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Construction defects law still hindering housing projects

City decides to wait on ordinance

La Plata County housing authorities would be the first to say that multi-family construction is integral to a holistic housing landscape, but a state law still stands in developers’ way when it comes to building such units.

Earlier this month, Durango city officials considered crafting a local ordinance that would counter Colorado’s construction defects legislation, which allows homeowners associations to easily bring class-action lawsuits against condominium and townhome builders.

City planner Phillip Supino said the city decided to wait on pursuing any countering law until it becomes clear what legislative action may happen this year. There are plans to move forward with the ordinance if the state does nothing. Meanwhile, like builders across the state, local developers are stalling high-density projects that could diversify housing in La Plata County.

In 2002, Timberline Builders owner Emil Wanatka began work on Parkside Terrace, a 71-unit townhome subdivision across from Santa Rita Park. Wanatka said he’s proud of the structure; it’s identifiable and walkable. But he wouldn’t touch a project like that today, solely because of construction defects laws.

“The easy answer is absolutely, unequivocally,” Wanatka said when asked if the law blocks multi-unit projects from happening. “Risks aside, it’s pretty much impossible to even build. You would need enormously deep pockets just to fund the insurance premiums, if you could find an insurer.”

If a builder were to develop 100 residential units under a single owner in an area like Three Springs, the premium could be in the realm of $30,000 to $40,000 per year. Under an HOA, the same development could cost hundreds of thousands.

Chris Jones of Mountain West Insurance said small-scale projects – 10 units or less – can more easily secure insurance at a reasonable cost than larger developments, but there are still options for the latter.

“If you’re doing a 100-unit project, the general contractor should get a wrap-up policy, which can be as low as $40,000,” Jones said.

Wrap-up policies, or owner-controlled insurance programs, for multi-unit projects have become popular under construction defects laws, allowing all contractors involved to get insured under a single policy.

But no policy is absolute in its coverage or without risk.

Local attorney Ken Golden of Gregory, Golden & Landeryou has handled construction defects lawsuits for years, representing parties on both sides of the issue. He said the most common misconception with those cases relates to what is and isn’t covered in the insurance policy.

“No one will sell a policy that covers all negligent work,” he said.

Even if the city were to adopt an ordinance to negate the law, it may not change the business plans of developers in the short-term.

About 12 communities across the state – none as of yet on the Western Slope – have adopted local ordinances, including Lakewood, Pueblo, Aurora and Colorado Springs.

But the approval of local laws won’t necessarily spur new construction. “We all believe these local ordinances will be tested in court,” Wanatka said, which is a belief shared by Golden.

Because of the minutia of defects, lawsuits of this kind are costly for everyone involved, he said. Homeowners can sue contractors, subcontractors and design professionals depending on the nature of the defect, and nothing statutory allows property owners to recover attorney fees.

“If a contractor is building multi-units, they have exposure for construction defects for the next six to eight years,” Golden said. “Is it more challenging in this day to build those types of projects? Yes.”

Under the statute of limitations, the HOA is granted two years to file a claim after the “physical manifestation” of a defect. Under the statute of repose, property owners have six years to file suit. For all intents and purposes, a contractor is on the hook for up to eight years.

In 2015, reforms that would have given contractors some leeway to correct defects cleared the Senate but were killed in the House. Gov. John Hickenlooper called for construction defect reforms in his State of the State address last month, citing the passage of local ordinances and the need to bring down housing costs. But lawmakers have failed for four consecutive years to reform the Homeowner Protection Act of 2007, which has at least partially contributed to a major decline in condo development.

According to Metrostudy, which analyzes housing data, condos accounted for 3.4 percent of single-family housing development in metro Denver last year, compared with 25 percent 10 years ago.

Even if local law would be ineffective for practical purposes, housing groups are lobbying for it to raise awareness.

“No one can afford condo development, and condos are one of the affordable housing tools in the toolbox of any community,” said Lisa Laughlin, executive officer at the Home Builders Association of Southwest Colorado. “We’ve written letters of support to the city for this ordinance.”

The argument over reforms is one of builder accountability versus realistic expectations.

“I believe that homeowners, just like anyone else, they need those protections,” Wanatka said. “But they need to be fair. That’s what’s lacking in the law.”

jpace@durangoherald.com

Dec 2, 2021
Durango City Council seeks to clear bottleneck in condominium construction
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