New condominium construction in Colorado has plummeted over the past two decades, meaning people scouring real estate listings for a home they can afford are unlikely to find one of the most common types of entry-level housing.
Builders say the reason for the decline is simple: Colorado laws lack guardrails, leaving developers susceptible to costly lawsuits over things like leaks, concrete leveling and defective cabinetry, which in turn makes it too difficult and expensive to find insurers willing to underwrite condo projects. State law prevents builders from limiting buyers’ right to sue and spreads liability for any construction errors among all the contractors and subcontractors who work on a project, even if they didn’t cause the defect.
“It’s not that people don’t want to take responsibility for (their) product,” said Dave Lemnah, president of Lokal Homes, a Colorado developer that builds condos. “They really do want to take responsibility for their condo product. It’s just that we’ve got such an uneven playing field.”
The attorneys filing the lawsuits say builders are just looking to maximize their profits.
“The building industry could easily put me out of a job,” said Chad Johnson, a Colorado lawyer who represents homeowners in lawsuits against builders. “All they have to do is not be negligent.”
Caught in the middle of that power struggle over so-called construction defects liability, playing out in the Capitol and the courts, are Coloradans struggling to find an affordable place to live. The legislature has been reluctant to take on reform because of how politically fraught the topic is. But the failure this year of Gov. Jared Polis’ signature land-use measure, which would have imposed higher residential density zoning rules on local governments, has reignited the push to take on the issue.
Now, a group of Colorado lawmakers is making moves to pass legislation next year aimed at jumpstarting condo construction and easing the housing affordability crisis. Some of their ideas include isolating liability for construction defects claims to the people who did the work and making it easier for builders to resolve a defect before it leads to a lawsuit.
“Policy solutions I’d like to see would be ones that can cut down on litigation,” said state Rep. Shannon Bird, a Westminster Democrat who plans to sponsor a construction defects bill at the Capitol next year.
Bird said she wants to do that while maintaining homeowners’ ability to hold builders accountable for mistakes and have the issues fixed promptly.
The big question is whether the Democratic majority at the Capitol, which has bristled at the idea of easing liability protections for homebuyers, will get on board. Some Democrats say construction liability changes are a distraction from policies that would be more effective at increasing the number of homes available to entry-level buyers.
Then there’s the governor, who appears open to construction defects reform but can be difficult to pin down on his policy positions. Polis said at The Colorado Sun’s SunFest conference last week that he’s for “anything that will reduce housing costs” — and that reducing construction defects lawsuits would do just that.
“Of course we’re supportive of that,” he said.
A constricted condo market
In the early 2000s, condominium construction was booming in the Denver metro area. It even outpaced new apartment construction in some years.
Condos are units in a multifamily building that are individually owned and occupied, letting people build equity as they pay off their mortgage and the value of the property increases. They can also serve as an option for people, like retirees, looking to downsize. By comparison, apartments are rented out, often by a property management company. The occupant gets no investment return.
But when the housing market crashed as the Great Recession began in 2007, all development dropped off. In the years since, apartment construction has surged while condo construction has never returned to its pre-2007 levels.
From 2018 to 2022, condo construction in the Denver metro area fell to about 600 new units per year, down 80% from the five-year period from 2002 to 2006, when an average of 3,000 new units were built per year, according to data gathered by Zonda, a company that does quarterly housing surveys of the eight-county metro area.
The rest of the state follows condo construction trends similar to metro Denver, said Tom Hayden, senior vice president of Zonda.
“If you’re crazy enough to build condos, you will probably want to build it at the higher end today,” Hayden said. “But that doesn’t necessarily help the market’s problem of affordability.”
The median sale price for a condo or townhome in the Denver metro area was $425,000 in June, compared with $625,000 for a single-family home, according to a recently released study from the Common Sense Institute, a conservative-leaning Colorado think tank.
Kelsi Arrieta, a Denver-based lender with Cross Country Mortgage, said dozens of her clients are looking to buy condos as a cheaper alternative to a single-family home, but are still being priced out of the market because of monthly homeowners association fees, which can add hundreds of dollars on top of a mortgage.
“I think if people had the chance to be a renter or buy a condo, I think they would (buy a condo) because then they could quit renting and build some equity for themselves,” Arrieta said.
But the pent-up demand comes as fewer and fewer developers are willing to work on condos. The number of builders working on condo projects in Colorado has decreased to 23 in 2022 from 146 in 2007, according to the Common Sense Institute study.
The ones that do develop condos, such Lokal Homes, say they too may be pushed out before long. That’s partly because it’s becoming increasingly difficult to find insurance for their projects, said Lemnah, the president of Lokal Homes.
Between the lawsuits and the resulting struggles with insurance, it feels like “death by a thousand cuts,” he said. Still, Lokal Homes keeps building multifamily units because the demand still exists.
“We’re pretty close to a breaking point of having folks like us not continue to do what we do,” he said.
A court records search showed Lokal Homes has been sued under the state’s construction defects law several times in the past few years.
Once a construction defects lawsuit is filed, the cases can last a year or two and can impede homeowners’ ability to sell their condo.
Developers say the reason more construction defects lawsuits are filed around condo buildings is because there are so many units grouped together, allowing owners to pool their resources while being represented by a homeowners association — as opposed to a single-family homeowner who brings a case by themself. The plaintiffs’ attorneys say it’s because any construction mistake has likely been repeated in every unit.
As a result of the threat of lawsuits, insurance costs are 5.5% of a condo project’s hard expenses, according to the Common Sense Institute study. For an apartment building, by comparison, it’s 1.1% to 1.65%.
Condos are the hardest projects to insure in Colorado, said Eric Richter, an insurance wholesaler who connects insurance carriers with agents to underwrite residential construction in Colorado and other states. He only knows of a handful of carriers willing to do so.
“They say there’s just too much risk,” he said. “There is a marketplace for it, but it is much more difficult in this state than, I’d say, 48 other states in the country.”
And without insurance, it’s virtually impossible for a developer to launch a project.
Years of policy battles in the legislature
Bills addressing construction liability have pingponged in the legislature for decades, with policy changes sometimes benefiting plaintiffs and other times benefiting builders.
The Colorado Construction Defect Action Reform Act, which passed in 2001, requires homeowners to let builders know about any defects they find before suing. The goal was to allow developers to either fix the problems or pay the owner instead of going to court.
Then in 2007, condo owners got a leg up when the Homeowner Protection Act was passed. That law prevents developers from including certain clauses in contracts shielding them from lawsuits.
In 2017, then-Assistant House Majority Leader Alec Garnett, a Denver Democrat, introduced House Bill 1279, which requires homeowners association boards to get approval from a majority of unit owners before initiating a construction defect lawsuit. The legislature approved the bill and Gov. John Hickenlooper signed it into law.
Garnett went on to become House speaker and now serves as the chief of staff for Polis.
That same year, the Colorado Supreme Court ruled in Vallagio at Inverness Residential Condo Association v. Metropolitan Homes, Inc. that homeowners can’t remove clauses in contracts with builders requiring any construction defects to go through arbitration, or the process of coming to an agreement to prevent a claim from advancing to a lawsuit.
After those developments in 2017, new condo construction began to tick back up. The amount of new builds is still far from the pre-2007 level, though.
“The only people that seem to win are attorneys,” said Ted Leighty, who leads the Colorado Association of Homebuilders.
A few members of the Homebuilders Association have tried to re-enter the condo market since then and have run into the same old problems with lawsuits, Leighty said.
“They are all either in a suit or coming out of a suit right now,” he said.
Johnson, the plaintiff’s attorney, once defended developers in construction defect lawsuits. After finding problems with his own home, he decided to switch sides and start representing homeowners. Johnson said he’s been shocked to see how rarely the option of resolving issues before litigation is actually used.
“We offer every builder the opportunity to come out and take a look at the problems that our homeowners discovered and to make an offer to repair it or to pay for repairs,” he said. “I would say in 95% of the cases, the builders, their attorneys and the insurance companies don’t even respond.”
David McClain, an attorney who represents developers in construction defects lawsuits, said in his cases, he tries to work with homeowners to find a solution that avoids going to court, but he agrees that many builders and insurance companies have the mindset that a lawsuit will be filed anyways so it’s not worth the effort.
Johnson said he will often hire inspectors to look more deeply into a unit to find other defects — ones the owner may not have even noticed — to ensure if they’re bringing a lawsuit that they tackle all of the known problems.
The pro-developer side points to the practice of inspecting homes as evidence that the attorneys are simply there to drum up as much work for themselves as possible.
McClain says no matter how diligent a developer is, there will always be defects.
“There is no perfect construction,” he said. “If you spend $5,000 or $10,000 per home looking for problems, you’ll find them. Whether they cause a problem or not, doesn’t matter.”
The cases are further complicated by the fact that developers can be held personally liable in Colorado, meaning their family homes and personal assets can be impacted by the cases, McClain said.
“To me, much of the construction defect litigation is an insurance shakedown to maximize a potential settlement, not necessarily to address purported construction issues,” said Lemnah with Lokal Homes.
Lemnah said his company hires peer reviewers, third-party inspectors and others to check their projects for mistakes, and still they face lawsuits.
Striving for new laws
Bird, a former Westeminster city councilwoman, was one of the lawmakers who didn’t support Polis’ housing bill earlier this year, saying the state shouldn’t step on local control over land-use decisions.
She sees construction defects reform as a better way to make housing more affordable.
“The best thing to do would be for us as a state to make good changes in public policy that allows the market to build what needs to be built for people before we start taking away local government and local citizens’ ability to determine land use within their city,” she said.
Sen. Rachel Zenzinger, an Arvada Democrat, also plans to sponsor the 2024 construction defects measure. She was another vocal opponent of Polis’ housing initiative this year. She called construction defect reform a “glaring omission” from that bill.
“If you want to increase density, if you want to increase your smart growth strategies, which would be densifying your key corridors versus sprawl, then you need to figure out how to get more of these units into the pipeline,” Zenzinger said.
Zenzinger said she wants liability to be more targeted toward the subcontractors who do the allegedly defective work. She also wants to create a right-to-remedy for builders that would allow them to pay a third-party contractor to fix any defects as another way to prevent court cases.
Leighty, with the Association of Homebuilders, said while there are still many conversations that need to occur with lawmakers, there is “no shortage” of representatives and senators from both parties who are interested in the issue after hearing about it during this year’s debates on the governor’s land-use bill, Senate Bill 213.
Other ideas that have been floated for possible future legislation include detailing a statewide minimum warranty standard or creating a state-backed last resort insurance option for projects that can’t be insured elsewhere.
The concepts are still in their early stages, with many conversations, particularly among the various Democratic leaders, still needing to play out.
Rep. Mike Weissman, an Aurora Democrat, is skeptical of construction defects reform. He said wouldn’t support something that limits people’s right to sue when they find something wrong with a recently built home they’ve purchased.
“That is a completely wrongheaded understanding of the problem and how solutions go,” he said. “What you will see is more profits for the builders. What you will not necessarily see is more housing.”
He’s concerned focusing on construction defects reform could bog down the legislature and prevent lawmakers from taking on other issues related to affordability during the legislative session, which is limited each year to 120 days.
Rep. Steven Woodrow, D-Denver, was one of the sponsors of the governor’s housing bill this year. He said he’s open to anything that could help ease affordability concerns, but he’s not yet convinced that changing Colorado’s laws around builders’ liability is the solution.
“I think there’s other states that have this same or even more lenient defects laws, and, for some reason, they don’t have a problem building condominiums,” he said. “I think it’s a convenient distraction.”
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Polis told The Sun that changes in land-use should accompany efforts to make it easier to build condos.
“The bigger problem is a lot of areas aren’t allowing these units to be built at all — whether they’re apartments or condos — and that’s why we need to talk about the permitting and the land use,” the governor said.
Zenzinger said she thinks more Democrats will come on board as pressure mounts to address housing affordability.
“Traditionally, Democrats tend to favor the trial lawyers and we suspect that they will not be happy if we’re taking a cut at their business,” she said. “However, I think Democrats in both chambers recognize the urgency of affordable housing in our state.”
“Does it solve it?”
Those supporting new laws say even with reform, the state is a ways out from seeing measurable change.
Richter, the insurance wholesaler, said he thinks it will take years for insurers to respond to any changes and bring their business to Colorado.
Hayden, the vice president at the real estate analytics firm Zonda, said addressing the laws around construction defect litigation could greatly improve the state’s housing affordability, but said more changes will be necessary.
“There’s not a real quick, easy fix. If we all suddenly could build condos does affordability improve? Yes. I think a lot. Does it solve it? No,” Hayden said.
For the state to truly address housing affordability, more diverse housing options must be available, he said.
Even Zenzinger, who is planning to be one of the sponsors, said the bill wouldn’t be a cure-all.
“It’s not going to solve our affordable housing problems,” she said. “By no means. But it is part of the picture.”
The 2024 legislative session begins in January.
Colorado Sun reporter Tamara Chuang contributed to this report.
CORRECTION: This story was updated at 9:15 a.m. on Monday, Oct. 2, 2023, to correct what Alec Garnett’s position was in 2017. He was the assistant House majority leader. Garnett went on to become House speaker and now serves as Gov. Jared Polis’ chief of staff. This story was also corrected to reflect that the governor’s land-use bill was debated at the Capitol this year.