Investors and Landlords Should Prepare for Legislative Hostilities in Colorado

With “Affordable Housing” moving to the forefront of the political conversation in Colorado, we’re starting to see an alarming uptick in outlandish proposals at both the state and municipal level from opportunistic politicians looking to hijack the debate and push bad policy.

Many of these policies (e.g., rent control) are proven failures while others are very likely to provide a very expensive lessons to taxpayers on why government is simply not suited for making anything more affordable, much less making housing more affordable.

Unfortunately, this means real estate investors, both small and large, are likely to be caught in the crossfire. Before we get to that though, let’s discuss some of the fundamental changes that are coming due to recently passed affordable housing legislation.

Affordable Housing Initiatives

While the themes surrounding affordable housing initiatives aren’t new, the amount of funding being directed towards these initiatives is brand new. Prop 123 (described in detail here) has opened the door for the state, specifically the Department of Local Affairs (DOLA) and the Office of Economic Development and International Trade (OEDIT), to act as gatekeeper to the plunder of a 6 fold increase in funding ($290 million annually) provided by tapping into what was formerly reserved for TABOR refunds.

So, how did this come about? If we go all the way back to the beginning of 2022, we can see how the state formulated a plan to deploy what it called at the time a “once in a generation” amount of funding from the “American Rescue Plan Act” to focus on affordable housing. The federal funding allocated to this was $400 million.

The state then created a task force and new programs within DOLA (outlined here) to decide how these funds would be doled out, then at some point decided that “once in a generation” funding should become an annual affair and set out to pass Prop 123 based largely on these newly established programs, while bolstering funding allocated to homelessness and state backed lending programs (administrated by CHFA). Outside of vague stipulations found in the bill, the two former haven’t established publicly how their funding will be allocated (and likely won’t as no public oversight was written into the bill), however the new programs within DOLA do provide some detail for a small portion (roughly $5.8 million) of their allocation.

At face value, the playbook honestly looks very promising. The overarching goal is to incentivize local governments to promote more density in zoning, expedite the approval process, and subsidize the regulatory and infrastructure costs associated with new development for “mixed-income” and affordable housing projects. That’s a great thing, right!

As much as I want to believe, I just don’t see this being a great thing.

First, these programs will create a very small supply (relative to the actual housing deficit in the state) of heavily regulated, deed-restricted housing that will be difficult to obtain and covered with so much red tape and bureaucratic nonsense that the only people who benefit are the people who figure out how to game the system. We’ve already seen this with Denver’s affordable housing program and pretty much any government mandated affordable housing across the country.

What’s more, the costs that the program’s subsidies are designed to help mitigate will simply increase as a result (honestly, when has subsidizing anything not resulted in that thing becoming more expensive?), making the cost to build any project that isn’t affordable housing even more expensive than it already is. Why not just get to the root of the problem and incentivize municipalities to be more expeditious and cost friendly for ALL housing development? Plus, expediting affordable projects won’t create magical efficiency in local government, rather it will push every other project to the back of the line increasing the time and holding-costs associated with those projects, and again, increasing the cost to build anything that’s not affordable housing. And for what? A stated goal of increasing affordable housing stock by 3% per year…

How does this impact your real estate investments?

The answer to this question is yet to be determined, but we can get a pretty good idea if we dig into the fine print from the already established DOLA programs, as well as recent proposals from both state and local politicians that would fall under the umbrella of “affordable housing.” What stands out here is that increased density will all but be required where it hasn’t previously existed. Meaning, to be eligible for funding, local governments will need to find some area within their borders to modify zoning away from single family to include some sort of multi-family zoning and increase their overall housing stock. I actually agree with this line of thinking (contrary to many, I’m sure), but depending on how or where this gets applied there is likely to be a noticeable impact on property values within and surrounding the affected zoning districts. For some, this could mean an increase in value, for others this could mean a decrease. Regardless, expect heavy influence from local governments as they (and the consultancy firms that they’ve hired) work to sell this new vision to the public. You can find a list of local governments that have already utilized state funds to build their strategies in line with what DOLA has required. To see a sample of the finished product, Wheat Ridge has already released their version to the public. All told, that’s probably not a major concern from a long-term investment standpoint, but if you find yourself with property caught in or around these areas of change it would be prudent to pay very close attention to what’s coming.

Things get much uglier once we move off the development side of things

Keep in mind that everything stated above only falls under the purview of “Local Government Capacity Building” and accounts for $5.8 million of the total $290 million dollars in annual affordable housing funding. The bulk of the funding is allocated to non-descript programs with no public oversight and vague stipulations on how the money is to be utilized (full text here). Based on recently released proposals, we’re starting to see angling from state politicians that could provide some clues on where they’d like the remaining $284.2 million dollars to go.

One of the more alarming proposals thus far (HB23-1115) comes from recently elected state reps Javier Mabrey (Dist. 1 – Denver, Jeffco) and Elizabeth Velasco (Dist. 57 – Eagle, Garfield, Pitkin) which would repeal existing legislation barring local governments from enacting rent control measures. While this has been tried before, and has failed before, the current political climate has created a situation in Colorado that we haven’t seen in years past. Considering various rent control measures were passed as recently as last fall in places like Maine and even Florida, it’s not outside the realm of possibility that some variation of rent control will find its way to Colorado.

With the lack of public oversight surrounding Prop 123 funding, there would be nothing to stop the state from using these programs to create grant conditions designed to pressure local governments into adding broad based rent control measures in the name of, let’s say… “combating homelessness,” for which DOLA will receive $52 million per year.

But wouldn’t that scare off developers who’ve been the main contributor to housing growth with all these new apartment buildings? Nope. As written, this bill would limit rent control measures only to buildings 15 years or older, essentially singling out mom-and-pop landlords who will bear the brunt of the burden. And what about the owners of big apartment buildings that are older than 15 years, won’t that massively devalue their properties? Why, yes. Yes, it would. Seeing as how valuations on these properties rely on income (and the potential for growth), they’d stand to lose value by the millions basically overnight. Enter proposal HB23-1190 introduced by state reps Boesenecker (Dist. 53. – Larimer) and Sirota (Dist. 9 – Arapahoe, Denver). This one is such a doozy that it makes me question the constitutionality of it, but again it shows you the brazen attitude that’s been adopted by our current elected officials.

This bill would require that local governments receive an automatic “right of first refusal” on the sale of any multi-family residential property (5-units or more) that they might want to consider turning into affordable housing for the next 50 years. Yes, you read that right. If you put your property up for sale you must first register the sale with your local government, then you get to enjoy the process as follows:

1. You must allow 14 days for the local government to notify you in writing whether they intend to preserve or waive their right of first refusal

2. If they preserve, they will notify all tenants and hold a public meeting to discuss their interest in purchasing the property and converting it into affordable housing

3. Once an offer is received from a third party buyer, the local government will have 60 days to decide whether they would like to submit an offer that is “economically substantially identical”

   1. (Guessing this is lawyer speak for “if you turn down our offer we’ll sue you and argue what this term actually means in front of a judge until you run out of money or give up. Also, we have way more money than you so good luck”)

4. You must then give the local government an additional 120 days to complete the sale

5. The local government may terminate their contract for any reason and at any time during these 120 days

So now, the local government has met with all your tenants, told them about how much cheaper their rent will be once Uncle Sam buys the joint, but…ope…never mind…no deal. You think the original buyer wants to come back on the same terms with dozens or even hundreds of angry tenants that must continue paying market rent? Oh, it gets even better, they can assign this right of first refusal to “the state, any political subdivision, any housing authority in the state, or the Colorado Housing and Finance Authority” aka CHFA all of whom just so happen to have come under a massive new funding windfall via prop 123. So, to sum this one up. These reps would like to position the state and local governments to become the presiding landlord for as much residential real estate as they can get their hands on. All supported by $290 million per year with vague stipulations to use the funding for grants to local governments, loans to non-profits or equity investments in affordable housing. Combine that with a mass devaluation event via rent control and we have ourselves the fastest growing, most radical public housing project in US History, locked in by deed restriction for 50 years, located anywhere that a building with 5 or more units exists. The implications here are just…wildly concerning…

 In the immortal words of Forest Gump, “That’s all I have to say about that.”

 Leave it to politicians, amirite? I really don’t believe that this was the intention behind Prop 123, but as you can see there exists potential for representatives to use it as a “trojan horse” for some of the most radical and egregious housing policy that Colorado (the U.S. even?) has ever seen.

Investors in Colorado will need to pay very close attention over the coming years to how both the state and local governments approach their use of affordable housing funding. As we’re already seeing with the DOLA capacity building programs (zoning density), the state has every intention of using its muscle to force municipalities into their way of thinking. And municipalities are gleefully going along for the ride. All nonsense aside, I fully believe that real estate is and will remain the strongest investment vehicle available to the average Joe (and I will most certainly continue adding to my portfolio). But the game has changed and will continue to change going forward. If you have the willingness and stamina to change with it, you’ll continue to be successful.

To prepare yourself and your property here a few considerations I’d recommend right away:

1. Update all leases. This includes current tenants, even if month to month.

   1. No more 1 pagers. Nothing downloaded for free from the internet.

   2. Leases should be drafted by an attorney to conform to current laws and protect you from hostile legislation that may come

   3. Tenants will likely be receiving free legal support for all disputes. Spend now to save later.

2. Take care of deferred maintenance

   1. Do this now while you can budget and build costs into rents

   2. Denver took this ability away with licensing inspections, this will likely spread

   3. Reach out to me for a copy of the inspection checklist required by Denver

3. Raise rents

   1. You must get your rents up to market

   2. Sadly, this one will hurt tenants, but modern rent control stays with the property and dictates how much you can raise rent on a percentage basis

   3. If you’re caught off guard below market, you’ll always be below market

   4. Reach out to me for a free rental analysis specific to your property

4. Look on the bright side

   1. Let’s see if your property has potential for improvements or development that will add value

   2. Can you add an ADU? Subdivide? Split units?

   3. Reach out to me for a free consultation to see what might be hiding under the rug

Don’t hesitate to reach out if you have questions, comments or just plain want to chat!