Marianne Goodland | Colorado Independent | March 22, 2017
For the first time in at least four years, a fix to the state’s construction defects law is finally within reach.
This much perhaps everyone can agree on: Colorado is in an affordable housing crisis, whether you live on the Front Range, Western Slope or the Eastern Plains. Affordable housing is almost a myth, with rents in Denver for a one-bedroom apartment averaging $1,550 per month.
But is a package of legislation tackling “construction defects reform,” which would change the process by which homeowners with defective condos sue developers, the answer to Colorado’s affordable housing crisis?
Some of those who build condos say yes: If you pass it, giving us more protections against lawsuits, we will return to building affordable for-sale condos and townhomes. But some of those who have lived in defective owner-occupied multi-housing units just don’t buy that.
Skeptics, including Jonathan Harris of Build Our Homes Right, a citizens’ group that advocates for homeowners with construction defects, say those who want to weaken homeowner rights are really just dressing up tort reform as an affordable housing fix.
“Nothing in any of these bills makes a promise for affordable housing,” says the former restaurant manager who fought his Denver home builder in court for years before reaching a settlement. “I think people are so desperate for affordable housing they are willing to throw real-life homeowners under the bus. They are willing to trade the right to go to court for the promise of ‘maybe we could have more condos.’”
Democrats in both the House and Senate have signed on to several reform bills this session, believing builders and developers who say Colorado is not a good place to construct affordable, owner-occupied multi-family housing, condos and townhouses because of the ease with which they might catch a class-action lawsuit if owners find defects.
What constitutes a construction defect is not defined in state law, and lawsuits and settlements claiming such defects include condos with poorly-constructed foundations that shift or crumble, windows and doors that don’t seal properly, and perhaps worst of all, plumbing leaks that can damage a home as well as create health issues.
Under current law, homeowners who discover construction defects must file a claim within two years of discovery. All claims must be filed within six years of the home’s completion.
Nowhere are the consequences of current construction defects law in the state more apparent than in Colorado’s condo market, often a choice for first-time homebuyers or older folks looking to downsize.
The state’s condo market collapsed during the Great Recession of 2009, when condo construction plummeted from about 20 percent of the market to the current 3 percent. But builders and developers say the problems for them really started about two years earlier, in 2007, when lawmakers at the state Capitol changed the construction defects law to be more amenable to homeowners who believed it was too hard to sue when their homes were defective.
Onward to the kill committee
This legislative session, which ends in May, represents the fourth year in a row that builders and developers hope the General Assembly can find a way for them to start building affordable condos again— with affordable being defined as around $200,000 for a new one bedroom.
It’s not that condos aren’t being built, but the ones coming onto the market today start at $400,000, hardly affordable for young professionals or newly-married young couples or anyone carrying student loans.
Last Friday, House lawmakers introduced a new measure they hope will solve at least one part of the construction defect puzzle: how homeowners’ associations (HOAs) handle information about defects lawsuits. The sponsors are Democratic Reps. Alec Garnett of Denver and Speaker of the House Crisanta Duran, also of Denver; Assistant House Minority Leader Rep. Cole Wist of Centennial and Republican Rep. Lori Saine of Firestone.
Current law allows an HOA board to file a claim if as few as five units in an association sign on. They must first notify the homeowners, but the law does not require they obtain permission before proceeding.
The latest bill requires an HOA board to notify all homeowners in an association, as well as the developer, about the potential for a lawsuit. The bill also requires the HOA to allow a developer an opportunity to present relevant facts to homeowners, along with potential costs and benefits from the HOA or its attorney. Finally, the HOA board must obtain permission from a majority of homeowners before proceeding with a lawsuit. The bill also says that if the HOA does not win its lawsuit, the HOA (and its homeowners) will have to cover the legal costs, including, in some circumstances, the legal costs of the opposing side. The impact, supporters say, would be to create a fairer, more transparent process. It would also make it more difficult to bring suits against builders.
Once a construction defect action is underway, a homeowner cannot sell or refinance a home in the development— even if their home is not among those with problems.
Part of the issue in the past, as Wist sees it, is a prohibition on allowing developers to talk to homeowners before they take action, more of a common practice than one set in statute.
“There are those who believe that if lawyers have been retained and are advising the board, that homeowners are included in that attorney-client relationship. I don’t personally agree with that,” Wist said. “I believe the board is the client, and that developers should be able to talk to homeowners” who are the developer’s customers.
The board’s attorneys also should be able to talk to the homeowners to explain the costs, risks and benefits of a lawsuit, and who may be representing the homeowners in court, Wist argues, adding, “We want this to be a balanced and transparent process.”
“With this bill, you have a clear process for sending out a notice, what has to be disclosed, and a meeting where both sides get to present to the homeowners,” Garnett told The Independent Monday. “This is the balance we’re looking for,” which is protecting homeowners who don’t live in defective units but who should have a say in whether to move forward with a lawsuit, as well as protecting those homeowners who have defective units.
Some legislative heavy hitters are pushing this proposed law.
In addition to the House heavy-hitters, in the Senate, the proposal will be carried by Senate Minority Leader Lucia Guzman, a Denver Democrat, and Republican Sen. Jack Tate of Centennial.
Wist is also the House sponsor of another construction defects measure, which passed the state Senate two weeks ago with strong bipartisan support, only to see Duran send it to a House “kill” committee where majority Democrats are expected to shoot it down.
Duran also sent the latest bipartisan measure to that same committee. A spokesperson for Duran says the State Affairs committee is best able to handle any construction defects legislation since that’s been its bailiwick for the past several years. This year, that committee has already dispatched a Republican-sponsored proposal giving builders a right to repair defects or to offer a settlement before a lawsuit is filed. The same committee in 2015 killed the only bill offered that year on construction defects, which included a requirement for binding arbitration, a provision that Democrats refuse to even consider.
This year it could be the courts rather than the General Assembly that is likely to resolve at least part of that issue.
‘The balance we’re looking for’
There are three legs of the stool in construction defects laws that builders and developers want to change.
The first is the HOA legislation. The second is liability insurance costs, and the third is alternate dispute resolution, commonly known as arbitration or mediation.
Builders and developers claim the cost of carrying liability insurance to pay for defects lawsuits adds thousands of dollars to the cost of building condos, shrinking the profit margin beyond what’s reasonable.
So a second bipartisan bill awaiting action from the Senate Appropriations Committee would spread the pain, so to speak, among all insurers in a construction defects lawsuit. Under the measure, which is sponsored by Duran and Republican Senate President Kevin Grantham of Cañon City, defense costs in a defects lawsuit would be divied up among insurers, who pay for either the settlement or the damage award.
Wist argues that changing the law will provide predictability for insurers, which he and other supporters believe will lower insurance costs. He says an insurer applies a price to a liability policy based on past lawsuit experience. A construction defects lawsuit may include not only the general contractor, but all the subcontractors from a roofer to a plumber, to an electrician, and more.
This particular proposed law would require all defendants to agree about how they would apportion costs and fees in the lawsuit. Wist said that would allow insurance companies, which cover those lawsuit costs under the liability policies, to better understand the risks involved. And that, in turn, would inform their policy underwriting in the future. And downstream from that, the real goal: Lower insurance costs.
A lot of insurance carriers have left Colorado because they’re unwilling to underwrite the liability insurance, Wist says. Testimony on the insurance bill in the Senate revealed the cost of liability insurance for a contractor can be $100,000 higher for condo projects than apartment buildings. Such costs steer contractors to choose work on apartment buildings rather than condo developments, Wist said.
The third leg – arbitration
This has been the major sticking point for legislation for the past four years.
Homeowners say requiring mediation or arbitration prevents them from filing a lawsuit if they don’t agree with the results. A bill addressing this also requires HOAs to stick to the arbitration or mediation language in original bylaws or other governing documents of HOAs. In mediation, the parties are allowed to decide whether to accept a settlement; in arbitration, the parties give the arbitrator the authority to decide the dispute.
But both Democrats and Republicans say this issue is likely to play out elsewhere: in the Colorado Supreme Court, which last week heard arguments in Vallagio at Inverness Residential Condo Association v. Metropolitan Homes.
The case is an appeal of a 2015 Colorado Court of Appeals decision that said if arbitration or mediation is included in an HOA’s original governing documents, it cannot be removed. In the Vallagio case, the arbitration language was included in the original documents when the association was still owned by Metropolitan Homes. Once the last unit was sold, however, a new HOA board decided to take that arbitration language out of the bylaws, in anticipation of filing a construction defects lawsuit. Metropolitan Homes sued in Denver District Court and lost, and then appealed to the Colorado Court of Appeals, which sided with Metropolitan Homes and its co-defendants.
A decision from the state Supreme Court is not expected until after the legislative session ends in May.
Consensus has it that the arbitration issue will sink Wist’s other bill – the one sent to the “kill” committee last week. The bill is backed by a who’s who of companies and organizations that want to see changes in the state’s construction defects laws: builders, developers, bankers, insurance companies, realtors, subcontractors, cities like Fort Collins, and chambers of commerce across the state. The bill cleared the Senate with five Democrats and 18 Republicans voting in favor, the most bipartisan support a construction defects bill has ever gotten.
Wist initially reacted angrily last week to Duran’s decision to sent it to House State Affairs, saying the decision “sends a mixed message regarding the Speaker’s willingness to meaningfully discuss affordable, attainable housing for Coloradans – and that’s very disappointing.”
But Wist, a co-sponsor of the more recent bipartisan House measure introduced last Friday, told The Independent this week he believes the part of the bill that deals with trying to remove arbitration from bylaws is premature and he instead wants to see how the the state Supreme Court decides that issue. That still leaves the question of whether to require HOAs to enter into mediation or arbitration before filing a lawsuit. That issue is unlikely to be resolved during this legislative session.
The big question for Democrats remains whether these reforms will be enough to spur affordable condo and other multi-family housing development in Colorado.
Colorado’s affordable housing crisis
Colorado is a fast-growing state where housing, particularly along the Front Range, is pricey and getting pricier. Stories about sticker shock in Denver, Boulder, and Fort Collins are the norm. Meanwhile, apartment rents are on the rise— if you can even find an affordable apartment where you want to live.
Look at the newspaper front pages across Colorado on a given week and there are stories about affordable housing issues from Aspen to Fort Collins and places in between.
In mid-February, residents of Steamboat Springs arrived at 3 a.m. for a chance to live in one of 48 affordable housing units they hope will open in the spring. Denver approved its first affordable housing fund in 2016. But it’s so bad service providers are handing out talking point guides that break the bad news to those hoping for affordable housing.
In order to keep good teachers, some school districts in Colorado are becoming developers and landlords. In Vail, there is even a movement afoot to create a tiny home village where teachers can afford to live.
At least one lawmaker isn’t waiting for a fix to the state’s construction defects laws: Republican Rep. Jim Wilson of Salida is sponsoring a bill this session that would use tax credits to build affordable housing for employees in rural communities who struggle to find somewhere close by to live.
According to a 2013 study by the Denver Regional Council of Governments, the great recession of 2009 led to a near-halt of construction of new homes in the Denver area. In the past five years, the market has begun to rebound, according to a Legislative Council report in 2015, although the vast majority of new construction has been for apartments, not owner-occupied condos.
The reason for more apartments rather than condos: the cost of fending off lawsuits. The Legislative Council report stated that every new condo built comes with an additional $15,000 in costs compared to the cost of building an apartment unit.
How did we get here?
Colorado’s construction defects law has been on the books since 2001. That law required homeowners to create a list of property defects, file it with the court, and then provide it to the defendant/builder within 60 days of filing the lawsuit. It allowed an HOA to file a defect claim for five or more units, and to notify the homeowners of the action.
Builders complained the law led to too many class action lawsuits, and wanted more protection. So in 2003, lawmakers revised the 2001 law, limiting damages to $250,000 and allowing the builder the right of inspection.
Homeowners then complained the 2003 law was too restrictive on their right to sue, and it was back to the drawing board. A 2007 revision eliminated an earlier requirement that homeowners waive their rights in dealing with builders, and with that law, condo construction in Colorado, especially in the Denver metro area, went from about 25 percent of new construction to where it is today, at about 3 percent.
Those who have first-hand experience with shoddy construction believe the effort to change the state’s construction defects law is little more than an effort to enact tort reform, which they say would cut off their ability to sue and fix their homes.
Take the example of Jonathan Harris of Five Points, who leads Build Our Homes Right, a group fighting some of the construction defects laws proposed at the state Capitol.
Harris managed restaurants all his life. Now, disabled with epilepsy, he works a part-time job doing payroll. In 2004, he bought a new condo in Denver’s Five Points. The builders, he believes, were trying to save money. It was built as mixed housing — condos, low income housing, and retail.
The four-story building isn’t sloped properly, so water ran into the units. “We’ve had a lot of water damage, a lot of mold inside walls,” Harris said. Doors and windows were not installed properly. “We have sills that were done so instead of the water running down away from the windows it runs towards the units. It just was not done well… They cut a lot of corners.”
The HOA board, which included Harris, sued the developer, who also owned 51 percent of the building. After six years, the lawsuit was settled, a month before it was due to go to court. The developer took care of some of the smaller issues, primarily dealing with the water damage. Harris said the homeowners aren’t happy with the settlement but it was the best they could do.
“If you sell substandard housing as affordable housing you’re doing [potential buyers] a disservice because they can’t afford to maintain it. You get to a point where you either pay the mortgage or you fix your unit.”
“Don’t build crap and the lawyers can’t sue you,” he says. “It will get thrown out of court if it’s not a legitimate lawsuit.”
Those who advocate for more affordable housing in Denver do support changing the construction defects law, in hopes that builders will start putting up owner-occupied condos once again.
That includes Sara Reynolds of Housing Colorado. “No one can deny that we have a housing crisis,” she says.
Reynolds believes condo developers when they tell her they would build more affordable for-sale housing if they could. “When they are the ones who are saying ‘seriously we can’t do it because of this,’ it’s not just tort reform,” she says. Reynolds believes that if the law is changed, builders will still build their $400,000 condos, but they’ll build affordable housing, too.
Christi Smith works for the Urban Land Conservancy, a nonprofit that focuses on affordable housing. The Conservancy buys land for future affordable housing, hoping developers would build condos on the land. “In the last 10 years we have not had one single proposal for a developer to build condos. And that says something,” she says.
There’s no broad mix of housing available for people in search of affordable homes in Denver. “We have such an affordable housing market crisis,” she says. No housing for police, fire workers, teachers, people who work in retail.
Smith is hopeful that a solution can be found in the 2017 session. “Every year we’re hopeful, and I think every year we’re getting closer to something being passed,” she says.
“There are a lot of things that need to happen so that condos are constructed,” she says. “Yes, legislation is a piece of it and I think it’s a catalytic piece of it.” But Smith said it isn’t the only change needed: insurance costs for builders also need to come down, because today the premiums are so high that condo builders will only build the high-end units.
The question remains whether these reforms will bring builders and developers back to Colorado to build affordable for-sale housing. Former state Sen. Mike Kopp is co-chair of the Homeownership Opportunity Alliance, a coalition that includes builders, more than a dozen mayors, business groups, and affordable housing advocates such as Habitat for Humanity. He said one builder in the coalition told him that the current construction defects laws are “100 percent” the reason he won’t build affordable for-sale multi-family homes in Colorado.
Garnett believes changing the construction defects laws will re-instill confidence in the marketplace, which in turn will bring builders and developers back to building affordable condos and townhomes.
“Developers will be more confident in breaking ground, and insurers will come back to Colorado and offer those cheaper liability policies,” he said this week. And he proudly points out that lawmakers this session, who he said have locked arms and are determined to come up with solutions, have moved the issue further than in any of the previous four years.
Kopp said Monday that his alliance appreciates the work done by the legislative team that has continued to push for construction defects reforms, such as the one included in the newest bill introduced last Friday.
“If the measure provides the substantial consumer protections and opens up building for-sale multifamily products, we’ll be enthusiastic supporters,” he said.