Rocky Mountain Real Estate Law

Rocky Mountain Real Estate Law

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

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

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.

Disparate Impact Liability Survives U.S. Supreme Court Review

Posted in Appellate, Housing, Land Use, Litigation, Multi-Unit Housing, Real Estate Development, Real Estate Finance, Real Property, Residential, Tax, Zoning

In a 5-4 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., the U.S. Supreme Court upheld the use of disparate impact analysis in Fair Housing Act claims.  In the June decision, a majority of the justices found that disparate impact liability was consistent with the intent of the FHA and was supported by prior Supreme Court decisions upholding disparate impact in the context of employment discrimination.  More on the facts and issues in Inclusive Communities can be found on our January blog post on the case.

The Court’s decision means that private parties and state and local governments can continue to be held liable for laws, rules, policies, and programs that do not discriminate on their face or have a discriminatory purpose, but which in effect create disparities between groups of people protected by the FHA (such as between races, ethnicities, or on the basis of disability status).  The majority opinion clarified, however, that claims of disparate impact may be defeated by showing that the policy in question is necessary to achieve a valid, non-discriminatory governmental purpose, and the opinion further indicated that statistical showings of disparity must be accompanied by a demonstration that the neutral policy in question caused the alleged disparity.

The decision is likely to have its most significant effect on lenders and insurers, whose facially neutral practices have been prosecuted by the Obama Administration on a disparate impact theory of liability when such neutral practices restrict the ability of minority groups to obtain loans or insurance coverage.  Moreover, local governments will continue to have potential disparate impact liability, particularly as the federal Department of Housing and Urban Development finalizes a proposed rule that will allow increased scrutiny of zoning and other local regulatory practices as a condition of local governments’ receipt of funds through HUD grant programs such as the Community Development Block Grant program.  As a result of the decision, fair housing advocates and providers of housing will continue to have a potent weapon for challenging government policies that limit their ability to provide housing for protected groups.

The American Planning Association’s Planning and Law Division will be hosting a nationally-broadcast webinar on the Inclusive Communities decision, tentatively scheduled for August 4, 2015 at 1:00  p.m. ET/11:00 a.m. MT.  See the Division’s website for more details.

California Supreme Court: Mandatory Affordable Housing Requirements Are Valid Land Use Regulations

Posted in Appellate, Eminent Domain, Housing, Land Use, Litigation, Multi-Unit Housing, Real Estate Development, Real Property, Residential, Zoning

Last week, in a case with national significance for multifamily housing developers, housing advocates, and local governments, the California Supreme Court upheld the City of San Jose’s inclusionary housing ordinance.  The ordinance requires new residential projects containing 20 or more units to provide at least 15% of the units at prices affordable to low- and moderate-income families as a condition of development approval.  The ruling in California Building Industry Association v. City of San Jose (CBIA) disproved many observers’ predictions regarding the constitutionality of inclusionary housing ordinances and the outcome in the case may pave the way for courts in other states to uphold similar affordable housing mandates.

In an attempt to remedy severe shortages of affordable housing, many local governments around the country have adopted inclusionary housing ordinances requiring developers to deed-restrict a certain number or percentage of units in new residential projects to make these units affordable to low- and moderate-income families.  For example, the City and County of Denver’s inclusionary housing ordinance, which was most recently amended in 2014, requires 10% of new units in for-sale housing to be made affordable to low- and moderate-income families.

The CBIA’s challenge asserted that San Jose’s mandatory affordable housing set-asides were unconstitutional “exactions” resulting in an uncompensated taking of private property  Exactions occur when a governmental permitting authority demands a dedication of property, money, or services—such as an easement for public use—in exchange for granting a property owner’s request for development approval (i.e., site plan approval, conditional use permit, rezoning, etc.).  In situations where the government conditions development approval on a property owner’s dedication of property for public benefit, the government must demonstrate (1) an essential nexus, or tailoring, between the condition imposed and the government’s purpose in imposing the condition, and (2) a rough proportionality between the nature and extent of the required dedication and the proposed development.  This analysis, commonly known as “heightened scrutiny,” derives from a pair of U.S. Supreme Court cases, Nollan v. California Coastal Commission and Dolan v. City of Tigard.

Refusing to apply Nollan and Dolan to inclusionary housing, the California Supreme Court held instead that the inclusionary housing ordinance was simply a valid land use regulation.  Unlike exactions, zoning and other land use regulations—such as use, height, bulk, and setback restrictions—are given deference by courts, and the burden generally falls on the challenger to prove such regulations invalid.  Zoning regulations are not typically viewed as exactions because they do not require a property owner to give anything to the government as a condition of approval.  The California court reasoned, that because the San Jose’s inclusionary housing ordinance simply places restrictions on the way a property owner can use land and does not require a dedication of property, money or services to the city, the San Jose inclusionary housing ordinance was not subject to heightened scrutiny and was therefore a valid land use regulation.  In so ruling, the court said:

It is well-established that the fact that a land use regulation may diminish the market value that the property would command in the absence of the regulation—i.e., that the regulation reduces the money that the property owner can obtain upon sale of the property—does not constitute a taking of the diminished value of the property.  Most land use regulations or restrictions reduce the value of the property; in this regard the affordable housing requirement at issue here is no different from limitations on density, unit size, number of bedrooms, required set-backs, or building heights.

CBIA is significant because it is the first state supreme court decision addressing inclusionary housing ordinances since the U.S. Supreme Court’s 2013 decision in Koontz v. St. Johns River Water Management District.  Koontz held that the government’s conditioning of development approval on a property owner’s payment of money or providing services—in addition to required dedications of land as in Nollan and Dolan—was subject to the essential nexus and rough proportionality analyses.  Following Koontz, many legal scholars and practitioners predicted that inclusionary housing ordinances might fail the essential nexus and rough proportionality requirements because of the difficulty of establishing a causal link between the creation of new housing supply and increased demand for affordable housing.  The CBIA decision, in rebuking that view, reaffirms two other state supreme court cases that also upheld mandatory inclusionary housing requirements.

If presented with a case similar to CBIA, it is not clear that the current justices of the U.S. Supreme Court would agree with the California ruling.  Yet while CBIA has precedential value only in California, the court’s decision may provide direction to other state courts reviewing the validity of inclusionary housing ordinances, meaning that multifamily developers interested in challenging inclusionary housing ordinances may have an uphill battle.

Special thanks to Otten Johnson law clerk Brittany Wiser for her assistance in preparing this post.  Brittany is a rising third-year student at the University of Denver Sturm College of Law.

U.S. Supreme Court Deals Significant Setback for Local Governments in Sign Case

Posted in Appellate, Land Use, Litigation, Real Estate Development, Zoning

Good News Presbyterian Church’s temporary signs were the subject of the Supreme Court’s June decision. Source:

Regulating signs in a content neutral manner satisfying First Amendment limitations may become more difficult for local governments following today’s U.S. Supreme Court decision in Reed v. Town of Gilbert.  In today’s opinion, all nine Supreme Court justices agreed that the Town of Gilbert, Arizona’s sign code failed the First Amendment’s content neutrality requirement, although the justices came to that conclusion in different ways.

Last year on this blog, I reported on the Supreme Court’s acceptance of the cert petition in Reed, and the facts of the case can be found on my post there.

In today’s decision, which is the first Supreme Court case in over two decades to address local sign regulations, six justices agreed that the town’s sign code was facially content based; that is, the code improperly distinguished between types of noncommercial speech based on the particular subject matter of the speech.  The town’s sign code made several exceptions to a general permit requirement for signs, including exceptions for political, ideological, temporary event, and other types of signage, and regulated each of these excepted forms of signage in different ways.  A majority of the Court found that these distinctions impermissibly regulated on the basis of the signs’ content, which is prohibited under the Court’s First Amendment doctrine.  In the majority’s eyes, because the code regulated based on content or message of speech, the code was subject to the “strict scrutiny” standard of review, which required the town to demonstrate a compelling governmental interest and narrow tailoring of the regulations to the governmental purpose.  According to the majority, the town failed to meet that standard, and thus the sign code was held invalid.

In separate concurring opinions, three justices agreed with the majority that the town’s sign code improperly distinguished among speech based on content, but disagreed with the application of strict scrutiny to the regulations.  In the concurring justices’ view, the town’s sign regulations would have failed even a much lower standard of review.

The result in Reed is expected to put a much greater obligation on local governments to ensure that sign regulations are content neutral both on the face of the regulations and in the government’s underlying purpose for the regulations.  Some First Amendment watchers anticipate that the decision will result in more freedom for sign owners to display signs of various messages, while others have suggested that the result in Reed will encourage governments to take a more cautious approach to sign regulation that more broadly suppresses speech.

Over the month of July, I will be participating in several hosted online webinar presentations analyzing the Reed decision, including webinars through the American Bar Association and the Planning and Law Division of the American Planning Association.  Check these organizations’ websites for more details and information as these events open for registration.

Our colleagues at the RLUIPA Defense blog have also posted about Reed and its potential impact here.