Condo Builders Put on Brakes Fearing Lawsuits

August 9, 2016

Some condo developers are entering new projects cautiously or refraining from them altogether due to the growing threat of litigation for potential construction defects that are making some projects difficult to finance.

Indeed, “we have a saying here that there are two types of condo projects,” Gary Godden, principal of Godden Sudik Architects in Centennial in Denver, told The Wall Street Journal. “The ones that have been sued, and the ones that haven’t been sued yet.”

Of all the segments in the U.S. housing market, condos have been one of the slowest to make a recovery. In the past five years, construction of apartments has nearly tripled. On the other hand, multifamily units for sale have risen about 53 percent in comparison.

“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,” The Wall Street Journal reports. “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.”

Condo developers are the most susceptible to the litigation since homeowner’s associations are responsible for the common areas of the property in the building. As such, boards can file suit on behalf of potentially hundreds of individual owners.

A 2013 study by consultant Economic & Planning Systems Inc. found that developer’s insurance costs per condo unit in Denver bloomed more than three times that of similarly sized apartments. The risk of construction defects liability added an extra $15,000 in costs per unit, according to the report.

The problem is particularly hitting a head in Colorado. In Denver, a lack of condo construction has caused lawmakers and affordable housing activists to push for changes to the state’s construction defects law to urge more condo construction. Lawmakers in Texas and Nevada also have approved legislation that is aimed at curbing such litigation.

Source: “Threat of Lawsuits Crimps Condo Developments,” The Wall Street Journal (Aug. 7, 2016)