Apartment boom: Will the 15,000 apartments being built in metro area convert to condos?
This week's cover story, "Design Flaw," delves into the drop-off in metro Denver condo development, a phenomenon some blame on construction defect lawsuits. The latest estimates show there are 15,000 apartment units under construction in the seven-county metro area, but just 371 condo units.
Which has led those close to the issue to wonder: Will some of those 15,000 apartments be converted to condos once the statute of limitations on suing over construction defects has lapsed?
"There have been some theories that the way to get around defect lawsuits is to build apartments, let them be apartments for seven years and then convert them to condos," says Amie Mayhew, the CEO of the Colorado Association of Home Builders. But this plan may not work, she adds. "There's a school of thought that says once the conversion takes place, you'd restart the statute of limitations. So you'd be back at square one."
It's technically called a "statute of repose," and in Colorado, it's six years. That means condo owners have six years to sue the builder or developer if they discover construction defects like leaking windows or sloping floors. If the defect is discovered in the fifth or sixth year, the timeline is extended to eight years.
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Doug Benson, an attorney who represents homeowners against builders, disagrees with the school of thought mentioned by Mayhew. It's his opinion that if builders and developers wait until the six-year statute of repose has run and then sell an apartment complex to another entity that then -- and this is important -- converts the units to condos without doing any further construction, the builder would be off the hook. Even if the people who buy the condos discover defects, they won't have anyone to sue. The original builder won't be involved anymore and the new owners would only be liable for any construction that they do themselves -- which would leave the condo-buyers stuck with the repair bill.
"The condos they're building right now aren't condos," Benson says. "They're apartment homes and that's just to avoid liability and I think that's insipid."
Cary Bruteig, the principal of Denver-based Apartment Appraisers & Consultants, says there are significant differences between condos and apartments that can make converting them a challenge. For instance, most apartment buildings have more units and more amenities than condo complexes. However, condos are usually more polished inside.
"We're not seeing much in the way of apartments being designed for condo conversion," Bruteig says. "It's still a possibility that if the condo market becomes strong, there will be some conversions."
But a few of the builders and developers we spoke with said that if a project has even a remote possibility of being converted to condos, they're not interested. They say they want to avoid at all costs the possibility of a multi-million-dollar construction defect lawsuit -- and since those lawsuits are usually filed by condo homeowners' associations, they'd rather steer clear of anything condo-like, just in case.
In fact, Michael Gifford, the president of the Associated General Contractors of Colorado, says some insurance companies are refusing to provide contractors any coverage at all if they work on multi-family housing projects. "Insurance companies are saying, 'We don't care if it's apartments or condos because apartments can be converted to condos and we don't want to be exposed to that risk,'" Gifford says.
Gifford is among those who think lawmakers may have to step in and find a legislative solution to the problem of too many construction defect lawsuits and too few condos. A bill proposed last session that would have provided some legal protections to entrepreneurs building condos around light rail stations was killed in its first committee.
"We like to do that kind of work," Gifford says of condo construction. "High-rise condos are nice projects for the city and they're profitable for contractors. The bigger issue is, we don't think...that twenty years from now we're going to look at downtown and like what we see if it's all just apartments. It's not healthy for the economy."
More from our Business archive: "Condo projects in Denver: Where are they and why are they so rare?"Follow me on Twitter @MelanieAsmar or e-mail me at email@example.com