and private property rights. As this law is further tested in practice, municipalities may adjust their policies to maximize its potential, while property owners may seek guidance on mitigating any delays or disruptions to their sales process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.