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

To update our previous post, Governor Hickenlooper has reinstated five of the ten public trustees who resigned or retired last month after reports by The Denver Post revealed apparent abuses of public funds by certain trustees.  The five reappointed trustees include those in El Paso, Jefferson, Larimer, Weld and Douglas Counties.  In addition, the Governor appointed new trustees in Adams, Boulder and Pueblo Counties and indicated that he was still searching for new appointees for Arapahoe and Mesa Counties.  The public trustees who were not reappointed were the focus of the Denver Post reports.  The Governor also indicated that he looked forward to working with the legislature in January on a number of changes to Colorado’s foreclosure laws, including the laws governing Colorado’s public trustees.

As we noted in a previous post, critics of Colorado’s foreclosure process have been pursuing various avenues to reform parts of that process.  They have been particularly focused on the “qualified holder” provision of Colorado statutes, which allows the foreclosing lender to state that it is the owner of the deed of trust being foreclosed, without producing the original documents to prove ownership.  A bill that would have amended the statute to require documentation died in the Colorado legislature earlier this year.  Proponents of the bill then started working on a ballot initiative that, if passed by voters in November’s general election, would have amended the Colorado Constitution to address this issue.

Those proponents recently announced they are not going to continue to pursue the ballot initiative, and will instead return to their original approach of pushing for legislative changes to the foreclosure statute.  According to The Denver Post, the campaign director for the Colorado Progressive Coalition, which had been leading the charge, said she believes the group has built the support it needs to pass the change legislatively.  A new bill is expected to be introduced in the next legislative session, which will begin in January.

The dramatic rise in the number of foreclosures filed in Colorado during the last five years has led to increased scrutiny of both the foreclosure laws and the actions of Colorado’s public trustees.  As detailed in an April 4 post in this blog, proponents of ballot Initiative 84 had sought to correct perceived problems in the state’s foreclosure laws with an amendment to the Colorado Constitution.  A recent article in The Denver Post indicates that these efforts are being redirected to effect legislative reform instead.  In addition, the resignation on July 10 of nine of the public trustees appointed by Governor Hickenlooper and the retirement of the tenth followed two days after allegations by The Denver Post that some trustees had used public funds to benefit themselves and their employees.  While public trustees for the majority of Colorado’s 64 counties are elected, ten trustees in some of the most populous counties, including Adams, Arapahoe, Boulder, Douglas, El Paso, Jefferson, Larimer, Mesa, Pueblo and Weld Counties, are appointed by the governor.  The appointed trustees operate with greater autonomy and less oversight of how they spend millions of dollars in foreclosure fees collected by their offices than those trustees who are elected and whose budgets and expenditures must be approved by county commissioners.  The governor’s office has indicated that the positions will be filled by mid-August, though Representative Ray Scott, R-Grand Junction, who sponsored legislation passed in May intended to rein in the authority of public trustees, has asked the governor not to fill the positions but to wait for the General Assembly to pass legislation in January to overhaul the foreclosure process and possibly eliminate the office of the public trustee in its entirety. 

Established in 1894 when Colorado’s economy collapsed upon the federal government’s switch to the gold standard from silver, Colorado’s unique public trustee system was designed to provide a fair venue that would protect the interests of both lenders and property owners.  While some have argued that recent changes in the laws have compromised the rights of property owners, others feel that the current process works fine and that calls to eliminate the public trustee’s office entirely would be throwing the baby out with the bath water.  The resigning public trustees are each eligible to re-apply for their posts and several have already indicated their intent to do so, including El Paso County Public Trustee Tom Mowle, whom our office has found to be one of the most knowledgeable trustees with one of the best-run offices.  We will be interested to see the actions that will be taken by the governor and the legislature, and how those actions will help Colorado address an expected new wave of foreclosures, if one comes.

This article in today's Denver Post discusses how, despite some regional variation in vacancy rates and rents, the statewide trends suggest optimism among property managers and landlords concerning future demand. 

The recent uptick in multi-family housing construction in some parts of Colorado indicates that developers may be feeling the same way. 

It will be interesting to watch whether this results in sustained multi-family growth. 

A last minute bill has been introduced in the Colorado Senate.   Colorado Senate Bill 12-181, introduced last week by State Senator Lois Tochtrop, proposes new requirements related to construction projects in Colorado.  These proposed changes are not favorable to property owners in Colorado and will limit the ability of property owners to negotiate business terms in their construction contracts.  SB 12-181 is set for a hearing before the Senate Business, Labor and Technology Committee on Wednesday, May 2, 2012. 

SB 12-181 applies to “Building and Construction Contracts” which is defined as any contract subject to Title 38, Article 22 of the Colorado Revised Statutes, Colorado’s mechanics’ lien law.  SB 12-181 contains the following points:

• Colorado Law Must Apply.  Any provision in a Building or Construction Contract for work to be performed in Colorado that makes the contract subject to the laws of another state or contains a dispute resolution provision governed by the laws of another state, is void and unenforceable. 

• Parties Cannot Contract Around Colorado Mechanics’ Lien Law.  Any provision in a Building and Construction Contract that requires a contractor or subcontractor to waive its right to file a mechanics’ lien or claim against a payment bond prior to being paid is void and unenforceable.

• Payment to Subcontractors and Suppliers Required Within 7 Days.  All principals, general contractors and subcontractors must pay their subcontractors and material suppliers within seven days of receipt of services.

• Mandatory Interest Penalty; Costs and Attorney Fees Award.  A 1.5% monthly interest penalty applies to all unpaid amounts, and subcontractors and suppliers who successfully sue to collect this interest penalty will also be entitled to collect their costs of suit, including attorney fees.

• Monthly Progress Payments Required; Retainage Amounts Capped.  Property owners or parties responsible for payment must make monthly progress payments to the general contractor unless the Building and Construction Contract specifies otherwise, and owners or payment parties may only reserve as retainage a maximum of 5% of each payment.

• Change Orders.  General contractors must submit the costs of any change orders to owners for payment within 30 days of the change order.  Owners or payment parties will be required to pay at least 50% of any disputed change order amounts.

Developers often secure FHA approval for their condominium projects, enabling buyers to obtain FHA loans.  Whether or not those approvals remain in place is left to the owners’ association for the project.  As investors continue to snap-up condominium units one at a time or in bulk, it is important to review the status of the FHA approval for the project.  As highlighted in a recent Denver Post article, the FHA backs nearly one-third of all mortgages in the United States, up from 5% in 2005.  The article also reports that nearly two-thirds of Denver metro-area condominium projects have rejected or expired FHA approvals.  As the article suggests, this could be the result of many factors, including FHA’s limit on the number of renters in a project.  Even for those projects with intact FHA approvals, investors should talk to the association to understand the association’s plans for renewing the registration and assuring that all the FHA requirements (such as the limit on renters) are satisfied.  The association’s plans (or lack thereof) with respect to FHA registration could have serious implications for the investor’s ability to rent the condominium units or sell them to consumers. 

Photo by Butterbean Man (Flickr)

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)

In May, Governor Hickenlooper signed into law Senate Bill 11-234 - Concerning Residential Real Property Transfer Fee Covenants.  The bill is targeted at prohibiting fees payable upon the transfer of residential real property to individuals and entities where such fees do not touch and concern the real property.  The common law likely already prohibited such fees.  Nevertheless, the bill became effective immediately, the General Assembly having determined that such was necessary "for the immediate preservation of the public peace, health and safety."  Apparently, the General Assembly identified a rising popularity trend for such fees, and it wanted to thwart their growth in Colorado.

The bill does essentially four things.  First, it prospectively prohibits fees payable upon the conveyance of residential real property, except for transfer fees that touch and concern residential real property, including payments to lenders, brokers, lessors, governmental and quasi-governmental entities, homeowner's associations, and certain non-profit entities.  Second, it narrows the circumstances under which prohibited fees established prior to the effective date of the bill are payable.  Third, it provides penalties for recording documents requiring the payment of such fees.  And fourth, under certain circumstances, it provides a quick mechanism for removing covenants requiring the payment of such fees. 

For a more complete discussion about the bill, please see my Client Alert on the topic.  Any individuals or entities that have either considered or implemented a transfer fee should be aware of the enforceability issues raised by this bill.