Marianne Goodland | Colorado Independent | March 22, 2017<\/p>\n
For the first time in at least four years, a fix to the state’s construction defects law is finally within reach.<\/strong><\/p>\n 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.<\/p>\n But is a package of legislation tackling\u00a0\u201cconstruction defects reform,\u201d which would change the process by which homeowners with defective condos sue developers, the answer to Colorado\u2019s affordable housing crisis?<\/p>\n 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\u2019t buy that.<\/p>\n Skeptics, including Jonathan Harris of Build Our Homes Right, a citizens\u2019 group that advocates for homeowners with construction defects, say those who want to weaken homeowner rights\u00a0\u00a0are really just\u00a0dressing up\u00a0tort reform as an affordable housing fix.<\/p>\n \u201cNothing in any of these bills makes a promise for affordable housing,\u201d says the former restaurant manager who fought his Denver home builder in court for years before reaching a settlement. \u201cI 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 \u2018maybe we could have more condos.\u2019\u201d<\/p>\n 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\u00a0which they might catch a class-action lawsuit if owners find defects.<\/p>\n What constitutes a construction defect is not defined in state law, and lawsuits and settlements claiming\u00a0such\u00a0defects include condos with poorly-constructed foundations that shift or crumble, windows and doors that don\u2019t seal properly, and perhaps worst of all, plumbing leaks that can damage a home as well as create health issues.<\/p>\n 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\u2019s completion.<\/p>\n Nowhere are the consequences of current construction defects law in the state more apparent than in Colorado\u2019s condo market, often a choice for first-time homebuyers or older folks looking to downsize.<\/p>\n The state\u2019s 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.<\/p>\n Onward to the kill committee<\/b><\/p>\n This legislative session, which ends in May, represents\u00a0the 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\u2014 with affordable being defined as around $200,000 for a new one bedroom.<\/p>\n It\u2019s not that condos aren\u2019t 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.<\/p>\n Last Friday, House lawmakers introduced a new measure they hope will solve at least one part of the construction defect puzzle: how homeowners\u2019 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Once a construction defect action is underway, a homeowner cannot sell or refinance a home in the development\u2014 even if their home is not among those with problems.<\/p>\n 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.<\/p>\n \u201cThere 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\u2019t personally agree with that,\u201d Wist said. \u201cI believe the board is the client, and that developers should be able to talk to homeowners\u201d who are the developer\u2019s customers.<\/p>\n The board\u2019s 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, \u201cWe want this to be a balanced and transparent process.\u201d<\/p>\n \u201cWith 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,\u201d Garnett told The Independent <\/em>Monday. \u201cThis is the balance we\u2019re looking for,\u201d which is protecting homeowners who don\u2019t 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.<\/p>\n Some legislative heavy hitters are pushing this proposed law.<\/p>\n 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.<\/p>\n 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 \u201ckill\u201d committee where majority Democrats are expected to\u00a0shoot it down.<\/p>\n 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\u2019s 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.<\/p>\n This year it could be the courts rather than the General Assembly that is likely to resolve at least part of that issue.<\/p>\n \u2018The balance we\u2019re looking for\u2019<\/b><\/p>\n There are three legs of the stool in construction defects laws that builders and developers want to change.<\/p>\n 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.<\/p>\n 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\u2019s reasonable.<\/p>\n 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 Ca\u00f1on City, defense costs in a defects lawsuit would be divied up among insurers, who pay for either the settlement or the damage award.<\/p>\n 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.<\/p>\n 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 \u00a0that, in turn, would inform their policy underwriting in the future. And downstream from that, the real goal: Lower insurance costs.<\/p>\n A lot of insurance carriers have left Colorado because they\u2019re 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.<\/p>\n The third leg \u2013 arbitration<\/b><\/p>\n This has been the <\/em>major sticking point for legislation for the past four years.<\/p>\n Homeowners say requiring mediation or arbitration prevents them from filing a lawsuit if they don\u2019t 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.<\/p>\n 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.<\/em><\/p>\n The case is an appeal of a 2015 Colorado Court of Appeals decision that said if arbitration or mediation is included in an HOA\u2019s original governing documents, it cannot be removed. In the Vallagio <\/i>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.<\/p>\n A decision from the state Supreme Court is not expected until after the legislative session ends in May.<\/p>\n Consensus has it that the arbitration issue will sink Wist\u2019s other bill \u2013 the one sent to the \u201ckill\u201d committee last week. The bill is backed by a who\u2019s who of companies and organizations that want to see changes in the state\u2019s 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.<\/p>\n Wist initially reacted angrily last week to Duran\u2019s decision to sent it to House State Affairs, saying the decision \u201csends a mixed message regarding the Speaker\u2019s willingness to meaningfully discuss affordable, attainable housing for Coloradans \u2013 and that\u2019s very disappointing.\u201d<\/p>\n But Wist, a co-sponsor of the more recent bipartisan House measure introduced last Friday, told The Independent <\/em>this week\u00a0he 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.<\/p>\n The big question for Democrats remains whether these reforms will be enough to spur affordable condo and other multi-family housing development in Colorado.<\/p>\n Colorado\u2019s affordable housing crisis<\/b><\/p>\n 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\u2014 if you can even find an affordable apartment where you want to live.<\/p>\n 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.<\/p>\n 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\u2019s so bad service providers are handing out talking point guides that break the bad news to those hoping for affordable housing.<\/p>\n 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.<\/p>\n At least one lawmaker isn\u2019t waiting for a fix to the state\u2019s 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n How did we get here?<\/b><\/p>\n Colorado\u2019s 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Those who have first-hand experience with shoddy construction believe the effort to change the state\u2019s 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.<\/p>\n 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.<\/p>\n 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\u2019s Five Points. The builders, he believes, were trying to save money. It was built as mixed housing \u2014 condos, low income housing, and retail.<\/p>\n The four-story building isn\u2019t sloped properly, so water ran into the units. \u201cWe\u2019ve had a lot of water damage, a lot of mold inside walls,\u201d Harris said. Doors and windows were not installed properly. \u201cWe 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\u2026 They cut a lot of corners.\u201d<\/p>\n 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\u2019t happy with the settlement but it was the best they could do.<\/p>\n \u201cIf you sell substandard housing as affordable housing you\u2019re doing [potential buyers] a disservice because they can\u2019t afford to maintain it. You get to a point where you either pay the mortgage or you fix your unit.\u201d<\/p>\n \u201cDon\u2019t build crap and the lawyers can\u2019t sue you,\u201d he says. \u201cIt will get thrown out of court if it\u2019s not a legitimate lawsuit.\u201d<\/p>\n 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.<\/p>\n That includes Sara Reynolds of Housing Colorado. \u201cNo one can deny that we have a housing crisis,\u201d she says.<\/p>\n Reynolds believes condo developers when they tell her they would build more affordable for-sale housing\u00a0if they could. \u201cWhen they are the ones who are saying \u2018seriously we can\u2019t do it because of this,\u2019 it\u2019s not just tort reform,\u201d she says. Reynolds believes that if the law is changed, builders will still build their $400,000 condos, but they\u2019ll build affordable housing, too.<\/p>\n 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. \u201cIn the last 10 years we have not had one single proposal for a developer to build condos. And that says something,\u201d she says.<\/p>\n There\u2019s no broad mix of housing available for people in search of affordable homes in Denver. \u201cWe have such an affordable housing market crisis,\u201d she says. No housing for police, fire workers, teachers, people who work in retail.<\/p>\n Smith is hopeful that a solution can be found in the 2017 session. \u201cEvery year we\u2019re hopeful, and I think every year we\u2019re getting closer to something being passed,\u201d she says.<\/p>\n \u201cThere are a lot of things that need to happen so that condos are constructed,\u201d she says. \u201cYes, legislation is a piece of it and I think it\u2019s a catalytic piece of it.\u201d But Smith said it isn\u2019t 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.<\/p>\n 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. \u00a0He said one builder in the coalition told him that the current construction defects laws are \u201c100 percent\u201d the reason he won\u2019t build affordable for-sale multi-family homes in Colorado.<\/p>\n 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.<\/p>\n \u201cDevelopers will be more confident in breaking ground, and insurers will come back to Colorado and offer those cheaper liability policies,\u201d 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.<\/p>\n Kopp\u00a0said 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.<\/p>\n \u201cIf the measure provides the substantial consumer protections and opens up building for-sale multifamily products, we\u2019ll be enthusiastic supporters,\u201d he said.<\/p>\n","protected":false},"excerpt":{"rendered":"