Denver move could spur state action on construction defect statutes

12/4/2015

By Ramsey Scott
THE COLORADO STATESMAN
Supporters of legislation aimed at making it harder for condominium owners to sue developers — backers say it would spur construction amid a statewide affordable-housing crisis — sounded a note of optimism this week amid word that Democratic House Speaker Dickey Lee Hullinghorst, who blocked legislation earlier this year, is holding talks with groups pushing for the change.

The pressure on the Legislature to approve a statewide fix to Colorado’s construction defect statutes was ratcheted up last week when Denver became the ninth city in the state to pass a local version of the law.

Supporters of a change to state law are encouraged there’s enough momentum coming from the local level now that Denver has joined Lakewood, Aurora, Littleton and others in passing its own version of a construction defect law. People both in and out of the development community finger current state law as a culprit in Colorado’s anemic condo-construction market.

Some Democrats, however, counter that the construction defect law is only a piece of the puzzle leading to a lack of diverse housing options across the state. Construction defect legislation — setting how homebuyers can seek redress from developers for problems in construction — is the new”shiny object” drawing focus, says state Rep. Max Tyler, D-Lakewood, who adds that the Legislature should deal with all the factors that have led to a shortage of affordable housing.

Lack of new condos

Jeff Wasden, president of the Colorado Business Roundtable and a strong supporter of a change to state law, said he believes the message sent by Denver will translate into action in the Legislature in 2016.

“The mayor and city council made a very strong statement on trying to spur housing development in Denver and their frustrations with the inability of the state Legislature to come to an acceptable, measured approach to this challenging defect in state law. This severely limits and restricts the development of owner-occupied housing,” Wasden told The Colorado Statesman.

Supporters of a fix blame the lack of condo development — just 3.4 percent of all new housing stock in Denver is condominium development, compared to 25 percent of new housing stock eight years ago — on a state law that allows what they term frivolous lawsuits to be brought against developers, which has driven up the cost to insure new projects.

Wasden said recent conversations he’s had with House Democratic leadership lead him to believe there’s enough support to pass a new construction defects law. A bipartisan attempt at a statewide fix earlier this year, Senate Bill 177, passed the Republican-controlled Senate but died in the Democratic-controlled House State, Veterans and Military Affairs Committee, known as the”kill” committee.

“I’ve actually met with Speaker Hullinghorst herself and, without getting into any details on her end, she knows there are some conversations going on in her party with a coalition of parties and key stakeholders to get this to move forward,” Wasden said.

A spokesman for the speaker confirmed that Hullinghorst told Wasden that conversations were happening between Democrats and a coalition of outside groups supporting the change. Hullinghorst wanted to make it clear, however, that, while there is a chance something will happen in the House in the upcoming session, she wouldn’t describe it as a”good” chance.

Denver’s ordinance

Skye Stuart, Mayor Michael Hancock’s legislative director, said Denver hopes the city’s move will put pressure on the Legislature for a statewide fix.

“This has been a real key issue for Mayor Hancock. He’s been vocal for changes at the state Legislature, and we still believe those changes are needed,” Stuart told The Statesman.”This is an important issue, and the lack of availability of for-sale multifamily housing is an important issue and important to our constituents out there. We really do hope the state will take action.”

Denver City Council’s 12-1 vote last week restricted how legal action can be pursued by homeowner associations representing condominium owners when it comes to faulty construction. The city’s new ordiance requires all homeowners in a common interest community to be informed of a potential lawsuit by the HOA, along with the downsides of litigation. In addition, a majority of homeowners must approve any legal action. Denver’s ordinance, unlike the one adopted by Lakewood a year ago, excludes developer-owned units from the vote.

“It’s a balance of two sides to ensure that legitimate defects are taken care of but also ensures that you, as a homeowner in the property, get to be informed on what’s going on. You’re not being left out of the conversation,” said Denver Councilwoman Deborah Ortega, who voted in favor of the law.”The 50-percent-plus-one (requirement) makes sure that there’s a broader outreach to the other owners so they know what’s going on.”

Denver Councilman Paul Kashmann, the lone dissenter in the vote, said the new ordinance was too favorable for developers and that he wanted to see more protections for homeowners. One concern, which he said he hopes will be addressed by a statewide fix, was to make sure homeowners in an HOA were informed of the downsides of not pursuing a legal action. He also said homeowners need more say in selecting an arbitrator.

“The main area that concerned me is the arbitration process. It has some loopholes where, in the initial declaration set up by the builder, it allows for provisions to be written into the arbitration process that can slant it toward the advantage of the builder, and I doubt that many people read those declarations in detail,” Kashmann told The Statesman.”I want (the Legislature) to take a balanced approach that allows developers the comfort level they need to build while providing homeowners the protections they need to ensure their homes are built correctly and, if not, they have a form of redress.”

Implications for 2016

Former Senate Minority Leader Mike Kopp, executive director of the business group Colorado Concern, said he doesn’t think the Legislature can avoid dealing with the matter.

“I think our members were pleased about (Denver), but they all realize that, ultimately, we need a statewide solution and we need the General Assembly to take action,” Kopp said.”I think the Legislature would be missing a key component of the message, and that is municipalities out there recognize that it’s preferable to have a statewide solution, something that brings some clarity and simplicity to the whole state. It would be a bit of a cynical view for the Legislature to say, &#145It’s been handled within that town where there was a problem, so we’re not going to take it up.’”

State Sen. Ray Scott, R-Grand Junction, said the Legislature needs to act to fix what he called a government-created problem that has made developing condos economically unfeasible. He said he is working on legislation, adding that several other members of the Senate majority are doing the same.

“It’s past time, obviously, to address this, first of all. I think this puts enormous pressure on the Legislature to once and for all deal with the entire scope of construction defects,” Scott told The Statesman.”I think people have to understand the spaghetti bowl that this problem is, how everything is connected, and that government created the spaghetti bowl. It wasn’t the builders, it wasn’t the buyers, it wasn’t the renters.”

Opponents of proposed changes to state law say that taking away the rights of homeowners to address faulty construction won’t boost the number of condominiums being built, arguing that market factors and skyrocketing rent have caused the imbalance in housing stock.

“In the last three years, had any (of the bills) passed, they would have devastated homeowners living in homes with defects,” said Molly Foley-Healy, spokeswoman for Colorado’s chapter of the Community Associations Institute, which represents HOAs.”If the builders are not held fully responsible for their faulty construction, the defects become a maintenance responsibility of HOAs. And since HOAs are nonprofit corporations, the only income they have to pay for defects are assessments or dues that are paid to HOAs. That means homeowners who purchase unknowingly defective homes — they’re the ones that end up having to pay to solve the shoddy work.”

Foley-Healy said she didn’t think any of the local-level construction defect ordinances would stand up to a legal challenge, an opinion shared by Tyler.

Tyler called the question of construction defect laws the”shiny object” people believe will encourage condo development but instead, he claimed, it just gives shoddy builders a pass. Instead, he said, the Legislature should work on bringing both sides of the issue to the table to find a multi-tiered approach to the lack of affordable housing in the state.

“This is just tort reform,” said Tyler.”We passed (an ordinance) in Lakewood a year ago, and we haven’t started building condos in Lakewood. I think it’s going to result in sort of a free pass for bad construction, and it’s not going to make it any cheaper, and it’s not going to solve the problem,” he said.”This is the most complex problem I’ve looked at in the Legislature, and you have to have a wide-ranging, complicated solution to solve a complicated problem. You can’t just put one magic bean out there and fix it.”

Tyler said any action in the House would have to address all the issues of affordable housing — perhaps including providing down-payment assistance — and not just construction defect changes for him to get behind a bill.

— info@coloradostatesman.com

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By Ray Scott

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