Condos as a share of single-family construction starts have dropped from 25 percent in 2007 to 3.4 percent in 2015.1 Despite that drop, condo re-sales constitute 29.3 percent of all single-family unit sales, evidence of a strong market demand for condos.2
The Denver City Council has approved a condo construction defects ordinance with the goal of having more multi-unit for-sale dwellings on the market.
It is the latest in a series of laws adopted by Front Range cities addressing what is generally referred to as the construction defects problem—where builders shy away from for-sale condominium products due to concerns with future litigation.
Denver’s ordinance is similar to ones adopted previously in Lakewood, Littleton and Aurora. Its three key features strive to strike a new balance between the builder and the homeowners association when construction defects claims are made:
- It requires “informed consent” of a majority of homeowners and a majority vote before litigation can be pursued.
- It requires alternative dispute resolution (arbitration or mediation) for construction defect claims if the covenants creating the HOA so require and it prohibits elimination of such covenants by the HOA.
- It eliminates technical code violations as a cause for action and requires that actual damage, injury or risk be demonstrated (Denver only).
The Denver ordinance takes effect January 1 and applies to any “community interest association” created after that date. (It does not apply to existing condo associations.) The local ordinances have been enacted in the absence of state legislation, which has traditionally set the framework for resolving construction defect claims.
Condo owner groups are opposed to the ordinance on several grounds. Molly Foley-Healy, legislative liaison for the Community Associations Institute (CAI), a national trade group representing homeowners associations, says the ordinance “stacks the deck against condo owners” by forcing use of arbitrators selected by the developer/builder. She also said that HOAs, which are nonprofit corporations, do not have the revenue base to pay for arbitration—asserting that arbitration is more expensive than going to court and generally results in less than full settlements.
Denver views for-sale condos as an important part of its overall affordable housing strategy since condos are typically less expensive than single-family detached housing. A staff-prepared fact sheet states, “Denver will see upwards of 50,000 new residents in the next five years and needs a diversity of housing types to remain a vibrant and thriving city.” Assistant City Attorney David Broadwell said, “It’s a statewide issue, but particularly acute in Denver… we have a huge amount of stuff being built right next to our TODs (transit-oriented developments) and it’s all rental.”
But Denver cannot require rental units to be affordable under current state law. Due to a 2000 Colorado Supreme Court decision, Denver and other cities are unable to require an affordable housing set-aside in rental projects.
Skye Stuart, the mayor’s legislative affairs director, says, “Since 2002 when the IHO was adopted, there has not been one project that has gone from apartments to condos in Denver,” which she believes is due, in part, to fear of construction defects litigation.
Forest City supports the IHO legislation, says Tom Gleason, vice president for public relations, “as it could be helpful in our efforts to expand the range of housing options at Stapleton.” He said Stapleton has only a couple hundred condo units total, with none built in the past 10 years.
The Denver ordinance is aimed at condominiums that are structured as “air rights” ownership units, as distinguished from units that sit on their own lots, such as duplexes, townhomes or row home condominiums.
The city’s staff memorandum to Denver City Council acknowledges that construction defect litigation reform has been controversial, stating, “Advocates on both sides of the issue disagree at the most basic level regarding whether or not the risks and costs associated with construction defect litigation are the fundamental reason there is a lack of condominium construction in the Denver metropolitan region.”
Foley-Healy and other opponents of the legislation argue that construction defects are not the main cause for the dearth of condo construction, citing other reasons such as stricter financing qualifications for builders and owners in the wake of the credit market scandal.
Foley-Healy agrees that there are problems with the current legal framework for resolving construction defect issues but says a statewide solution is needed, not piecemeal approaches by individual local governments. She also predicts litigation over whether any home rule city has the authority to legislate on this matter given existing state statutes. Broadwell says the Denver ordinance “complements and does not conflict with existing state laws” that already govern the legal relationships between homebuilders and homebuyers.
1 Compiled by Metrostudy from metro Denver permit data.
2 Patty Silverstein, Development Research Partners, quoted in Denver staff background memo to Denver City Council.