On the west side of Denver, a developer has big plans to transform a polluted brownfield site into thousands of new homes.
It’s exactly the sort of project state leaders have been clamoring for, accommodating a mix of income levels and housing types. Some would be affordable for low-income residents, others sold or rented at market rate. The project would include single family houses, as well as denser multifamily properties, developer Chris Elliott of E5X Management told The Colorado Sun.
But, Elliott says, the financing he needs to build it could all fall apart in November if voters adopt a new constitutional limit on property taxes in Colorado.
Municipal bond investors are threatening to leave Colorado if voters approve a proposed cap on property tax growth, putting the state’s largest source of infrastructure funding for new development in jeopardy.
“We’ve seen investors starting to pull back from the Colorado market,” said Tiffany Leichman, a public finance specialist at Sherman & Howard, a Denver-based law firm.
“If that money dries up, development is essentially going to come to a halt.”
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The bond market fears have led a growing number of developers and financial industry insiders to speak out against Initiative 50, exposing new fractures in the coalition of business groups, Republican officials and conservative activists who would typically be expected to back a statewide tax cut.
A number of GOP lawmakers have criticized the proposal, including Sen. Barbara Kirkmeyer of Brighton and Rep. Lisa Frizell of Castle Rock, two of the most influential Republicans at the Capitol on fiscal policy. Last month, Jon Caldara of the Independence Institute — who has backed a number of tax-limiting ballot measures of his own — entered the fray, calling it an “unworkable mechanism.”
Brought by conservative political nonprofit Advance Colorado, Initiative 50 would limit annual property tax revenue growth statewide to 4% in an attempt to address the skyrocketing tax bills of recent years. But the measure, which has qualified for the November ballot, would also tie a new constitutional knot around public finance in Colorado, with potentially wide-ranging consequences.
Property taxes are primarily used to fund city and county governments, schools and other local services. But they also help finance private development through special taxing entities like metropolitan districts and urban renewal authorities.
When developers build a new subdivision, they’ll often set up a metro district to finance the project’s infrastructure, such as roads and utilities, as well as community amenities like parks and recreation centers. To pay for it all, they issue tax-exempt bonds that are repaid through the future property tax bills of the community’s residents.
Bond investors worry a 4% statewide cap will trigger local property tax cuts that could prevent them from being paid what they’re owed.
In June, a group of eight law firms sent a letter to Advance Colorado and Colorado Concern, another supporter of the initiative, predicting that the tax-limiting measure would have a “severe” and “immediate” impact on the municipal bond market across the state. In July, the Colorado Municipal Bond Dealers Association weighed in with an open letter of its own, saying Initiative 50 will raise the cost of borrowing for local governments and slow the flow of capital to Colorado.
“I think it’s a dangerous game that we’re playing,” said Zach Bishop, a bond underwriter who heads the special district group at Piper Sandler. “The potential implications of passage of Initiative 50 are an increase in home prices for Coloradans because the land development process becomes more challenging for home builders.”
Karen Crummy, a spokesperson for the campaign in support of Initiative 50, dismissed the concerns in a statement to The Sun, insisting the measure would reduce housing costs, not increase them.
“These property tax increases are regressive and cruel, especially for young families trying to buy a home, or working-class families and seniors trying to stay in their homes,” Crummy said. “Voters will roll their eyes when they hear politicians, investment bankers and white-shoe lawyers argue that the sky will fall because the state can’t keep every cent of 30%, 40% or even 50% property tax increases.”
A 4% cap could trigger frequent cuts
In November, Colorado voters could face yet another round of decisions on complicated tax policies that will have significant implications for taxpayers and public services for years — and possibly decades — to come.
The more straightforward of the two is Initiative 108, another conservative measure that would cut property taxes by $3 billion next year. Its eye-popping cost has made it a target for public officials who worry about its impact on local government budgets, and that of the state which would be required to replace a sizable amount of the revenue lost to the cuts.
But over the long term, Initiative 50 might be more consequential.
Statewide property tax revenue has grown by less than 4% just 15 times in the past 60 years, a Colorado Sun analysis of Department of Local Affairs data found. That means homeowners can expect the proposed cap to trigger a statewide tax cut more often than not.
Even though 4% is double the Federal Reserve’s 2% target for inflation, critics say it doesn’t allow enough of a cushion for growth and new development. As an example, if you build a $500,000 house on an empty patch of land worth $10,000, that property’s value would jump by 5,000%.
Colorado Concern and Advanced Colorado acknowledged this concern when they introduced other property tax cap proposals this year that had allowances for new development. But those measures didn’t make the ballot, and Initiative 50 has no such protections, leaving it in the hands of elected officials and the courts to decipher.
The tax cuts that would result are likely to lead to lawsuits, Leichman suspects. If special districts cut taxes as required by the amendment, bond holders might sue over a breach of their contract, which typically calls for taxes set at a certain level to repay the debt. If the district doesn’t cut taxes, taxpayers could sue.
Even if courts side with the bond holders, industry insiders say it could still have a chilling effect on new debt, which wouldn’t be protected by contractual guarantees in place before the cap.
Supporters point out that other states have implemented property tax caps without destroying their bond markets. And until 2020, Colorado had a property tax-limiting provision of its own in the Gallagher Amendment.
The difference is Colorado had a system under Gallagher for local districts to adjust their mill levies upward to cover debt payments when tax cuts were triggered.
Initiative 50 appears to require a statewide vote to exceed the 4% cap. That could take the power to problem-solve out of local officials’ hands.
The stakes for development are high
If the bond market’s concerns prove correct, the stakes could be gigantic.
Colorado has over $22.8 billion in outstanding debt issued by local governments, school districts and special districts — a list that includes traditional government services like firefighting and hospitals as well as entities that finance the public infrastructure needed for private sector development.
In 2023, 88% of all new homes along the Front Range were built using metro district financing, according to Peak Economics Research & Consulting. That’s up from 60% a decade ago.
Elliott worries his brownfield redevelopment project won’t get built at all without the ability to tap into government-issued bonds at attractive rates. It’s not clear if bond prices have shifted yet as a result of investor concerns, but if the measure passes, Elliott said it could turn a developer’s ability to generate $10 worth of financing into more like $3 or $4.
“It will likely make it just that much harder, if not impossible to be able to do it,” Elliott said.
But that doesn’t mean developers won’t build anything at all. He suspects the future of new housing development in Colorado would involve a phased approach, in which the homes are built and sold, then community amenities follow years later once a developer can secure additional financing.
Other developments that rely on government-issued bonds might turn to the corporate bond market instead. But corporate bonds tend to cost borrowers an extra 30% in financing costs, Leichman says — if the project can be built at all.
On the flip side, a drop in metro district debt — which is repaid through property taxes — could save many homeowners money on their tax bills. The trade-off, Elliott says, is a higher up-front cost to buy a home.