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

To update our previous post, Colorado Senate Bill 12-181 regarding construction contracts failed today in the Senate Business, Labor and Technology Committee by a vote of 6-1.

It has been a little over a year since the requirement that Colorado property owners' associations register with the newly created HOA Information and Resource Center went into effect. The center’s 2011 annual report is out (and a copy of it is provided below). According to the annual report, in 2011, 8,037 property owners’ associations registered, comprising a total of 838,211 units.

As reported here earlier, the registration requirement went into effect on January 1, 2011, but an emergency rule was enacted automatically registering all such associations through March 1, 2011. As we reported last year, if a property owners' association fails to register, its assessment lien power and right to enforce such liens are suspended. Most associations registered sometime in the first quarter of 2011, and so the time to renew those registrations is now. This is an annual requirement, and the ramifications of non-renewal are the same as if an association did not register in the first instance.

The legislation is not clear on whether the registration requirement applies to all property owners' associations in Colorado or only property owners' associations subject to the Colorado Common Interest Ownership Act (CCIOA). In 2011, legislation was introduced that would have clarified this point, but the legislation failed. The Division of Real Estate has promulgated a position statement clarifying that pre-CCIOA associations (associations formed prior to July 1, 1992) are not subject to registration unless that association has elected treatment under CCIOA. The position statement is authoritative but not binding, and so pre-CCIOA associations may still want to register despite the position statement.

A complaint form is now on the HOA Information and Resource Center’s website. The center has no investigative or enforcement capabilities, and the complaint form states that clearly on its face. However, the center tracks complaints and reports on them .The annual report includes, among other things, the report on complaints received which cover a variety of topics ranging from pets and parking to conflicts of interest and transparency.  The annual report also comments on the ongoing confusion related to the center's power and authority to deal with complaints. For people involved with property owners' associations, whether in a development, management, board or ownership role, this information is instructive as to what the hot button issues are with owners.  Whether or not it leads to further regulation of property owners' associations remains to be seen.

2011 Annual Report of the HOA Information and Resource Center Office.pdf

In October of 2009, the United States Department of Justice issued a memorandum (the "Ogden Memo") stating that scarce federal resources should not be focused "on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." The Ogden Memo also emphasized the federal commitment to enforcing federal drug laws and that marijuana remained illegal, but it was widely perceived as marking a significant decrease in the risk of federal criminal prosecution of state-sanctioned medical marijuana activities. This perception was arguably the catalyst that sparked the rapid development of Colorado's commercial medical marijuana industry, which started toward the end of 2009.

In reaction to the development of the industry, the State of Colorado has spent the last eighteen months developing and implementing the most comprehensive medical marijuana regulatory system in the country. Operating under this regime is quite onerous for the regulated businesses, but the extensive amount of oversight involved, as well as the resulting elimination of more "amateur" businesses, has also tended to increase the perceived legitimacy of the industry. In turn, the development and institutionalization of medical marijuana as a legitimate, regulated industry has had a significant impact on real estate in Colorado, perhaps most notably by creating new demand for warehouse and retail space.

However, largely in reaction to the increase in the scope of the commercial cultivation, sale and distribution of medical marijuana, the DOJ issued a new memorandum in June of this year. It stated that the Ogden Memo was intended to refer to sick individuals and the individuals who care for them, and not to commercial medical marijuana operations. As such, the new memorandum stated that persons "in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities," are in violation of federal criminal drug laws. Those who "knowingly facilitate such activities" could include, for example, landlords that lease property to persons engaged in these illegal activities. The new memorandum also made clear that these activities should not be considered "shielded" by the Ogden Memo, and are properly the subject of federal prosecution.

Thus far, the federal government's hands-off approach in Colorado has not changed. However, the new policy makes explicit that the participants in Colorado's medical marijuana industry face a very real risk of federal criminal prosecution. This includes those who "knowingly facilitate" the business of cultivating, selling or distributing marijuana. Especially given the recent federal pronouncement, it is important for property owners to understand and recognize the risks associated with their participation in the medical marijuana industry. Though federal authorities have not clamped down on Colorado's medical marijuana industry to date, landlords of medical marijuana businesses could face federal criminal liability (for example, through "aiding and abetting" federal criminal statutes), and their properties could be subject to forfeiture.

Photo by Tony Webster (flickr)

We are past the half-way point of the 2011 Colorado legislative session, which began in early January and ends in early May.  Several hundred bills have been proposed, and many have already been “postponed indefinitely” or voted down in committee or in a legislative chamber.  Below are summaries of certain significant bills affecting Colorado real estate law or the commercial real estate industry that continue to be debated as of the date of publication of this post.  Given the many bills under consideration, this list is not intended to be a comprehensive overview.

Real Estate Finance – Lenders Must Pursue Collateral First (HB 11-1139).  This bill would prohibit consumer loan creditors, credit unions, savings and loan associations, state banks, industrial banks and mortgage lenders from attempting to collect a debt from a borrower personally unless (a) the creditor first attempts to collect the debt from the collateral, and (b) the proceeds from the collateral are insufficient to pay the debt.

Ballot Measures – Constitutional Initiatives and Referenda Require 60% Voter Approval (Senate Concurrent Resolution 11-001).  This resolution would put to the voters via referendum in November 2012, a proposed amendment to the Colorado Constitution that would: (a) beginning in 2013, increase the amount of votes needed to pass a ballot measure for a Constitutional amendment from a simple majority to 60%, except as to measures that repeal Constitutional ballot measures passed prior to 2013, (b) require that a certain number of signatures for Constitutional initiatives be obtained from each congressional district in the State, and (c) increase the voting requirement in the legislature to amend or repeal a successful statutory initiative or referendum from a majority to two-thirds for a three year period after passage.  The scope of this measure clearly goes beyond real estate.  However, it may be of particular concern to the Colorado commercial real estate industry, which has had to defend against various initiatives over the years.  This referendum would make future Constitutional initiatives and referenda more difficult to pass, although it would provide greater protection to successful statutory ballot measures.  The concurrent resolution to establish this referendum has passed the House with minor modifications to the approved Senate version.  It now is back in the Senate for a vote on the modified version.  My colleague Bob Fisher provides more information about this resolution in a post below.

Agricultural Land Taxation – Split Assessment for Agricultural Land with Residence (HB 11-1146).  This bill would allow tax assessors to divide a parcel for assessment purposes into agricultural land and up to two acres of residential land unless the residence is “integral to agricultural operations.”  The phrase “integral to agricultural operations” would be defined by the Colorado property tax administrator.

Property Disclosures – Commercial Properties Must Disclose Energy Data (SB 11-130).  This bill would require owners and operators of commercial properties, defined to exclude multifamily properties sold or leased on a unit-by-unit basis, (a) to upload to the Environmental Protection Agency data necessary to generate an energy performance rating, and (b) disclose the building’s energy performance rating (if one is generated by the EPA) to a buyer, tenant, or lender at the time of conveyance and upon request by such parties.  The bill would only cover commercial buildings in excess of 50,000 square feet during 2012, but would cover all commercial buildings thereafter.

Also, a bill restricting private transfer fees is expected to be introduced this session but has not been introduced yet.  Further information on these and other bills affecting real estate may be obtained by visiting www.statebillinfo.com.

Photo by cliff1066™ (Flickr).

In order to facilitate the settlement of the western United States in the nineteenth century, the federal government broke the land up into “townships” that were generally 36-square mile blocks.  Each township was then broken into “sections” of roughly one square mile, or 640 acres.  Each section was further divided into “quarter sections,” and further into “quarter quarter sections” of 40 acres each.

Sometimes when we are working on acquisitions or financings of raw land, we encounter roads that follow the section lines, usually 30 feet on either side of the line.  There is often no deed, easement or dedication for these roads, and the question comes up as to whether there is some statutory basis for these roads.  If there is no statutory basis, then we need inquire about whether there is a prescriptive easement for these roads.  (See the note below on prescriptive easements.)

So, is there statutory authority for those roads?  There isn’t now, but there used to be. 

In 1885, the Colorado General Assembly passed a law [PDF] that allowed commissioners of a county, by an order at a regular meeting, to declare any section or township line “on the public domain” to be a public highway.  As pointed out by H. Keith Corey of Grand Junction (see part (3) of his paper), this statute was repealed in 1953, but its repeal did not remove any roads that were in place prior to repeal.  Before repeal, El Paso, Weld and Mesa Counties passed resolutions pursuant to this statute.  See Book 571, Page 55[PDF] of the El Paso County real property records and Book 86, Page 273 [PDF] of the Weld County real property records.

If you are looking at land that has one of these roads located on a section line, and the county passed a resolution pursuant to the 1885 statute before 1953, then you should assume that there is a public highway for the first 30 feet inside the section line.

Thanks to Ian Cortez of Ulteig Engineers, who brought this up at a surveying seminar, and to David Knapp at Land Title for sharing his experience on this issue.

NOTE:  Generally, a prescriptive easement arises when a party adversely uses property in the same manner as if it had an easement, and such use is continuous and uninterrupted for the period of prescription.  Almost every element of a presciptive easement is loaded with specific, and sometimes controversial, meaning, so the analysis needs to handled carefully.  Note that a prescriptive easement (and its cousin, adverse possession) usually cannot be established by private parties against governmental entities, so you probably can't make one of these public highways go away without the county's consent.

Photo by goingslo (flickr)

Anton Troianovski had an interesting article in the Wall Street Journal on how downtown office markets are currently improving faster than suburban office markets.  In part, Troianovski observes, this may be based on the types of businesses that tend to be in the two markets (mortgage companies and home builders in suburban markets, while downtowns tend to be home to government offices and big banks).  

But he also notes that a possible "secular shift is under way in the American workplace" because younger people want to work in downtown markets.  Downtown Denver is specifically mentioned in this article as a beneficiary of this trend.  Whether this trend continues as the job market solidifies over the coming months and years will be worth watching.

Photo by paul (dex) (flickr)

The two most common types of lease expansion options are rights of first refusal and rights of first offer.  When negotiating these expansion rights, landlords and tenants should understand the factors involved.

What’s the Difference?  A right of first refusal provides that when the landlord receives an acceptable offer from a third party for certain space, then the landlord must offer such space to the tenant on the same business terms.  A right of first of offer requires the landlord to offer any “available” space covered by the right to the tenant before the landlord offers the space to the market generally.

Some of the factors that are common to both types of rights are as follows: 

• Both rights should cover a finite area, although it is possible to have these rights apply to an entire building or project.  The lease should specify what space is covered by the right. Use a diagram or other clear method of defining the space.  Beware that the configurations of a suite can change over time, so suite numbers can be problematic. 
• Both types of rights are encumbrances on the landlord’s ability to lease the space.  Landlords need to track and monitor these rights carefully to avoid violations.  The landlord’s failure to honor a tenant’s right can result in the landlord incurring liability.
• Landlords should try to protect the right to negotiate extensions of existing leases with other tenants of the encumbered space without triggering the right, even if those other tenants do not have a renewal right.
• Once the landlord makes the offer to the tenant, and if the tenant declines, does the tenant have an ongoing right to further offers?  Or is it a one-time right?

Factors particular to rights of first refusal are:

• Because there is a third‑party offer involved, the tenant can be reasonably assured that the business terms of the offer approximate the fair market value for the space. 
• Because the landlord has to identify a prospective tenant and negotiate a deal before making an offer to the tenant, these rights are more cumbersome for the landlord’s management of its property.
• Consider whether the existing tenant has to accept the agreed-upon deal, or does the tenant have the right to adjust the offer to be more similar to the terms of the tenant’s lease?  For instance, the term of the offer may be shortened or extended to be “coterminous” with the tenant’s lease term.  Landlord’s should try to avoid any requirement to modify the agreed-upon deal. 

Factors particular to rights of first offer are:

• Rights of first offer are easier for the landlord to manage because it can offer the space to the existing tenant before negotiating with any other potential tenant.
• A right of first offer is less attractive to tenants because it can be difficult to know if the landlord’s offer is fair.  On the other hand, the offer that can be easier to customize to the existing tenant’s needs, such as requiring a coterminous term or the same rental rate as the tenant’s existing space.
• When is the space “available” and therefore subject to being offered by the landlord?  Is it available when the space is actually vacated? Or, when the occupant of the encumbered space is otherwise obligated to vacate the space?  Landlords will want to preserve flexibility in case the existing occupant wants to renew its lease, or if the occupant holds over in the encumbered space.
• How can the tenant know the offer is fair?  One method is to require that the landlord “re-offer” the space to the tenant if the landlord actually offers materially more favorable terms to a third party (and the parties should agree on what the phrase “materially more favorable terms” means).  Also, if a certain period of time elapses after the offer and the landlord has not found a tenant, then the landlord may be required to re-offer the space.

Whatever the parties decide to do, they should be aware of the various issues involved in right of first refusal and right of first offer.

Late last week, there were two news stories reporting on important developments for real estate in the Denver area.  Given the continued state of the economy and commercial real estate, I was pleased to see these reports.  While actual development resulting from these events may be some time off, important ground work is being laid now. 

First, the Denver Business Journal reports that Regional Transportation District (RTD) has adopted a more flexible policy for transit‑oriented developments (TOD), which are anticipated to be constructed along RTD’s FasTracks expansion.  Four pilot projects will be selected by RTD to test this new policy. 

According to the DBJ, RTD’s new policy:

• gives developers more flexibility with regard parking requirements for TODs;
• allows RTD to take a combination of up-front cash and a deferred payment (profits interest or revenue participation for instance) for the sale of property to a developer; and 
• encourages cooperation with developers in an effort to bring in more federal and non‑profit funding. 

Second, the Denver Post reports that Greyhound is looking to move its bus station from its current location at 19^th & Curtis Streets (right across the street from The Ritz‑Carlton) to somewhere in the metro area near a major RTD bus or rail station.  This certainly is good news for The Ritz‑Carlton and also for downtown.  This is a key area of downtown, in close proximity to the Arapahoe Square redevelopment area.  In fact, the boundaries of the Arapahoe Square urban renewal area are being redrawn to include the Greyhound site.  The redevelopment of the Greyhound site could have a tremendous impact on the central part of downtown, and with its inclusion in an urban renewal area, the economics of such a redevelopment might actually make sense sooner rather than later.

I am a firm believer that being proactive during the downturn will mean we are better poised to be one of the first markets to really see a rebound.  It is good to see RTD, DURA and others making decisions today that will hopefully attract new development to Denver when the market starts its recovery. 

Residents of the northern Douglas County City of Castle Pines North, or Castle Pines as it's now known, voted on Tuesday to abolish the City's recently established urban renewal authority.  The yes votes on Question 300 outnumbered the no votes by almost 2 to 1.  In abolishing the City's urban renewal authority, residents decided not to grant City Council and the urban renewal authority - here one and the same body - the urban renewal powers granted to such authorities by Colorado's urban renewal laws (31-25-101, C.R.S.), including the ability to capture and direct to the construction of new public improvements incremental tax revenues created by virtue of new or redeveloped portions of the City.  So, why did Castle Pines' residents reject the authority  I've got some ideas, but first a little background on urban renewal. 

Urban renewal laws have been on the books for more many years, and the authorities created under the laws have successfully implemented numerous urban renewal projects across Colorado. The Denver Urban Renewal Authority is just one such example.  Urban renewal laws grant urban renewal authorities the power to issue bonds to pay for qualifying elements of an urban renewal project, which typically consists of public streets, drainage improvements, sewer lines and other public infrastructure, but in any event, improvements that are intended to eliminate blight.  The urban renewal authority captures the incremental property and sales tax generated on redeveloped property (for a maximum period of 20 years), calculated as the difference of such taxes before and after developing the property.

Urban renewal projects are permitted, as an initial matter, only within areas where an urban renewal plan has been adopted by the municipality containing the urban renewal authority.  To establish an urban renewal plan for a particular area, the municipality must first determine that the area is "blighted."  It is this determination of "blight" where residents often run into issues. 

I believe the residents of Castle Pines didn't like their community being labeled as blighted, as most people don't like to have their property labeled as blighted.  Unfortunately, the urban renewal law requires a finding of "blight", based on a number of indicia as a prerequisite to establishing an urban renewal authority, notwithstanding that many of the indicia don't fall into the category of conditions most people associate with blight - like faulty lot layout, defective title conditions, unusual topography and inadequate street layout.  

Also, I believe the residents of Castle Pines thought the incremental tax dollars captured by the urban renewal authority amounted to a tax increase.  With or without an urban renewal authority, the incremental taxes generated by development are collected by the government.  But, the rationale behind the urban renewal law is that such increment would not be available if the development did not occur.  In other words, the development enabled by public financing of a portion of the public improvements would not have occurred, and therefore the increment would not be available, but for the urban renewal's ability to capture the increment.  In sum, the urban renewal authority is not responsible for tax increases, it merely uses the increased taxes collected by virtue of development to encourage development.  

Finally, I believe the residents may have thought "urban renewal" should be relegated exclusively to urban areas.

The real debate here should not be focused on whether a community contains indicia of blight or if the development is located in an urban area, but instead on specifically when and where it is appropriate to use tax increment financing to stimulate development, if at all.  If the debate does not focus on these issues, the public will continue to get lost in the meaningless distinction between the practical and legal interpretations of "blight" and "urban" under the urban renewal law.  Urban renewal laws could be easily reconstituted to address specifically when and where tax increment financing is appropriate, and I think they should be.

Despite today’s economic reality, real estate developers should consider the unique opportunities of pursuing land use entitlements now.  While there is expense entailed in pursuing annexation, zoning, subdivision and related approvals, many jurisdictions are experiencing a significant drop in tax and fee revenues due to reduced development activity.  Accordingly, developers who are able to pursue land use entitlements during this difficult economy may find these jurisdictions more responsive to development proposals than they historically have been.

Although obtaining entitlements now may be “early” (end users or the ultimate land plan may be unknown), jurisdictions have been recognizing such circumstances and the need for flexible zoning that will allow for diverse development opportunities.  Planned Unit Development (PUD) or similar zoning can provide for standards that differ from the jurisdiction’s generally applicable zoning or technical standards to accommodate a variety of users.

Because there are fewer development applications being submitted today, applications may be processed in an abbreviated period of time.  And, as it traditionally may take years to process and obtain final approval of complete land use entitlements, there is no better time than the present to initiate that process.

Governor Ritter signed H.B. 1284 into law on June 7, 2010, which enacted the Colorado Medical Marijuana Code.  Among a host of other impacts, the Code will likely have the effect of concentrating medical marijuana production, and increasing medical marijuana businesses’ demand for commercial and industrial space to house grow operations and retail dispensaries.  Accordingly, landlords throughout the state are beginning to feel the effects of the law’s new requirements, as a market of new potential tenants emerges. 

This is coming at a time when the retail and industrial market is seeing high vacancy rates, thus making medical marijuana tenants a potentially appealing way for landlords to turn empty space into a rent-producing revenue stream. 

However, much confusion and ambiguity remains surrounding Colorado’s medical marijuana laws.  This is true both with respect to the ever-looming issue that marijuana remains illegal for any purpose under federal law, but also with respect to Colorado’s requirements themselves. 

As described in the Daily Camera, the City of Boulder’s efforts to get medical marijuana businesses within its borders to comply with its regulations is a telling example of the latter problem.    

Landlords dealing with medical marijuana tenants should always keep the federal prohibition on marijuana in mind in deciding whether to enter into leases with such tenants, and in structuring their relationships with such tenants if they do.  Under current Department of Justice policy, federal authorities should not focus their prosecution resources on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”  Unfortunately, given the confusion at the state and local level, it may be some time before anyone knows what “clear and unambiguous compliance” with Colorado’s medical marijuana laws even means.

The ambiguities and confusion suggest that it would be prudent for landlord to be vigilant to ensure that they obtain timely information from their medical marijuana tenants.  Particularly in this field, it is important for landlords to have early notice if problems arise with respect to the licensing or legal status of their tenants.

Photo by eggrole (flickr).

I recently attended a webinar in which Jacob Bart of Stroock & Stroock & Lavan LLP spoke about how the costs of going “green” can conflict with the provisions in many existing leases.  It is common for landlords to “pass through” operating expenses to their tenants, but those expenses are usually limited to non-capital expenditures.  However, any changes to make a building more energy efficient or to reduce carbon emissions will likely be capital in nature.  Therefore, it is difficult for a landlord to make those green changes because the landlord will not be reimbursed for the cost from the tenants.  One way to address this is to allow the landlord to pass through capital expenses if they result in a savings of operating expenses.  

But what if the new equipment is better for the environment, but won’t save much money?  I recently had a chance to speak with Lee Johnson and Michael Noyes from the Greenwood Village office of the accounting firm Clifton Gunderson LLP about a tax deduction for energy saving improvements in commercial buildings under Section 179D of the Internal Revenue Code.  This may provide an incentive for Landlord’s to make cost-saving capital improvements even if the landlord cannot pass them through to its tenants. 

As tenants desire green buildings, not only for cost savings, but also for prestige and marketing purposes, it will be interesting to see if there are changes in the traditional allocation in leases of capital and operating costs between landlord and tenant.

Otten Johnson Robinson Neff + Ragonetti has once again been ranked as the leading real estate law firm in Colorado.  Chambers USA annually ranks law firms and lawyers by areas of practice in each state.  Otten Johnson has been ranked in the top "band" every year since Chambers began ranking law firms in the United States in 2003.  No other firm in Colorado has been ranked in the top band for real estate during that entire period or has as many individual lawyers ranked in the category in 2010.

Here's what Chambers had to say about Otten Johnson in 2010:

"Otten Johnson's well-regarded practice covers acquisitions and real estate development and workouts.  The firm has a strong reputation for land use and condemnation work throughout Colorado, particularly in relation to the mountain and resort communities.  Clients include Simpson Housing, bank consortium Sturm Financial Group and mixed-use, large-scale projects developer Continuum Partners."

Read other client comments about the firm and its lawyers here. 

The Governor recently signed into law House Bill 10-1278 (“HB 1278”), which creates the “HOA Information and Resource Center” and requires property owners’ associations (not just residential/homeowners associations) to register annually with the Division of Real Estate.  HB 1278 takes effect January 1, 2011.  Real estate owners and professionals should be aware of HB 1278 because failure to register has some potentially serious consequences including loss of lien power and because it grants the Division of Real Estate oversight and regulatory authority in an area that has not been regulated previously. 

HB 1278 creates the HOA Information and Resource Center which is to be headed by the “HOA Information Officer” appointed by the Executive Director of the Department of Regulatory Agencies.  The HOA Information and Resource Center is to (a) serve as a clearing house for information concerning the basic rights and duties of unit owners, developers, and unit owners’ associations under the Colorado Common Interest Ownership Act (“CCIOA”), and (b) track and report inquiries and complaints regarding HOAs to the Division of Real Estate. 

HB 1278 requires that all HOAs register annually with the Division of Real Estate and to submit general information about the HOA and pay a fee that will serve to fund the HOA Information and Resource Center.  The fee must not exceed $50.00 and is subject to adjustment to reflect the actual direct and indirect costs of operating the HOA Information and Resource Center.  Certain low revenue HOAs are exempt from the fee requirement.

If an HOA fails to register or is not current in its registration, it will be ineligible to impose or enforce a lien for assessments under CCIOA, which has priority over many other liens from the date of recording of the declaration creating the community.  Likewise, if an HOA fails to register or keep it registration current, it will lose its right to collection costs and attorneys’ fees expended in enforcing an owner’s assessment obligations. 

With some limited exceptions, before the adoption of HB 1278, the Division of Real Estate did not have any oversight over HOAs and related developments.  HB 1278 grants the Director of the Division of Real Estate the power to adopt rules as necessary to implement HB 1278.  Because HB 1278 speaks in fairly general terms, the operations and impacts of the HOA Information and Resource Center will likely be determined by the scope of the adopted rules.  Given that this is the Division of Real Estate’s first involvement with HOAs in general, it will be interesting to see if it seeks out additional oversight over the operations of HOA or new oversight over the formation of HOAs in the form of regulations or additional legislation.

HB 1278 repeatedly uses the term “HOA” which is misleading.  The term “HOA” is defined in HB 1278 to include “unit owners’ association” as defined in CCIOA, which can include residential, commercial and mixed-use condominiums, planned communities and cooperatives, and not just conventional residential planned communities headed by what a layperson might call a “homeowners association.”  CCIOA was initially effective July 1, 1992, and there is some ambiguity as to whether the term “HOA” includes and whether HB 1278 requirements apply to unit owners’ associations that were formed prior to that date.  We are hopeful that regulations to be adopted by the Division of Real Estate will clarify this point.