Rocky Mountain Real Estate Law

Rocky Mountain Real Estate Law

Development, Financing and Other Property News from Colorado's Leading Real Estate Law Firm

New Disclosure Requirements for Certain Real Estate Investors

Posted in Real Estate Development, Real Property, Residential

The New York Times and other news outlets recently reported that the U.S. Treasury Department will require title companies to report the identity of the “true beneficial owner” of any entity that purchases luxury, residential real estate in an all-cash transaction in Miami or New York City.  The reports mention that this test run could become a permanent requirement across the country and that other real estate professionals (such as real estate agents, lawyers, bankers, etc.) may become the subject of future investigations.  The Treasury Department has stated that this move is aimed to combat money laundering by corrupt foreign officials and transnational criminals, and it comes at time when the U.S. government is requiring greater disclosure from foreign real estate investors.  For instance, in late 2014, the Bureau of Economic Analysis (BEA) reinstated its requirement that certain foreign investors file a disclosure form (known as a BE-13 form) disclosing the nature and extent of their investments in U.S. real estate or other U.S. business enterprises.   It will be interesting to see whether these new Treasury Department reporting requirements will spread to other real estate investments or whether agencies like the BEA will expand the scope of the information that they collect.

Denver Apartment Rents Still Rising, but Move-In Incentives Soar

Posted in Multi-Unit Housing, Residential, Uncategorized

It’s no secret that rental rates in Denver are sky-high, and the multi-family apartment industry is booming. According to one study, 7,749 multi-family residential units have come online in the downtown area alone since the start of 2010, and an additional 5,039 units are currently under construction.

But some reports indicate that the red-hot rental market might be showing some initial signs of a cool down. Given the seasonal swings inherent to the apartment market, a one-percent decline in rental rates in the month of December isn’t exactly earth-shattering, but another study found that the rate of increase for apartment rents in Denver dropped 2.5 percent from 2014 to 2015.

Perhaps more telling than rental rates are the discounts and other incentives that new apartment buildings are handing out with new rental agreements. Such incentives typically include some combination of between two and six weeks of free rent, discounts or gifts of up to $1,000, and free parking. These incentives are considerably more generous than in years past—as a former resident of one of the buildings listed in the survey, I can confirm that I did not receive the choice of a iRobot vacuum cleaner or a bundle of appliances (including a KitchenAid mixer, a Keurig coffee maker and a margarita mixer) that one building is offering to new residents as part of its move-in package!

It remains to be seen whether these trends are real indicators of change or merely seasonal blips.

Cert Petition Asks U.S. Supreme Court to Reconsider Williamson County Doctrine

Posted in Appellate, Eminent Domain, Land Use, Litigation, Real Property, Zoning

Last month, a petition for writ of certiorari was filed with the U.S. Supreme Court, asking the Court to revisit a 30-year-old doctrine that makes it difficult for private landowners to bring inverse condemnation and regulatory takings claims.  Under current doctrine, to obtain compensation for government actions that take property or deprive property of value, a plaintiff must first exhaust state administrative and judicial remedies before filing a claim in federal court.  In effect, this doctrine has prevented property owners from seeking compensation from local governments that take property or impair property values.  If the Court grants the petition in Arrigoni Enterprises, LLC v. Town of Durham, private landowners could get another chance to bring their claims for compensation in the federal courts.

The Fifth Amendment to the U.S. Constitution requires the government to compensate landowners whenever it takes private property for public purposes.  The compensation requirement extends to direct appropriations of property—say, condemnation actions for right-of-way or park purposes—and also to government actions that, in their effect, deprive private landowners of property rights or value.  The latter form of takings is called “inverse condemnation,” or alternatively, a “regulatory taking.”  Inverse condemnation occurs when the government appropriates property without compensating the landowner.  A regulatory taking occurs when the government regulates the use and development of property, perhaps through zoning laws, in a manner that deprives property of all economic value—for example, restricting property solely for open space purposes—or so limits the property’s value so as to interfere with the investment-backed expectations of the owner.  A third, related category of takings occurs when the government conditions the issuance of a permit on a landowner’s giving up of property, money, or services.

Arrigoni Enterprises asks the Court reconsider the doctrine established in Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City.  In Williamson County, the Supreme Court denied a landowner’s claim for compensation following a denial of a development permit by a local planning commission, finding the case unripe.  The ripeness doctrine requires a case to have reached a point in the applicable controversy, where an injury has actually occurred, such that the court can and should decide on the matter.  In Williamson County, the Supreme Court found the case unripe because the landowner had not sought compensation through the procedures provided by the state, i.e., the landowner did not sue the planning commission in state court to seek compensation.

Since Williamson County, landowners cannot seek compensation in federal court for an inverse condemnation or regulatory taking until they exhaust all state judicial remedies to obtain compensation.  This doctrine creates a significant hurdle.  In Colorado, for example, a landowner who believes that his or her property has been deprived of value by local government action would, under Williamson County, be required to pursue relief from the local government, perhaps through a rezoning or variance, and if unsuccessful there, bring an action in state district court.  If that fails, the landowner would then be required to appeal the district court’s decision to the Colorado Court of Appeals.  Then, if unsuccessful at the Court of Appeals, the landowner could bring a claim in federal district court only after being denied either compensation or certiorari by the Colorado Supreme Court.  And even then, some federal courts find that rehearings of state court decisions on such cases are barred by the doctrine of res judicata. In essence, Williamson County requires a landowner to proceed through an uncertain and potentially years-long legal battle before a claim can be filed in federal court to vindicate the right to compensation provided by the Federal Constitution.

Arrigoni Enterprises is emblematic of these cases.  In 2005, Arrigoni Enterprises, a small, family-owned company that owns a 9-acre parcel of land in Durham, Connecticut, sought to use its property for extraction and industrial purposes.  After being denied a rezoning and a subsequent denial of a special use permit to conduct the foregoing activities, Arrigoni filed an appeal of the denials in Connecticut Superior Court.  In February 2007, the Superior Court upheld the permit denials.  Arrigoni sought, but was denied, certification of the case before the Connecticut Court of Appeals.  Arrigoni went back to the town in 2007 to obtain a variance for the use of its property, and was again denied.  Subsequently, Arrigoni filed suit in federal district court on several grounds, including Arrigoni’s claim that it been denied just compensation for a taking of its property.  The district court dismissed Arrigoni’s takings claim, finding that Arrigoni had not pursued compensation in state court apart from its appeal of the 2005 permit denial.  Arrigoni then appealed the district court’s decision, and the Second Circuit Court of Appeals affirmed in October 2015.  The cert petition followed.

As the circuitous path of Arrigoni Enterprises demonstrates, the length and difficulty of establishing a ripe claim for relief acts bars many landowners who might have a claim for compensation from seeking judicial relief.  As of this writing, the Supreme Court has not decided on whether to grant the petition for certiorari.  Several public interest organizations have provided amicus curiae briefs in the case, and many conservative, pro-property rights organizations are encouraging the Court to take up the matter in the hope that the Court’s conservative majority might be willing to relax the Williamson County prudential barriers.  If the Court were to overturn Williamson County, it would provide a likely boon to private landowners while creating potentially significant liability for local governments that impose permitting conditions or highly-restrictive zoning regulations.

More information on Arrigoni Enterprises can be found here.

Denver Passes Condominium Construction Defect Ordinance

Posted in Commercial Real Estate, HOA & CCIOA, Housing, Legislation, Multi-Unit Housing, Real Estate Development, Real Property, Residential

On Monday night (November 23, 2015), Denver City Council voted to approve the construction defect ordinance proposed by Mayor Hancock. The ordinance, which we wrote about when it was proposed last month, is intended to jump start condominium construction in Denver, which has stagnated under Colorado’s current construction defect law. The Colorado legislature tried and failed in the 2013, 2014 and 2015 sessions to pass legislative reform, and with the passage of this ordinance, Denver joins several other Colorado municipalities no longer waiting for the legislature to take action to spur condominium construction.

Voters Approve New Taxes on Short-Term Rentals

Posted in Land Use, Leasing, Residential, Tax

Two major cities on the front range recently enacted new regulations – and city taxes – for short-term rentals.  As covered in my earlier post, municipalities throughout the country have been considering how to regulate short-term rentals, such as those available on AirBnb, VRBO and other popular vacation rental websites.

Boulder’s new regulations, which were conditioned upon voter approval of the new 7.5 percent lodging tax that will apply to such short-term rentals, allow only natural persons who own their property to rent their “principal place of residence” upon obtaining a license from the city.  The new regulations do not apply to individuals who lease their homes, absentee owners, homes included in the city’s permanently affordable housing program, or any entity that owns a residence.  In addition, an owner looking to rent a residence on a short-term basis must provide the city with the contact information for an individual who can respond in person within 60 minutes of receiving notice of a problem at the residence.  Boulder’s regulations also impose limitations on the number of days per year that accessory dwelling units, which must pass an inspection, may be rented and the type and number of guests that may rent certain premises based on the location of the residence.

Aurora voters also approved an 8 percent lodging tax on short-term rentals earlier this month.  Although specific details of the new regulation are still somewhat unclear, the city has already begun issuing licenses for short-term rentals within its boundaries, at $38 per license.  Licenses must be renewed biannually for $25.  According to a city representative, the short-term rental uses, once licensed, will be treated as permitted home occupations under the city’s code.

Mayor Hancock’s Construction Defect Ordinance Passes Important Hurdle

Posted in Commercial Real Estate, HOA & CCIOA, Housing, Legislation, Multi-Unit Housing, Real Estate Development, Real Property, Residential

On November 16, 2015, the Denver City Council unanimously approved the first reading of Mayor Hancock’s construction defect ordinance that we wrote about last month. The vote came after about two hours of debate and comment from both sides of the issue. The final reading and vote is set for November 23, 2015. Once the ordinance is in force, developers and prospective purchasers alike will be looking at the initial condominium developments – like the recently announced East West Partners, Amstar Advisors project that will bring 342 condos to the Union Station Development. This development represents the first downtown condo development since 2009.

Affirmatively Furthering Fair Housing: HUD Promulgates Final Rule

Posted in Legislation, Multi-Unit Housing, Real Estate Development, Zoning

Only a few weeks after the U.S. Supreme Court announced its decision upholding disparate impact as basis for liability under the Fair Housing Act (the Act; for further discussion of the case, see our blog posts here and here), the U.S. Department of Housing and Urban Development (HUD) promulgated a new rule implementing the Act.  The rule aims to give more teeth to the duty imposed by the Act to affirmatively further fair housing using federal funds.  The new rule requires recipients of some HUD funds to analyze extensive amounts of data—provided by HUD and supplemented by the community participation process—to identify patterns of discrimination and segregation, and to draft a template-based assessment of the results.  Whereas the previous regulatory framework did not require that the assessment go much further than the desk of the person who prepared it, the new rule requires HUD program participants to submit their assessments to HUD for review.

The new rule responds to concerns, highlighted particularly in litigation related to the use of HUD funding in Westchester County, New York, that the previous regulatory framework did not effectively further the Act’s objective of addressing barriers to fair housing.  Under the previous regulations, recipients of HUD funds certified that they would affirmatively further fair housing.  However, that phrase was not defined.  Furthermore, the analysis of impediments (AI) to fair housing that some program participants were required to prepare was not submitted to HUD for review or comment.  A 2010 report published by the U.S. Government Accountability Office concluded that as a result of HUD’s limited guidance and oversight, a vast majority of AIs were outdated or completed in a cursory manner.

The new rule emphasizes a more data-driven assessment and planning process and requires more systematic HUD oversight.  Specific changes under the new rule are as follows:

  • To clarify the duty of program participants and the significance of the certification required under the rule, the new rule provides a definition of “affirmatively furthering fair housing.”
  • An Assessment of Fair Housing (AFH) is required. Jurisdictions and public housing agencies (PHAs) that administer Community Development Block Grants (CDBG), Emergency Solutions Grants (ESG), HOME Investment Partnerships (HOME), Housing Opportunities for People With Aids (HOPWA) and PHAs receiving Section 8 or 9 funds will conduct and submit an AFH, replacing the AI. At a minimum, the AFH analyzes fair housing data, assesses fair housing issues and contributing factors and identifies fair housing priorities and goals.
  • Templates, referred to as “Assessment Tools” in the new rule, will be provided by HUD for completing AFHs. HUD will provide multiple templates, each one tailored to the roles and responsibilities of the various program participants.
  • AFHs will be subject to HUD’s review and acceptance.  An AFH will be deemed accepted after 60 days after HUD’s receipt of the AFH unless HUD notifies the program participant otherwise.
  • HUD will provide data to facilitate completion of the Assessment Tool. Program participants will supplement the HUD-provided data with local data and local knowledge, including information obtained from the community participation process.
  • Joint or regional AFHs are permitted. Recognizing that some fair housing goals may be more effectively addressed from a broader perspective, the new rule facilitates collaboration between certain program participants by permitting those participants to develop and submit a single joint or regional AFH.
  • Phased implementation allows extra time for some participants. The first AFHs are due to HUD 270 days after the applicable program year that begins on or after January 1, 2017, but a phased-in approach provides additional time for certain program participants, such as those receiving a CDBG grant of $500,000 or less and qualified PHAs, to submit their first AFH.
  • Until program participants are required to submit an AFH under the final rule, the program participant is required to conduct an analysis of impediments in accordance with prior HUD regulations.

The practical impact of the new rule is significant, since more data and analysis are required than under the previous rule.  Some required analysis, such as the statistical analysis of local data, may be beyond the capacity of a local government, requiring those entities to engage third party consultants to a greater extent than before.  HUD estimates that the increased compliance costs for program participants resulting from the new rule will total $25 million annually in the aggregate; however, HUD notes that the net change in burden on specific program participants will depend on the extent to which they complied with previous planning requirements.

In addition to increased compliance costs, program participants may also face greater liability exposure under the new rule  By defining what it means to affirmatively further fair housing, HUD and relators in qui tam actions have a clearer basis to challenge certifications made under the new rule.  Furthermore, the new rule’s requirement to submit AFHs to HUD for review will likely result in increased scrutiny by HUD of existing policies and practices.  As a result, local governments may need to amend their zoning and other regulations in order to continue receiving federal funds.

The new rule may have unintended consequences with respect to the policy goals of the Act and the rule itself, as it could discourage some local governments from participating in HUD programs due to the increased analytical requirements and costs imposed in connection with receipt of HUD funds, and the increased federal sensitivity over matters of local planning and zoning.  Although it is too soon to tell whether the changes set forth in the new rule will result in greater achievement of the Act’s fair housing objectives, it is clear that the rule is controversial—supporters, such as HUD Secretary Julian Castro, hope that the new rule will “expand access to opportunity,” while critics argue that the rule is an  “assault on freedom” because it puts zoning and housing policies (matters of local concern) more squarely in the hands of the federal government.  We will likely hear more about the rule as a talking point in the presidential campaign.

Brian Connolly, a land use attorney with Otten Johnson, also contributed to this post.

Is Renting Your Home on Airbnb Illegal? Maybe.

Posted in Housing, Land Use, Leasing, Legislation, Multi-Unit Housing, Real Property, Residential, Tax, Uncategorized, Zoning
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Recent growth in the short-term rental market has caused some cities to consider new regulations.

One of the biggest players in what’s been dubbed the “sharing economy” is Airbnb, a peer-to-peer lodging platform that makes it easy for homeowners or renters to open up their homes to strangers in the form of short-term lodging. For many of the families renting their homes or rooms in their homes on Airbnb and other sites, the income from a short-term rental can provide a financial cushion, and may be enough to make ends meet. One study commissioned by Airbnb found that a typical single-property host makes an average of $7,530 for renting an average of 66 days per year.

Since its launch in 2008, over 50 million people around the world have booked stays through Airbnb. The summer of 2015 alone accounted for over 17 million bookings. Today, Airbnb offers more rooms than mega hotel groups like Hilton, InterContinental and Marriott, and makes up between 10 and 20 percent of hotel room supply in New York, London and Paris. Sites such as VRBO, HomeAway, onefinestay and FlipKey offer similar services and also contribute to the growing short-term rental market, which represents approximately 8 percent of the total U.S. travel market.

Despite their popularity, short-term rentals are illegal in many major cities. In Denver, for example, local regulations ban short-term rentals of less than 30 consecutive days altogether. Though many of these regulations are enforced only haphazardly at best, fines may be steep – violations of New York City’s regulations can result in charges of over $1,000 for the first offense.

Short-term rentals may also be subject to lodging taxes at rates of up to 15 percent, but it’s not always clear if and when the lodging tax applies, particularly to relatively inexperienced operators. According to one study, unlicensed short-term rentals cost the state of Montana almost $4 million a year in uncollected taxes. In its early years, Airbnb simply argued that lodging taxes did not apply to its services, but in recent years has started collecting lodging taxes on transactions in cities like Portland, San Francisco, Amsterdam and Chicago.

In response to the ambiguity surrounding the legality of short-term rentals, Austin, San Francisco, Portland and Seattle have enacted legislation aimed at providing clear regulatory standards for short-term rentals and capturing unpaid lodging taxes. San Francisco will even create a new city office dedicated to enforcing its short-term rental laws. Several other markets have enacted similar laws, and Denver, Boulder, Santa Monica and Santa Fe are among the cities currently considering how to approach the issue. Typical regulations address any number of issues related to short-term rentals, including licensing, permitting and notification requirements, spacing and intensity standards, types of permitted short-term rentals (e.g., entire home compared to single-room rentals), residency requirements, inspection and safety standards, and of course, taxes.

Vacation and resort towns in which a significant portion of the housing market consists of second homes have particularly high potential for rental income. In Colorado, numerous mountain towns have enacted short-term rental regulations. For example, Aspen’s regulations enacted in 2012 prohibit single-room rentals, but permit other rentals throughout the town with no limit on the number of rental properties. These regulations require that the property be properly licensed and obtain a permit from the town, and also require designation of a “local representative” if the homeowner resides elsewhere. Durango similarly requires a city-issued permit, but issues only a limited number of permits in certain zones within the city. Durango has also implemented spacing requirements that prohibit high concentrations of short-term rentals in small areas.

Given the diversity of local regulations addressing short-term rentals, anyone interested in joining the millions offering their homes as short-term lodging should review any applicable local regulations, including zoning and tax laws, to determine whether and to what extent the home municipality permits and regulates short-term rentals. In addition to local laws, potential hosts should also review privately-imposed covenants, conditions and restrictions and lease agreements, which may provide additional restrictions or outright bans on short-term rentals.

Real Estate Transactions Are Vulnerable To Wire Scams

Posted in Commercial Real Estate, Real Estate Development, Real Estate Finance

Last month, I got a call from a title insurance company closer. Our client and the other parties to a real estate transaction had just instructed the title company to go ahead with the recording of documents and disbursement of funds in accordance with the settlement statement. We had sent an email to the closer with wire instructions for the funds—and the closer was calling to ask me to confirm those wire instructions, including the ABA routing number and the account number, over the phone.

The closer explained that her company had instituted a policy of confirming all wire instructions by phone (using a phone number obtained from a source other than the wire instructions themselves). The title company was reacting to reports of scammers hacking into emails, replacing the original wire instructions with fraudulent instructions, and sending the hacked emails on to the intended recipient—resulting, of course, in funds being wired to the scammers and never getting to where they were supposed to go.

A few days later, The Wall Street Journal published an article headlined, Hackers Trick Email Systems Into Wiring Them Large Sums. According to the article, worldwide losses from scams involving false wire transfer instructions amounted to more than $1 billion from October 2013 through June 2015, and most of the losses were in the U.S. In some cases, cybercriminals implant malicious software that allows them to access an email system, which they then use to send false wire transfer instructions for a transaction that’s otherwise legitimate. The scammers also sometimes send emails from addresses that are almost identical to legitimate addresses but are off by one or two characters; the recipient, not noticing the error, complies with the instructions. Victims of this fraud have little recourse, and the funds are often quickly moved to foreign bank accounts that are hard to trace.

According to a January 2015 public service announcement by the FBI, this scam, which was formerly known as the Man-in-the-E-Mail Scam, has been relabeled as Business E-Mail Compromise, to highlight the “business angle” of the scam. One of the characteristics of the scam, according to the FBI, is that the fraudulent email requests for wire transfers are “well-worded, specific to the business being victimized, and do not raise suspicions to the legitimacy of the request.”

What steps can you take to avoid becoming a victim of this scam?

– Before sending any wire, review the applicable invoice and request for wire very thoroughly.

– Contact the party who is supposed to receive the wire, in order to confirm the wire instructions before sending the wire.

– Use a secure messaging system when you are sending wire transfer instructions.

– And, of course, always use secure passwords for your email accounts.

 

More Local Action on Construction Defects

Posted in HOA & CCIOA, Housing, Legislation, Litigation, Multi-Unit Housing, Real Estate Development, Real Property, Residential

The Denver Business Journal is reporting that, on Monday, Commerce City became the third city in the Denver metro-area to enact an ordinance addressing construction defects in condominium and other common interest community construction.  Lakewood and Lone Tree have also enacted similar ordinances, and other municipalities are considering doing the same.

These moves are a reaction to a lack of new construction of owner-occupied multi-family properties, which the development community and many local governments attribute to the high costs of defending and insuring against construction defect litigation.  Generally speaking, these local ordinances attempt to encourage alternative dispute resolution, such as mediation and arbitration, provide an opportunity for builders to repair alleged defects, and ensure that unit owners are informed and give consent before a homeowners’ association can bring a construction defect action.

Commerce City’s ordinance follows the failure of SB177 in the legislature earlier this year, which would have enacted similar changes into state law.  The issue has been contentious, with proponents of reform arguing that construction defect litigation is out of control and unjustified, and opponents claiming that reform is merely an effort by developers to shield themselves from liability for shoddy construction.   Next year is an election year, and reform proponents are skeptical that they will have better success in what could be an even more politically charged 2016 legislative session.

Many experts believe that there is a severe lack of construction of new condominium projects in Colorado relative to demand, especially considering likely housing trends tied to forces such as transit oriented development.  In light of the unclear prospects for legislative change at the state level, it is likely that more local jurisdictions will consider legislative changes aimed at reforming the construction defect process.

Despite the trend, it remains unclear  whether such local ordinances are preempted by conflicting state statutes relating to issues such as statutes of limitations, amendment of common interest community declarations, and the procedures laid out in the Colorado Construction Defect Action Reform Act, C.R.S. § 13-20-801 et seq.  The ordinances will survive a preemption challenge if a court determines they do not conflict with state law or address matters of purely local concern, but will be preempted if the subject matter is a matter of state or mixed state and local concern.  However, it may be years before these local ordinances are tested in court.

As a result, it is not clear that developers and insurance companies will be able to feel comfortable for some time that these ordinances address their concerns about construction defect liability.  However, if new condo construction levels remain low, we can expect that more local governments will consider adopting similar ordinances unless and until there is legislative change at the state level, or relevant case law gives additional guidance.