Why so many new apartments and so few new condominiums?

Did you ever notice that there seem to be so many new apartment buildings in the Boulder Valley and Denver (perhaps too many) and only a miniscule amount of new condo buildings? If you are in the market for your first home, or downsizing to your last, I bet you have noticed this phenomenon. I am here to tell you that you are not crazy. There is an explanation and a solution.

Anyone who is even casually familiar with the real estate market in the Boulder Valley, like much of Colorado, knows that it is characterized by two features: lack of inventory generally and lack of affordable homes specifically. Most people do not know, however, that correcting the imbalances in the construction-defects law would help ameliorate both conditions, and it’s within your power to do so.

What is wrong with the current law?

While, in my opinion, there are myriad issues with the current law, this article does not have space for a full treatment. However, here are a few of the key problems that must be addressed before things can get better.

1. Statute of limitations: Currently, a lawsuit can be brought up to eight years after substantial completion of a project. This alone is enough to deter developers and builders from building condominiums — how can you plan for the future when you know you could be sued eight years after your last project? To make matters worse, when builders and developers make agreed-upon repairs from an initial lawsuit, a whole new eight-year statute of limitations begins. That means builders can be on the hook for 16 years or more after a project is completed. Would you agree to do something knowing you could be sued for it over a decade later?

2. Informed consent: Currently, a majority vote of the board members of a homeowners association is sufficient to begin a lawsuit — without the consent of a majority of condo owners.  The problem with this is that any such litigation impedes the ability of all owners to sell their units.  Many, if not most, lenders will not loan buyers money to purchase a condo that is part of an ongoing construction-defects lawsuit. Thus, without their consent, average owners are held hostage to the litigation process, which in the case of construction-defects lawsuits is likely to drag on for years.

3. Broken incentive structure:  The law should be structured to allow the parties to identify serious issues and have them addressed quickly. That way, condo owners would get safe, quality homes in which to live, and builders would be able to address issues efficiently and move onto their next project. The current law does the opposite of this. It does not encourage repair-based settlements, but rather lends itself to very high-dollar claims that force insurance companies representing builders to hold out as long as possible before settling and incentivizes plaintiffs lawyers (who mostly works such cases on contingency) to seek as large a settlement as possible.

What impact does this have?

A decade ago, approximately 25 percent of all new residential housing starts were condo projects, which was fairly typical for a healthy housing market. For the last several years, under the current iteration of construction-defects law, that figure has dropped closer to 3 percent. There is overwhelming buyer demand for new condo units throughout Colorado (with 100,000 people moving here each year), but developers and builders are not building the desired product.

Why would they disobey the laws of supply and demand? First, most developers and builders understand that if they build a condo project in Colorado, getting sued under the current construction-defects rubric is a virtual certainty. Second, even if they wanted to go ahead and build condos anyway, most insurance companies will either not insure the projects or will charge premiums above what builders can afford. Why? Because the insurance companies also know the builder will almost certainly be sued, regardless of the quality of its product. Let’s face it — building an absolutely flawless product in nearly impossible. That is why you see so many new apartment buildings and so few condos.

How can it be fixed?

An ideal solution to the construction-defects problem would provide an efficient process for identifying and correcting true defects that affect health or safety so that homeowners would have their issues fixed expeditiously and honest developers and builder could correct issues and move on with certainty.

A number of bills have been introduced in the last several years, and each of them has failed. One bill currently being considered is Senate Bill 17-156, which attempts to implement a quick resolution process for HOAs trying to correct construction defects, while also protecting homeowners who are trying to re-sell or finance their homes from actions taken by their boards without their consent or knowledge.

You can read the bill for yourself at: www.statebillinfo.com/bills/bills/17/2017A_156_01.pdf.

If you are convinced that the problem is real and believe, as I do, that SB 17-156 goes a long way toward fixing our dearth of affordable condos, please let your state representatives know.

Jay Kalinski is broker/owner of Re/Max of Boulder.

Comments

Start a discussion in the form below.

To participate in commenting, you must enable JavaScript.