During the 2023 legislative session, local governments may receive a right of first refusal on multifamily residential property due to bill HB23-1190.

Representative Andrew Boesenecker (D), Representative Emily Sirota (D), and Senator Faith Winter (D) are sponsoring  HB23-1190 during Colorado’s 2023 legislative session, which would create a right of first refusal for local Colorado governments on the sale of residential or mixed-use multifamily property consisting of five or more units in urban counties or three or more units in rural counties and subject to those exceptions set forth in the bill. While HB23-1190 uses the terminology of a “right of first refusal” for local Colorado governments, it would really create a hybrid right of first refusal and right of first offer for local governments.

The City and County of Denver already has a similar, but more limited, right of first refusal option in place on rental housing that has affordability restrictions in place on five or more rental units as a result of having received local financial assistance. Denver, Colo., Rev. Mun. Code ch. 27, art. III, § 27- 47(g) (2022). HB23-1190 has been introduced in an effort to provide long-term affordable housing to those individuals living in Colorado in areas beyond the City and County of Denver who are struggling to afford rising home and rental prices.

If HB23-1190 is passed, private owners of residential or mixed-use multifamily properties will be required to provide notice to local governments when selling or even contemplating a sale of qualifying properties. For example, it is a “triggering event” requiring a property owner to give notice to a local government when the owner “takes any action demonstrating an intent to sell the qualifying property.” Following receipt of the seller’s notice, local governments will have 14 days to preserve their right of first refusal, 60 days to make an offer on the real property, and 120 days to agree to close on the qualifying property by signing a purchase and sale agreement for the purchase of the real property.

The right of first refusal is subject to the local government’s commitment to using the qualifying property as long-term affordable housing for a minimum of 50 years. Additionally, the local government is permitted to assign its right of first refusal regarding a qualifying property to the State of Colorado, any political subdivision, and any housing authority, so long as the assignee assumes the local government’s long-term affordable housing commitment. If local governments or their assignees elect to exercise their right of first refusal, such commitments to use the qualifying property as long-term affordable housing will tie up the use of certain properties for decades to come.

It is clear local governments’ right of first refusal will have far-reaching consequences and will disrupt the multifamily residential market. While local governments are required to make an offer that is economically substantially identical to an acceptable offer in the seller’s eyes, HB23-1190 will likely have a chilling effect on the multifamily residential market, as it eliminates sellers’ flexibility to market and negotiate the sale of real property with any party it desires and to close on a schedule that private parties would otherwise be free to pursue. When evaluating whether a local government’s offer is economically substantially similar, sellers cannot consider the time period for closing; the type of financing or payment method; whether or not the offer is contingent on financing or a payment method; and whether or not the offer is contingent on an appraisal, inspection, review of title, obtaining title insurance, or other customary conditions for the sale of a similar property. Further, if a seller rejects a local government’s offer, the seller is required to provide to the local government an explanation of the rejection and invite the local government to make a subsequent offer. Beyond removing a seller’s ability to evaluate a local government’s offer for reasons beyond the purchase price, there is nothing in HB23-1190 that obligates a local government to close on a qualifying property. As many say in the real estate world, time kills deals, and HB23-1190 would cause sellers and buyers to lose control of deal timelines.

While many courts across the United States have held under the Taking Clause of the Fifth Amendment to the U.S. Constitution that a public right of refusal does not constitute a taking by the government because property owners retain economic value for selling their property, a public right of first refusal certainly discourages potential buyers to bid on a property, as there is less incentive for potential buyers to invest time and money into investigation and negotiation of a qualifying property until the local government relinquishes its right of first refusal.

Parties that violate HB23-1190 will be subject to a statutory penalty equal to the greater of (1) a minimum amount of $50,000 or (2) thirty percent of the purchase or listing price of the qualifying property. Additionally, a court may award damages, reasonable attorney fees, and costs.

For updated status of HB23-1190, visit the Colorado General Assembly website at:  https://leg.colorado.gov/bills/hb23-1190 .

What is written here is for general information only and should not be taken as legal advice. If legal advice is needed, please consult an attorney.