Affordable housing is a growing problem across the nation, and although the housing industry is practically unanimous on that point, it is highly uncertain on the best solution.
In our local market, my team facilitated the sale of an affordable housing property that was subject to the Preservation of Affordable Housing Ordinance for the first time in 2016. On the surface it seemed like it would be a straightforward transaction with substantial buyer interest from both affordable housing and market-rate operators because it was located in central Denver, had only 10 years remaining on Land Use Restriction Agreement (LURA) affordability period and was in good condition. However, the Preservation Ordinance made it one of the most complex transactions we’ve executed and delayed closing by 120 days due to the city’s right of first refusal (ROFR).
Fortunately, we learned important lessons about how to navigate a transaction subject to the Preservation Ordinance, which I believe can benefit current or future owners of affordable housing in the City and County of Denver.
My business partner and I specialize in the disposition of multifamily assets with expertise in Colorado’s market-rate, student and affordable housing. We’re very familiar with the nuances of the Low-Income Housing Tax Credit (LIHTC) and project-based Housing Assistance Payment (HAP) property, and experienced in selling both types of affordable housing. Nonetheless, when we were hired in the spring of 2016 to represent a nonprofit in the sale of its affordable multifamily property, we knew we needed to completely absorb the Preservation Ordinance if the sale was going to be smooth.
The Preservation Ordinance gives the City and County of Denver the ROFR to buy any affordable housing property on “economically substantially identical” terms to an executed purchase and sale agreement. This can make buyers reluctant to put their best offer forward when they know the city can simply match that offer and win the deal. Fortunately, the multifamily market was very strong at that time, and we had no problem attracting interested parties. In fact, we were able to identify a market-rate buyer willing to pay the highest price, provide generous protection for the current residents and take on the cost risk of conducting due diligence inspections while still subject to the ROFR.
The sale closed nearly $1,000,000 over our strike price with existing tenants given five years of capped rent escalation at rates less than what was required by the LURA‚ but not until after we waited four months while the city considered executing its ROFR.
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Four Tips For Navigating The Preservation Ordinance
1. Proactively communicate with the city. The ordinance requires a one-year notification from the landlord to the city and to residents prior to a sale or the expiration of affordability. You should notify the city 12-13 months prior to a sale and use this as an opportunity to start a conversation about how affordability might be preserved. It is a sign of goodwill and may help you get an early waiver.
2. Proactively disclose the right of first refusal to prospective buyers. Buyers don’t like surprises when they are trying to acquire investment real estate. You should disclose the ROFR both in writing and during initial calls with interested groups so they can get familiar with the contingency and best ways to navigate the process.
3. Turn your call for offers process into a request for proposals process. Because there are many moving pieces in this process, I recommend you explain your separate goals and concerns to all interested parties and ask them to address those in their offers. Most groups will respond very favorably, as it provides an opportunity to differentiate their offers in ways other than just price.
4. Request an early waiver. If you are proactive with your notifications and maintain good communication with the city during your marketing process, you should request an early waiver of the ROFR when you present the city with your accepted purchase and sales agreement. You won’t know unless you try, and though we had to wait 120 days for the city to waive its ROFR on this transaction, we were able to gain an early waiver on our most recent affordable sale in the summer of 2018.
The sale of an affordable housing asset in Denver doesn’t have to be difficult. There are several unique steps you need to take to ensure you stay in compliance with the Preservation Ordinance, but spending the time to plan out the process well in advance of the sale and proactively working with the city will enable you to avoid missteps and limit potential surprises.