Late last week, the City and County of Denver sent letters to over 300 homeowners notifying them that they fail to comply with the City’s affordable housing standards. Many of those who received the letters had no idea their homes were subject to such standards in the first place.

Before enacting its affordable housing fund legislation, Denver’s main mechanism for securing affordable housing involved requiring a certain percentage of new, for-sale housing to be made subject to deed restrictions that limited both the income of the property owner—to 80 percent of area median income—and the sales price for subsequent transactions. Per Denver’s municipal code, the deed restrictions must remain in place for a minimum of 15 years after the initial sale of the home, and provide the Office of Economic Development an option to purchase the home before any resale within 10 years after the expiration of that 15-year period.

Violations ranged from owners who leased out their properties in violation of the deed restrictions to, for about 196 people, not being an “income-qualified” buyer. For the latter group, Denver has offered two solutions: either complete an income verification process to become qualified; or sell the home to an income-qualified buyer at a price that meets the requirements of the deed restriction—which in most cases allows only a five percent increase each year. For homeowners that cannot meet the income requirements, selling could mean taking a loss of tens of thousands of dollars.

Since the affordable housing program had been mostly enforced based on complaints and self-reporting until recently, deed restrictions had been omitted from subsequent deeds, not disclosed by listing brokers and even left off of title policies. About 381 owners of restricted homes even paid property taxes based on the unrestricted property value, and in some cases, mortgage lenders determined loan amounts based on appraisals that did not consider the restricted value of the home. However, since property owners are deemed to have “constructive notice” of any properly recorded and indexed documents affecting title to their real property, the deed restrictions nonetheless bind subsequent buyers regardless of whether they were actually informed of the restrictions or not. Although some homeowners may have claims against the brokers or title companies that failed to disclose the deed restrictions, coming into compliance, even within the six-month grace period Denver has offered, could be costly in Denver’s tight housing market.