“Condo Construction Crisis?” Don’t Believe The Hype

Construction defect.

Historic construction defect.

Quite a bit of coverage last week of the introduction of legislation restricting the rights of homeowners to sue over faulty construction. As the Denver Business Journal's Ed Sealover reported:

A bipartisan pair of senators introduced a long-awaited construction-defects reform bill in the Colorado Legislature Tuesday, starting the clock on an 85-day effort to try to win over opponents who have killed similar efforts in each of the past two sessions.

Supporters of Senate Bill 177, sponsored by Senate Majority Leader Mark Scheffel, R-Parker, and Sen. Jessie Ulibarri, D-Commerce City, unveiled a wide-ranging coalition of backers that includes municipal leaders, builders, economic developers and affordable-housing advocates…

But that coalition did not include any of the groups that opposed Ulibarri's 2014 bill, supporters acknowledged, leaving legislative sponsors needing to find a way to convince homeowners and trial lawyers that they should accept having a tougher path to file a lawsuit in exchange for a solution that many say will do little to spur the building of new condos. [Pols emphasis]

The push to "reform" Colorado's multifamily residential construction defects law has been widely forecast to become one of the most contentious issues the General Assembly will debate this year. Proponents argue that the current state of Colorado law creates a legal disincentive for developers to undertake these kinds of construction projects. The Denver Post's John Aguilar:

Reform advocates contend that the condo market has dried up in Colorado because construction-defects law has increased the liability — along with insurance premiums — for builders to the point where owner-occupied multifamily projects are not viable.

According to the market research firm Metrostudy, condos accounted for more than 20 percent of all housing starts (more than 4,000 units) in late 2005 but only 3 percent through most of 2014.

Beauvallon, a Denver construction defect horror story.

Beauvallon, a Denver construction defect horror story.

In short, lobbyists for developers say that Colorado law exposes builders to unacceptable liability for construction defects, and that's why there aren't enough condos available in Denver's red-hot housing market.

But is that really what's going on? A group representing homeowners in Colorado says the situation is much more complicated than risk of lawsuits over defects–and has data to back it up. The DBJ reported in January:

Economic conditions following the recession have contributed to a market in which buying a home is more difficult and expensive than it used to be, the study says.

Higher fees, required credit scores and home prices, as well as wage stagnation, unemployment and lower marriage rates have all kept potential buyers out of the market, said Pat Pacey, principal at Pacey Economics, during a conference call Tuesday.

Higher student-debt loads have also contributed to the younger generation holding off on buying a home, she said…

The findings are in direct opposition to the narrative put forward by developers, brokers and politicians in recent months, who say that the state's construction defects law is to blame for the lack of condo development, which many say has put a chokehold on the lower end of the home buying market across the metro area. [Pols emphasis]

But perhaps the best argument against weakening the rights of homeowners to "spur" condo construction is this: Colorado's slump in multifamily construction is not unique to Colorado.

The Colorado builders complain that “condos accounted for more than 20 percent of all housing starts (more than 4,000 units) in late 2005 but only 3 percent through most of 2014.” And, “in 2014, 5 percent of all new housing stock in Colorado was condominiums.”  Yeah, well, take a number.  Nationally, in November 2014, multi-family starts were down 11% from the same time last year. Moreover, according to the U.S. Department of Housing and Urban Development and the U.S. Census, its August 2014 report showed a “steep 31.7 percent decline in multifamily production.” 

Bottom line: the hurdles faced by the next generation of Colorado homebuyers are more complicated than proponents of this legislation suggest. To buy their argument is to ignore the crushing burden of student debt faced by young people today, stagnation and even decline of real incomes for today's workers, and the tighter lending requirements buyers face today as opposed to before the recession of 2008. Not to mention that this is just the latest attempt by developers to shield themselves from liability, part of a years-long strategy–and at this point, the possibility that political objectives are factoring into business decisions should be considered.

Once you understand that the roots of the problem are much more complex than liability of builders for construction defects, the whole campaign to weaken homeowner's rights to sue over those defects falls apart. The fact is, buying a home is one of the biggest, if not the biggest investment most working families will ever make. To force homeowners into arbitration and hobble HOAs trying to get justice for their members deprives Coloradans of basic and entirely reasonable protections for their most valuable asset.

Honestly, it's hard to imagine a greater disincentive to buying a condo than this bill.

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27 Community Comments, Facebook Comments

  1. bullshit!bullshit! says:

    The Democrats supporting this bill are well-intentioned but misguided, and they're being used by the lobbyists. Taking away homeowners rights is not the way to make housing affordable. Here's hoping Sen. Ulibarri and Rep. Singer see reason.

  2. ModeratusModeratus says:

    Wow, Pols is closer to the trial lawyers than even their fellow Democrats. That explains a lot about this blog.

  3. Wong21fr says:

    The current law is hampering condo construction, though it certainly isn't the only cause as the OP expanded upon.  Modest reforms such as what are proposed, such as requiring the majority of homeowners to approve suing the developer instead of a majority of the board, are a good step in getting the construction liability rates decreased so that some of the more modest-priced for-sale projects can be economical.

    BTW, using the Beauvallon as an example is like holding up Charles Manson as your typical murdererer.  Both are extreme examples of something gone wrong.

    • JeffcoBlueJeffcoBlue says:

      Hey thanks! Which lobbyist do you work for?

      • Wong21fr says:

        None.  I'm just someone who's interested in urban development in Denver and doesn't want to see 100% of the middle-class and below priced out of the City and County of Denver.

        There's practically nothing in Denver U/C right now that someone could buy assuming 4x GI and the median household income of $50K, including single-family homes in areas like Stapleton or Green Valley Ranch.  There's zero affordable for-sale multi-family housing U/C.  If the Millenials that are flocking to the city want to buy, their only choice right now is head out to the 'burbs as there's no starter condos available (current condo inventory could hardly be considered affordable given the appreciation due to limited supply).  

        While the cost construction defect liability isn't going to address the issue entirely- stricter FHA requirements, higher borrower standards, consumer debt load are other downward pressures, if we can double the % of for-sale multi-family U/C at least we will be more comparable to the rest of the nation.

        • JeffcoBlueJeffcoBlue says:

          The problem is, you have yet to present evidence that builder liability for defects is the cause of problem. We all know there is a shortage of affordable housing in Denver, and the OP explains pretty well why other factors are more to blame than builders being liable for defects.

          Without that, you're just shilling for contractors who don't want to stand behind ther work.

          • Wong21fr says:

            I'm not saying that builder defect liability is the whole cause of the problem, there are several variables in play as the OP alluded to.  I do disagree with the OP that builder defect liability is a non-significant variable for the lack of for-sale, multi-family housing that requires an HOA,  i.e. condominiums.  The OP's argument fails to make this point.  The statistics that are referenced don't address the fundamental question in regards to Colorao condominium construction:  the national average for for-sale condominium construction is 10-12% while it is 3-5% in Colorado.  The lending requirements are consistent across the nation, so what explains the gap between Colorado and the rest of the US?

             

        • DavieDavie says:

          I looked at a new condo development in Lower Highlands a few weeks ago.  It had 3 levels plus roof top patio (with a big puddle of water collecting on the flat roof).  Nice view of the city skyline though.  However, the walls were so close together, you felt like you could touch both sides with outstretched arms.  But the killer was when I took a step on the top floor and the wood beneath the carpet let out a loud groan as my foot sank into the floor.  They wanted a half million for that.  No thanks!

          You really need to know and trust the builder.  

          • Diogenesdemar says:

            "You really need to know and trust the builder."

            That's the formula for a regretful blunder.  Never, never, never, never, never trust a builder — unless you're the kind of person that has hundreds of thousands of dollars you don't mind pissing away.

            Get guarantees, warantees, inspections, and legal review — and hope to fucking hell that there's enough of a legal structure to sue the bejeezus out of the worthless bastards (P.S. — they're all worthless bastards, btw — all) if and when the shortcutted defects start to show up and they aren't promplty made right!!!!

            • Duke CoxDuke Cox says:

              I am almost never moved to say this to you, Dio…

               

              — they're all worthless bastards, btw — all

               

              You are wrong.

              There are trustworthy builders…besides myself, I know a handful. They are VSB (very small business) owners and are not members of nor are they represented by the CAHB or any other corporate support group.

              I warranty ALL my work for a full year and in fifteen years of business I have had one difficult resolution to a contract. I do not advertise…I don't need to.

              It really has a great deal to do with the size of the company. The only real money for lawyers in this is in trying to hook big builders with defects in multi-family work or large subdivisions with many homes by the same builder. Those builders are usually construction management companies with little on-site interface with their sub-contractors. Not only does this process enhance the opportunity for repeated construction defects in the first place, but also makes the prospect of effective cure a matter of concern.

              The bottom line is that this is a fight between trial lawyers and big corporate builders…you know, millionaires fighting millionaires. Caught in the middle is the hapless homeowner whose needs and rights as a buyer should be the focus of justice here…Ultimately, it is all their money.

              My bottom line on this is the bottom line of my post below…smiley

               

              • Diogenesdemar says:

                I saw your post after I ranted. I had two thoughts: "Damn that man is reasonable."  And, "I kinda wish I hadn't been such an hyperbolic ass."

                Don't worry, I'll probably get over it . . .

                Know you will, too!   ;~)

                 

                • Duke CoxDuke Cox says:

                  Not a problem, my friend. I am well aware of the frustration and disappointment experienced by many who do business with builders….almost all of it justified. I have remediated a lot of shoddy work over these many years.

                  My primary point is that small, independent builders are not represented by the trade organizations and lobbyist firms and the wholly owned elected officials who push these bills. As is almost always the case, it is Big Money that attempts to pervert the system to their benefit, while leaving the little guys to get by on their own.

    • bullshit!bullshit! says:

      I think Beauvallon is the perfect example of the problem, unless of course you're a homebuilder! Then I bet you would want to change the subject.

      • Wong21fr says:

        And what happened to the developer of the Beavallon (Craig Nassi) due to the problems brought on by lousy design?  He was ridden out of town by everyone and will never work here again.  

        But for every Beauvallon (a luxury project) there's a couple of Glass Houses and Spires which injected a far greater number of units that first-time homebuyers could afford and which are desperately needed in this market.

        • JeffcoBlueJeffcoBlue says:

          Uh no, Craig Nassi was run out of town after he GOT SUED. Big difference, and under this bill Nassi could have kept Beauvallon nicely bottled up in arbitration.

          • Wong21fr says:

            No, he was run out of town when he opted to stiff his GC and the subs on final payments.  The construction deficit lawsuit came after Nassi embarked for NYC to become an even bigger developer where he fell flat on his face.

            • OneBroker says:

              Any links or more stories on this guy Craig Nassi? A friend of mine was approached by another party to invest in a NYC condo project of BCN Development (Craig Nassi) and Im a little skeptical. He’s been sued by his own father which was the first red flag and now im reading this. Please help if you can.

              Thanks,

        • ModeratusModeratus says:

          Liberals only care about "affordable housing" if it's owned by the state.

        • Old Time Dem says:

          The Glass House and Spire are your idea of first-time homebuyer properties?  They are among the highest $/sf in the area, and I ruled out the Glass House because of ongoing litigation involving defects.

          • Wong21fr says:

            The only reason that they are amongst the highest $/sf in the area, which I assume you mean being the Denver Metro Area, is that they are a) downtown and b) some of the only new-build condo units available in a rabid market.  When they were first built, you could buy a 1-bedroom unit in the low $200K range.  

            Given current market demands, we should have 3-4 Spire/Glass Houses U/C right now.  Instead we have townhomes, 300-500 unit apartments buildings, and single-family homes.  Oh, and a couple-hundred condos that are some of the priciest in the whole region.

            • Old Time Dem says:

              No, I don't mean Denver Metro Area. They are expensive even by downtown standards.  Other projects in Riverfront, Lower Highlands, as well as loft conversions, are much cheaper.

  4. Duke CoxDuke Cox says:

    I have been a builder for over two decades and I am here to tell you this is bullshit….

     

    Reform advocates contend that the condo market has dried up in Colorado because construction-defects law has increased the liability — along with insurance premiums — for builders to the point where owner-occupied multifamily projects are not viable.

     

    Insurance premiums slow construction growth just like oil and gas regulations slow drilling…not at all. This is the standard hyperbole from the industry Bigs…

    In 2002, State Representative Greg Rippy, sponsored a bill on the same subject…

     

    "Rippy …sponsored a bill that died in committee, House Bill 1398, which would have stripped consumers of protections currently afforded them under the state's consumer protection laws.It would have capped and limited damages consumers could collect from any architect, contractor, builder, engineer or inspector for construction defects in residential building.Builders have seen their liability- insurance premiums explode in the face of unjustifiably large damage awards, Rippy said."I think this is my number-one priority," he said."People can't afford to pay for the huge increase in the costs of construction that this has caused. (Aspen Daily News, 2002)

     

    His opponent in that years campaign, Rick Davis, himself a builder, countered Rep.Rippys' claims

     

    In his 34 years of construction experience, Davis said he has seen far too many bad builders."I've seen willful negligence and it gives all of us in construction a bad name," he said."We can't let consumers be penalized for negligence."

     

    Consumers need protection from negligent builders just like gas patch residents need protection from drillers and their industry…negligence is the bastard child of the union of Easy Money and A Quick Buck…

      Penalties for bad builders should be steep, but there should also be a limited right to cure for those builders with the integrity to stand behind their work.

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