Colorado Might Finally Tweak Prop 123's Strict Affordable Housing Rules.

What This Bill Actually Does

When Colorado voters passed Proposition 123 to fund affordable housing, the law came with strict guardrails. Under current law, to buy a home funded by the program, a household can't make more than 120% of the local area median income. On top of that, their total monthly housing costs (mortgage, interest, property taxes, insurance, and HOA fees) cannot exceed 35% of their monthly income. That sounds great on paper. But in the real world of 7% interest rates and sky-high construction costs, developers are finishing these homes only to find that eligible buyers literally cannot afford the math.

Senate Bill 26-040 acts as a giant pressure valve for the Affordable Home Ownership Program. First, it clarifies that the income cap is based on 120% of the statewide Area Median Income (AMI) rather than just the local AMI, which broadens the pool of eligible buyers in certain areas. More importantly, it creates a formal housing cost waiver process. If a developer finishes a state-funded affordable home and it sits unsold for six months—despite being actively marketed—they can go to the Division of Housing (DOLA) and ask for a waiver to increase that 35% housing cost cap. DOLA can approve the waiver, modify it, or even pump more grant money into the project to buy down the purchase price so it actually sells.

But here is the real game-changer: the bill allows DOLA to let organizations pivot and rent these units instead of selling them. It also allows the state to accept local affordability mechanisms—like a 99-year ground lease from a community land trust or a local deed restriction—instead of forcing developers to use a rigid state-prescribed use covenant. Basically, it stops letting the perfect be the enemy of the good when it comes to getting people into homes.

What It Means for You

If you are a Colorado resident trying to buy your first home, this bill directly impacts your chances of actually securing the keys. By shifting the income eligibility from local AMI to the statewide AMI, the bill might make you eligible for down-payment assistance or an affordable unit even if your local county's median income is unusually low.

If you live in a community where affordable housing is currently being built, this legislation ensures those brand-new units don't turn into vacant neighborhood eyesores. Right now, because of the rigid 35% income cap on housing costs, a perfectly good home might sit empty for over half a year because no eligible buyer can secure a mortgage at current interest rates that keeps their payment under that threshold. By allowing the state to grant a housing cost waiver or let the builder pivot to renting the property, this bill ensures the housing we are subsidizing actually gets lived in by real families.

Here is what you should do next:

• Check your AMI: Look up the statewide Area Median Income versus your county's AMI. If you previously made slightly too much to qualify for local assistance, this statewide shift might push you back into the eligible bracket.
• Watch for local rentals: If you are currently renting and looking for better options, keep an eye on local 'for-sale' affordable developments. If they sit empty for six months, they may suddenly hit the rental market later this year.
• Contact the committee: If you have strong feelings about whether affordable housing funds should be strictly for homeownership versus renting, reach out to the Senate Local Government & Housing Committee before their first hearing.

What It Means for Your Business

For developers, general contractors, and nonprofit builders, SB26-040 is a massive de-risking mechanism. Right now, taking Proposition 123 money is a gamble. You underwrite a project based on today's interest rates, but if rates jump or insurance premiums spike right as you secure your certificate of occupancy, your target buyers are suddenly disqualified by the 35% housing cost cap. This bill gives you a six-month safety net. If you can prove you've adequately marketed the property for six months and it hasn't sold, you are no longer trapped. You can apply for a waiver to raise the cost limit, or you can request permission to rent the units out to stop the bleeding on your carrying costs.

This is also a major win for Community Development Financial Institutions (CDFIs) and community land trusts. The bill explicitly allows the state to offer below-market-rate loans (not just grants) to these organizations. Furthermore, the state will now accept your local affordability mechanisms (like a secured recapture lien or land trust ground lease) in lieu of their standard state covenants, provided it's just as protective. This means less friction when you are trying to stack capital and satisfy multiple lenders on a single project.

Here are three things you should do this week:

• Audit your current pipeline: Look at any active or planned projects utilizing Prop 123 funds. Identify any units that are struggling to sell and start the clock on your six-month window.
• Document your marketing: The waiver requires hard proof that a unit has been "adequately marketed" to eligible buyers. Make sure your real estate agents or sales teams are keeping meticulous records of listings, open houses, and buyer feedback right now.
• Review your covenants: If you use community land trust models or local deed restrictions, prepare to submit your standard legal instruments to DOLA for pre-approval so you can ditch the duplicative state covenants.

Follow the Money

This is that rare piece of legislation that solves a massive headache for almost zero cost. According to the initial fiscal note, the bill will cost the state just $8,856 per year starting in FY 2026-27.

That money doesn't come from your general tax dollars; it is paid directly out of the continuously appropriated Affordable Housing Cash Fund. The funds will be used to cover roughly 0.1 FTE (about four hours a week of staff time at the Division of Housing) to underwrite, review, and process the estimated four waiver requests they expect to receive each year, as well as draft the new guidelines for renting unsold units. Local governments and housing authorities might see a very slight, temporary bump in administrative work to update their own procedures, but overall, this is a negligible fiscal impact for a lot of market flexibility.

Where This Bill Stands

The bill was officially introduced in the Senate on January 27, 2026, and was immediately assigned to the Senate Local Government & Housing Committee.

It features strong bipartisan sponsorship, spearheaded by Senator Cleave Simpson (R) and Senator Judy Amabile (D) in the Senate, and Representative Katie Stewart (D) in the House. Because this is essentially a technical fix designed to rescue an existing voter-approved program from market realities—and because it costs the state practically nothing—it has a very high likelihood of passing. Keep an eye on the committee calendar for its first hearing; unless there is unexpected pushback regarding the pivot from homeownership to rentals, expect this to move smoothly through the chamber.