Here's a surprising fact: Despite the popularity of starter homes in today's recovering housing market, Colorado builders aren't throwing up many condominiums.
Jeff Whiton, CEO and executive vice president of the Home Builders Association of Metro Denver, says that ideally, condos and townhomes should make up about 20 to 25 percent of new residential buildings. But, according to the Pikes Peak Regional Building Department, condos composed .9 percent of El Paso County residential building permits in 2004 (54 permits representing 276 units) and less than .07 percent (two permits representing 44 units) in 2013. Townhomes have been more popular with builders — they comprised 12 percent of permits in 2004 (714 permits) and 4.9 percent in 2013 (143 permits) — but still aren't being built on the scale Whiton says is healthy.
Despite a building boom in the Denver area, the situation isn't much better there. In April, Inside Real Estate News reported that the number of condo permits issued in the Denver area in the first quarter of the year was up 787.5 percent from a year before. Unfortunately, that percentage represents small figures — condos still make up less than 3 percent of total permits.
So what gives?
Joe Loidolt, president of Classic Homes and of the Housing and Building Association of Colorado Springs, says the hold-up isn't caused by reasons you'd expect — a demand for more apartments, small profit margins, or difficulty securing loans. Rather, he says, builders are running scared from homeowners associations that have been empowered by current laws to sue over any construction defect, no matter how small.
"It's so risky that most builders don't want to do it," he says, "or if they do it, they do it on a smaller level."
At Classic Homes, Loidolt says, condos and townhomes used to be 15 to 20 percent of business 15 or 20 years ago. Now, he says, they're only 5 percent.
A whole lot of suing?
In the last legislative session, a coalition of organizations representing business, home construction and housing interests banded together with 25 Colorado mayors (Mayor Steve Bach was not on the official list) to push legislation it felt would lead to more construction of townhomes and condos.
The Homeownership Opportunity Alliance was successful in getting a bill introduced by Sen. Jessie Ulibarri, D-Adams County, that aimed to make changes to existing law. Senate Bill 220, which met a quick death, proposed three main changes:
• It required a majority vote of the members of a homeowners association before a suit could be filed against a builder, developer or contractor.
• It required a clear notification of the suit and its implications to all homeowners.
• It took away the ability of an HOA to remove language in its bylaws (usually authored by a developer) that requires that disputes with a builder be resolved in arbitration instead of a jury trial.
As it is now, Whiton says, "The general consensus among builders is if you build a condominium project you can bet there will be litigation on it at some time during the future."
To put that in context, Tom Clark, chief executive officer of the Metro Denver Economic Development Corporation and executive vice president of Denver Metro Chamber of Commerce, says, "In some of the metro counties, in data that we tracked over 10 years — this would be Arapahoe [County], places where there was a lot of building going on — you had a 40 percent chance of being sued [if you built condos]."
Those types of suits are less common with townhomes, because individuals own the land underneath their home. In condominiums, the HOA owns the land and the suits come more regularly.
Amy Hansen, a Denver real estate lawyer who represents developers at the Otten Johnson law firm, says that currently a vote of an HOA board — perhaps only three or five people — is often enough to get an entire condo complex into a lengthy suit. Once the complex is involved, homeowners can't sell their homes or even refinance in most cases, experts on both sides of the issue say.
This could be more simply handled through arbitration, she says, where a neutral third party, often a retired judge, considers the facts and makes a ruling that can't be appealed by either side. While arbitration can be expensive, she says builders often pick up the initial cost, and usually pick up all the cost if they lose.
Plus, she says, there are other issues with filing a suit. Once an attorney has hired an expert to discover all the problems with a building — no matter how minor — the property has been found to be defective. If those problems aren't resolved, a homeowner could be required to disclose them to a potential buyer.
"In many cases their biggest assets are devalued by the process," she says.
On the other hand
Naturally, there's another side to this.
Molly Foley-Healy, a Denver attorney who represents HOAs for Winzenburg Leff Purvis & Payne, says of SB220, "I've never seen such a cynical attempt to take away consumer rights."
She says SB220 would have made it nearly impossible for homeowners to recover money for bad construction, because:
• It's extremely difficult to get 51 percent of owners in a large condo project to vote on anything, especially if those owners happen to be deployed with the military or live somewhere else most of the time (e.g., it's their vacation home).
• SB220 required disclosures to homeowners that included details that could only be accurately determined by a construction defects attorney. But the legislation prohibited hiring one to write it.
• The developer gets to set the original rules for the HOA, which often specifies an arbitration service — meaning the developer picks the arbiter.
Foley-Healy says she's glad that SB220 failed, as did related legislation in the 2013 session.
Jeff Kerrane, a construction defects attorney with Benson, Kerrane, Storz and Nelson in Golden, agrees and says the lawsuit problem has been blown out of proportion. Most builders, he says, never get sued. And some get sued every time they build something — because they have shoddy workmanship.
"The vast majority of townhome and condo associations do not have litigation," he says, "and that's the way it's always been."
HOAs, he says, don't generally want to get involved in a lengthy lawsuit unless something is seriously wrong — like leaking roofs and windows, or drainage and grading problems that lead to flooding. And when HOAs do sue, homeowners are already required to be notified and the suit must be approved by an elected HOA board.
And as far as arbitration goes, Kerrane says that it can cost tens of thousands of dollars in deposits, and if an arbiter isn't fair, there's no options for the HOA.
Kerrane says he doesn't buy the idea that current laws are too hard on builders. A series of laws passed since the 1980s, he says, have actually favored builders. For instance, laws have limited the damages from construction defects claims and the time allowed for bringing a claim.
Sean Duffy, spokesperson for the business alliance Colorado Concern, a major supporter of Senate Bill 220, says the exact opposite, arguing the pendulum has swung too far in favor of homeowners associations. He says builders aren't giving up the fight to loosen regulations and make building condos more attractive.
"We need to get the band back together if you will," he says, "and see what can we get moving as we head into '15."
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