Political turbulence impacts real estate plans

Simply put, lenders have quietly become more selective on the loans they close.
Tyler Carlson Principal, Evergreen, Denver

Tyler Carlson
Principal, Evergreen, Denver

While the adage “the only thing constant is change” remains true about life, commercial real estate developers and investors crave certainty to make good business decisions. As a result, the increasing political turbulence and uncertainty at the local and state levels of government in 2016 is challenging the real estate industry in a number of ways.

Erin Goff General counsel, Axiom Strategies Inc., Denver

Erin Goff
General counsel, Axiom Strategies Inc., Denver

Municipal turbulence. At the municipal level, several cities along the Front Range recently replaced their city managers and planning directors and have significant political and personal fractures on boards and councils, creating uncertainly regarding projects seeking municipal approval. New leadership may have different priorities, code interpretations and development philosophies that may not sync with projects in the pipeline.

Additionally, there is increasing political pushback against urban renewal, metro districts, public-private partnerships and other forms of public financing critical to the development of large-scale real estate projects. The passage of Question 300 in Wheat Ridge and Littleton is the most glaring examples of municipal impairment of public financing tools.

Additionally, new code mandates and fees chill new development already challenged from rising construction costs, skyrocketing property taxes and tenants fearing the end of our economic cycle. Proposed initiatives such as Energize Denver and Denver’s Affordable Housing Fund each include significant fees and mandates that will impair not only future development but also impact nearly every commercial building and landlord in Denver.

The unintended consequences of these well-intentioned initiatives are higher rents or property costs for small businesses and family landlords. It’s not surprising the biggest cheerleaders for these initiatives are consultants who will financially benefit from their implementation and city staff with commendable intentions but little experience owning or managing real estate. It’s imperative the real estate community educate and advocate on these important municipal issues to strike a balance between our environmental stewardship and affordable housing challenges and protecting small businesses and future growth.

State challenges. On the state level, we have lawsuits pending, ballot initiatives filed and legislative action or inaction that creates uncertainty in building and financing projects.

Construction defects reform. Minimal owner-occupied attached housing has been constructed in Colorado for years due to our state construction defects statute, which has a low threshold for homeowner associations to sue builders and developers for defects, real or imaginary. Most U.S. housing markets have 20 to 25 percent of building permits for condos/townhouses, while Colorado has less than 5 percent, which is good for trial lawyers wanting to stir up HOAs, but bad for entry-level homebuyers looking for attainable housing.

Proponents of construction defects reform have worked diligently for years, particularly during the 2015 and 2016 legislative sessions, to bring forward legislation to minimize construction defects lawsuits that would stabilize or lower insurance rates and spur new condo and townhome development. Despite bipartisan support for reform in the House and Senate, the Legislature has failed to take action. To their credit, some local governments have adopted ordinances to address this problem but most people agree this is an issue that should be addressed on the state level in order to revive confidence and certainty in condo development.

Urban renewal legislation. Nearly every year since 2000, the Legislature has considered amending the urban renewal statute, which was instrumental in creating important developments such as the 16th Street Mall, Stapleton, Lowry, Belmar and the Twin Peaks Mall. Legislative uncertainly has kept urban renewal authorities and developers walking on eggshells for years, wondering when a bill would pass and how bad it would be.

That question was answered during the 2015 session when the House and Senate passed H.B. 15-1348, the Urban Redevelopment Fairness Act, which requires urban renewal authorities to go through mediation with other taxing entities if the entities cannot come to an agreement on sharing tax increment revenues. Because this bill was heavily amended and passed through both chambers in the final days of the 2015 session, the final bill that went into effect Jan. 1 was a mess.

The governor signed the bill accompanied by a letter recognizing the bill was imperfect and promising to appoint a committee to review the “technical” issues with the bill. This committee met and, ultimately, presented a bill for the 2016 session that clarified many provisions of H.B. 15-1348 but left outstanding the issue of applicability. It is not clear if the mediation requirements in H.B. 15-1348 apply to projects that were approved prior to Jan.1, if financing has not yet begun on the project. This creates enough uncertainty that bond lawyers cannot give an unqualified legal opinion concerning the revenue stream for the bonds of affected projects, which is holding up significant development projects important to our community.

Ballot initiatives. Colorado has one of the easiest processes in the country for putting a “citizen-” (translation: special interest group) initiated measure on the ballot. As a result, it is not uncommon for us to have as many initiatives on the ballot as we do candidates. The 2016 ballot will be no exception with more than 150 ballot initiatives filed. While most of these have been withdrawn, there are still a number for which signatures are being gathered as of this writing. Some of these, if adopted by the electorate, could be enormously detrimental to the commercial real estate industry, so please monitor them closely this fall.

In closing, we plead with government leaders – elected and staff – to take a more thoughtful and predictable approach to governance in these increasingly turbulent times and take into consideration the many unintended consequences that come with well-intentioned legislation, code updates, fee expansions and personnel changes.

Featured in August 2016 issue of  Retail Properties Quarterly.

Edited by the Colorado Real Estate Journal staff.