Threat of Lawsuits Crimps Condo Developments
Wall Street Journal
By Chris Kirkham
07 August 2016
The condo
where Jonathan Harris lives in Denver, shown above, sued the builder
and won after years of unsuccessful fixes to leaky windows and drainage
problems. PHOTO: THEO STROOMER FOR THE WALL STREET JOURNAL
Gary Godden used to specialize in designing condominiums for first-time
buyers near Denver, often completing eight to 10 projects a year before
the real-estate crash.
But while the Denver area has re-emerged as one of the nation’s hottest
real-estate markets, Mr. Godden’s architecture firm has all but exited
the condo business. The reason: The threat of litigation for potential
construction defects in Colorado makes most projects impossible for
developers to finance, he said.
“We have a saying here that there are two types of condo projects,”
said Mr. Godden, principal of Godden Sudik Architects in Centennial.
“The ones that have been sued, and the ones that haven’t been sued yet.”
Condos have been the slowest to bounce back of any segment of the U.S.
housing market. Over the past five years, construction of apartments
has nearly tripled, while that of for-sale multifamily units has
increased only about 53%.
increased exposure to construction-defects lawsuits
The slow comeback stems partly from developers’ increasing confidence
in rental-apartment buildings as young adults and middle-aged families
stung by the housing crash have turned to renting. But developers also
point to increased exposure to construction-defects lawsuits, which
they say have made insuring large projects much more expensive.
Some lawmakers say the legal landscape is limiting the supply of
entry-level housing. Although the term “condo” often conjures images of
luxury penthouses in New York and Miami, such housing, usually
consisting of individually owned units in a building or a complex, has
historically provided a moderately priced transition into homeownership
from the rental market.
In Denver, the lack of condo construction has become a central part of
a debate about the local housing market. A coalition of Democratic and
Republican mayors, real estate developers and affordable-housing
activists have pushed for changes to state construction-defects laws to
encourage more condo building.
Condo developers are particularly susceptible to litigation because
homeowners’ associations govern the common property of the building,
making it possible for boards to file suit on behalf of potentially
hundreds of individual owners.
The issue goes beyond Colorado. Lawmakers in Texas and Nevada have
approved legislation in recent years meant to curtail litigation, while
a housing affordability study in Seattle last year suggested the city
and state explore changes to its condo laws.
But developers say several aspects of Colorado’s law make it a tougher
environment for them. One provision in particular makes insurers
responsible for covering a broad array of problems that could arise on
a project—a factor that has made premiums more expensive. Another part
of Colorado law prevents developers from having a say in whether claims
should be decided by an arbitrator before going to trial.
No one tracks such litigation in a comprehensive way, but studies of
the market for general contractors’ liability insurance for residential
construction have shown that costs are much greater for condos than
rental-apartment projects of the same size. One study of Denver’s
market by land use consultant Economic & Planning Systems Inc. in
2013 found that a developer’s insurance costs per condo unit are more
than three times that of similarly sized apartments. The risk of
construction defects liability added an additional $15,000 in costs per
unit, the report found.
Denver, the priciest U.S. housing market not on a coastline, has
recorded home price and rent growth among the top five of all large
U.S. metro regions over the past two years, conditions that would
normally invite builders to pounce. Instead, “There’s a great deal of
chill,” said Denver Mayor Michael Hancock, a Democrat. “We need every
tool in our tool chest to help us begin producing as much affordable
and market-rate housing as we can.”
Condo associations argue that easing state laws would leave homeowners
at the mercy of developers who might shortchange needed repairs.
The condo association where Jonathan Harris lives in Denver sued its
builder after years of unsuccessful fixes to leaky windows and drainage
problems that caused water to back up into some units during storms.
“Don’t build crap and you won’t have these lawsuits.”
“I don’t understand this resistance to stand behind what they do,” said
Mr. Harris, who has represented homeowners associations in front of the
legislature. “Don’t build crap and you won’t have these lawsuits.”
For the past four years, Colorado’s legislature has debated changes to
the laws that would require homeowners and developers to try settling
disputes in private arbitration process before going to civil court.
Another proposal would require that a majority of homeowners in a
building vote to proceed with a suit, as opposed to just the board
members. Lawmakers ended the session in May without voting on a package.
Meanwhile, critics of the current system say condo boards can continue
to pursue lawsuits even when individual owners might not be on board.
Allison Boerner said she and her husband were unable to sell their unit
in Parker, Colo., in 2013 because their homeowners’ association decided
to pursue a lawsuit. Potential buyers were unable to get mortgage
financing because of the pending litigation, she said.
“There are so many people living in the same building,” Ms. Boerner said. “It’s not going to be perfect.”
Comments
Al Harrell
Aug 8, 2016
Maybe developers and builders need to "build it right" and not blame
"unreasonable" homeowners. I live in a condo in a metro Atlanta area.
We had over 100 units which experienced water intrusion problems. The
windows were improperly flashed and stucco improperly mixed and
applied. After a three year lawsuit and collection of an insurance
settlement covering perhaps 20% of costs, the residents had to
expend close to $3 million to repair the building. Scaffolding had to be
erected, all existing stucco removed, window flashing and waterproofing
reapplied, and stucco replaced.
Developers know that if they build a large apartment complex, they are
much more likely to be dealing with a large corporate entity with
lawyers and deep pockets likely to hold them accountable, as opposed to
a condominium development consisting of individual homeowners.
Dennis Peek
Aug 8, 2016
In Florida, we have seen the horror stories of condos, low and high
rises, that show up 10 or more years after construction: water
infiltration, mold, poor installation of windows and weatherstripping,
roof leaks and failures, etc. Much can be traced to the construction
labor and lack of oversight— inexperienced laborers instead of
craftsmen are used and over sight is nil.
Developers go the cheap
route and their companies often disappear shortly after completion. We
have seen developers "use' a small contractor's license as cover and
when things go south, the small contractor loses his license and
the condo owners are stuck with millions in repair costs. Meanwhile,
the developer is long gone with his profits.
Douglas Foley
Aug 7, 2016
Denver has lots of high-end multi-family being constructed. They will
serve as rentals for five years after which the units are no longer
"new construction." They will be converted to fairly high-end condos
after the expiry of defect time limits.
Mike Rinner
12 days ago
@Douglas Foley Actually, the problem is so severe that most apartment
developers are saving big money on insurance costs by accepting deed
restrictions for 7-9 years that preclude condo conversion. Once again,
no short-term relief for the affordability problem.
top
contents
appendices
previous next