Last week the U.S. House of Representatives passed a bill that seeks to delineate what causes a commercial real estate loan to be classified as a “high volatility commercial real estate loan,” or, as it’s more commonly referred to, as a “HVCRE loan.”  Since the rule regarding HVCRE loans was promulgated, there’s been much debate and confusion around that fundamental question.  A synopsis of HVCRE loans and the implications of HVCRE classification can be found here.

The bill, H.R. 2148, the Clarifying Commercial Real Estate Loans Act, defines an HVCRE loan as a loan that is secured by land or improved real property and meets the following criteria:

(1)          it primarily finances, has financed, or refinances the acquisition, development, or construction of real property;

(2)          it has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and

(3)          it is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility.

Additionally, H.R. 2148 details which commercial real estate loans do not constitute HVCRE loans—that is, which loans are exempted from HVCRE classification.  These include, but are not limited to, loans that finance the acquisition or refinance of real property producing cash flow sufficient to service the contemplated debt and the property’s expenses.  Loans financing improvements to real property producing that level of cash flow are also exempt.  The bill keeps the existing exemption for a loan that meets both the applicable loan-to-value ratio requirement and the 15% borrower capital contribution requirement but modifies it in two respects.  First, when calculating a borrower’s capital contribution, the value of land will be based upon a recent appraisal rather than its purchase price.  Second, until the loan is reclassified as a non-HVCRE loan, only an amount equal to that 15% contribution must stay in the project; in other words, any equity in excess of that 15% amount may be withdrawn by the borrower.

Importantly, H.R. 2148 also addresses when a HVCRE loan may be reclassified as a non-HVCRE loan.  That reclassification occurs when (1) completion of the development or construction of the real property being financed by the loan occurs, and (2) cash flow being generated by the real property is sufficient to support the debt service and expenses of the project.

The bill will now go before the Senate.

Last week, Denver voters received their ballots for the November 7 municipal election.  In addition to considering a $937 million bond issuance and a Denver Public Schools Board election that has garnered national attention, Denver voters will decide whether to mandate the construction of “green roofs” on large buildings throughout the city.  The proposed ordinance would apply to all new construction and every “roof replacement” on buildings of 25,000 square feet or more beginning in January 2018.

As the name implies, a green roof is a space containing plants and soil on top of a human-made structure.  Proponents cite evidence that green roofs reduce energy consumption, more efficiently manage storm water runoff, ameliorate the urban heat island effect—one recent study found that Denver’s is the third worst in the United States—and improve air quality. Modern green roof technology was developed in Germany in the 1970s, and many U.S. cities have launched green roof incentive programs, including Chicago (2006), Washington D.C. (2006), New York City (2008), and Portland, Oregon (2008). Last October, San Francisco became the first U.S. city to mandate the inclusion of green roofs in certain new construction projects.

The Denver initiative is modeled on a similar ordinance enacted in Toronto in 2009. If voters approve the ordinance, buildings with 25,000 square feet of gross floor area would need a green roof to cover 20% of available roof space. For buildings larger than 200,000 square feet, it would need cover at least 60%. In between, the ordinance provides a sliding scale. Green roof space may be occupied by solar panels, and the ordinance allows for cash-in-lieu fees of $25 per square foot for structures receiving a variance or exemption. The Community Planning and Development Department would evaluate applications for compliance with construction standards contained in the ordinance and issue permits.

Opposition to this initiative is gaining traction. The Editorial Board of the Denver Post took a position against the initiative back in March, and Mayor Michael Hancock, Denver Metro Chamber of Commerce, Downtown Denver Partnership, and several trade and professional associations have followed suit.  Their primary concern is cost, which studies have estimated at $10 to $25 per square foot for initial construction, and around $1 per square foot for annual maintenance. Perhaps the most controversial aspect of the proposed ordinance is its application to every “roof replacement,” which goes beyond the mandate of both the San Francisco and Toronto ordinances.  In a statement issued last week, Mayor Hancock said that the initiative, “goes too far, too fast and provides no flexibility or opportunity for carrots instead of sticks.”

Turnout in these off-year local elections has historically been low—between about 20% and 40% in Denver—which means that as few as 60,000 votes could decide the fate of this initiative.

Colorado Convention Center, Denver Credit: Dan
Colorado Convention Center, Denver
Credit: Dan

A Denver City Council committee has taken the first step toward creating Colorado’s first-ever tourist improvement district.  On Wednesday, June 7, the Business, Arts, Workforce & Aeronautical Services committee unanimously approved Bill 17-0653, authorizing the district, which is designed as a mechanism to help fund tourism-related facility improvements and services like the upcoming $233 million Colorado Convention Center expansion project. Continue Reading Denver City Council Advances Tourist Improvement District Proposal

Last week, the Colorado Senate passed a bipartisan bill—House Bill 1375—requiring school districts to either develop a plan by the 2019-2010 academic year to equitably share mill levy override funds with charter schools of their districts or to distribute 95% of the per pupil amount of the revenue to those charter schools.  The bill further requires charter schools to post certain tax documents on their websites and to limit their financial waivers.

As reported in the Denver Post, roughly one-third of Colorado’s 178 school districts share mill levy override revenue with charter schools, and approximately $34 million in local tax increases are not being shared equitably with charter schools.  This is juxtaposed with the fact that, as further reported in the Denver Post, charter school enrollment in Colorado has grown by 30% since 2013, with more than 108,000 enrolled in the 2015-16 school year, and charter school students earn higher scores on state tests than their district peers.

The bill’s proponents say the bill is the first of its kind in the United States and that it “provides equitable funding for all Colorado’s children no matter what type of school they attend” while “also improve[ing] our education system by requiring additional transparency and accountability from charter schools without creating additional burdens for schools.”

After passing the House and Senate, the bill now awaits the Governor’s signature.

The bill can be found here.

In our April Client Alert, we reported on a possible breakthrough in construction defect reform legislation, which had passed the House and was moving to the Senate.  The Colorado Senate has now unanimously approved House Bill 1279, and sent it to Governor Hickenlooper, who is expected to sign the bill.  HB 1279 was one of six bills introduced this year in an effort to address the dearth of condominium construction in Denver.  It is the only bill to reach the Governor’s desk, and the first bill in four years of effort to make substantive changes to the existing construction defect law in Colorado.