Condos, construction liability laws, etc.

Introductions - Urban Issues - Miscellaneous News, Topics, Interests
Archiapolis
Foshay Tower
Posts: 818
Joined: November 2nd, 2012, 8:59 am

Re: Nicollet Hotel Block

Postby Archiapolis » July 31st, 2015, 9:16 am

sushisimo wrote:Or apartments for that matter. If the cladding on Nic on 5th falls off and smashes an LRT, do we say "Eh, C'est la vie, apartments. Thank god it's not condos or imagine the litigation!"
Emphasis on class action lawsuit (many litigants targeting many possible entities to maximize profits)...if a cladding panel falls of Nic on Fifth, it is developers suing contractors who then sue subcontractors, etc. The renters have nothing to do with it. If it is condos, the owners have everything to do with it...

Architorture
Metrodome
Posts: 67
Joined: December 26th, 2012, 1:21 pm

Re: Nicollet Hotel Block

Postby Architorture » July 31st, 2015, 9:30 am

Exactly right on the last few posts Archiapolis. The additional problem that then develops is that all the additional built in costs are added to the final cost of the units. Higher units costs then make the economic viability of selling the units that much more difficult, etc.

MNdible
is great.
Posts: 5797
Joined: June 8th, 2012, 8:14 pm
Location: Minneapolis

Re: Nicollet Hotel Block

Postby MNdible » July 31st, 2015, 9:47 am

We're not talking about cladding falling off of a building. We're talking about (usually) minor building defects.

If you're the owner of a big apartment building, you're probably a savvy operator who's most interested in getting the problem fixed. You'll work directly with the contractor to fix said problem. Fin.

If you own your condo, you'll work with your dysfunctional condo board to hire a lawyer who will puff up the case to make more money for themselves. The contractor will clam up because they're getting sued, and they'll need to hire their own lawyers who will tell them to deny everything and certainly not to fix anything. Everybody gets pulled into the shitstorm. Five years later, the only ones smiling are the lawyers.

acs
Wells Fargo Center
Posts: 1378
Joined: March 26th, 2014, 8:41 pm

Re: Nicollet Hotel Block

Postby acs » July 31st, 2015, 9:50 am

Ok, clearly something needs to change and fast, but how would reducing the liability period for condo's from 10 to 2 years help?

MobJob
Block E
Posts: 20
Joined: July 31st, 2014, 12:07 pm

Re: Nicollet Hotel Block

Postby MobJob » July 31st, 2015, 10:00 am

Minnesota's construction defect laws (327A.02 and 541.051) apply equally to any new "dwelling." The statutes don't discriminate between condos and apartments. Thus, the "vendee" (which could be a condo unit owner, HOA, or apartment building owner) can sue the "vendor" (basically the development team) for construction defects. Not all defects are created equal either-- different "defects" carry different statutes of limitations, ranging from 1-10 years depending on the type of defect. So, condo developers are not actually singled out by these laws. Any developer, regardless of what they are building, is exposed to liability by these laws.

In my view, the more likely reason we haven't seen condo development equal to apartment development is simply a market issue. Condominiums have never been built at the same pace as apartments and it isnt realistic to expect them to be. If you look at US Census data, condos were completed at a high rate leading up to '08, leaving excess condo stock during the recession. Considering that people were not buying homes during the recession, it makes sense that we don't have new supply at the moment. Now that the economy has recovered from the recession (mostly), people are buying homes again and probably have absorbed the condo surplus that existed during the recession. But since supply reacts to demand with considerable lag time (due to the complex nature of big development), we haven't seen new condo completions just yet. However, supply appears to be reacting now, with numerous new condo projects (totaling almost 1000 units) proposed or u/c.

My point is that the condo shortage is more about the cyclical nature of real estate markets than it is about construction defect warranties. At least, that is my take on the matter.

mplsjaromir
Wells Fargo Center
Posts: 1112
Joined: June 1st, 2012, 8:03 am
Location: Sommerset Knolls

Re: Nicollet Hotel Block

Postby mplsjaromir » July 31st, 2015, 10:11 am

Condos are a bad idea in general. A condo homeowners board really needs a professional who has the wherewithal to forecast maintenance and make sure the money is allocated. When I lived at Grant Park they had funded accounts for planned building (parking garage) projects 40 years into the future. That building had more than 300 units, so the cost of a professional manager can spread around enough to make sense. I have heard stories about smaller condo associations that mismanage funds and end up with sticking owners with $10K+ assessments for repairs that should have been anticipated. If one lives in a mismanaged apartment one moves when the lease is up, a mismanaged condo building one better find a good lawyer and deal with lots of uncertainty.

The other problem with condos is that they essentially cannot be redeveloped. It is possible to buy out everyone, but that will never be easy or predictable. Many of the recent apartments built have been lackluster, hopefully if the market conditions are right better building can replace them. Build a crappy condo, its almost assured to around for a very long time.

amiller92
Wells Fargo Center
Posts: 1748
Joined: October 31st, 2014, 12:50 pm

Re: Nicollet Hotel Block

Postby amiller92 » July 31st, 2015, 10:48 am

Archiapolis wrote: If there is a leaking window in one unit, a lawyer will go to ALL owners, try to push forward a class action type of suit and push the scope as far as possible - not just new flashing, but new windows, new install, new siding which means different trades, scaffolding, material cost, etc.
So it's all the lawyers' fault? Huh.

amiller92
Wells Fargo Center
Posts: 1748
Joined: October 31st, 2014, 12:50 pm

Re: Nicollet Hotel Block

Postby amiller92 » July 31st, 2015, 10:52 am

MobJob wrote: My point is that the condo shortage is more about the cyclical nature of real estate markets than it is about construction defect warranties. At least, that is my take on the matter.
I have no expertise at all on the liability issues, but it seems to me that any discussion of the lack of condo development in the last few years that doesn't at least touch on the changed credit environment post-2008 seem to be missing an obvious large factor.

There was a period of several years where getting financing to purchase a condo was decidedly harder than it used to be. That makes it rather hard to build and sell condos.

Tyler
Foshay Tower
Posts: 881
Joined: June 1st, 2012, 10:10 am

Re: Nicollet Hotel Block

Postby Tyler » July 31st, 2015, 1:29 pm

A couple guys at sherman have used the warranty excuse as essentially the entire reason they are not building condos. Or more specifically insurance issues/cost because of the warranty law. At some p/sq ft it would still make sense, obviously.
Towns!

Archiapolis
Foshay Tower
Posts: 818
Joined: November 2nd, 2012, 8:59 am

Re: Nicollet Hotel Block

Postby Archiapolis » July 31st, 2015, 1:58 pm

amiller92 wrote:
Archiapolis wrote: If there is a leaking window in one unit, a lawyer will go to ALL owners, try to push forward a class action type of suit and push the scope as far as possible - not just new flashing, but new windows, new install, new siding which means different trades, scaffolding, material cost, etc.
So it's all the lawyers' fault? Huh.
Ha! Spoken like a true architect I guess...I'm sure a lawyer's retort would be that if architects did a better job detailing, contractors did a better job managing, subcontractors did a better job building, they wouldn't have to sue etc.

It depends whose ox is being gored I guess.

All I know is that architect's are being told that their liability insurance goes through the roof if they want to do condo work so it's a risk/reward calculation that MANY architects won't touch currently.

min-chi-cbus
Capella Tower
Posts: 3131
Joined: June 1st, 2012, 9:19 am

Re: Nicollet Hotel Block

Postby min-chi-cbus » August 1st, 2015, 7:59 pm

Let's face it, condos are a major luxury -- they're insanely expensive on a $$/SF basis and it's no wonder they're built more sparingly and/or in larger, more expensive or "hot" (speculative) markets. Condos in the Midwest (or South) never made a ton of sense to me, simply because of the economics of it: you could buy a home with 2X the SF and have a yard for the price of a condo. So I get why most people don't see the value in that here or in this region. I also get why there are SOME condos, since there is enough of a marketplace for them here to fill up a few buildings per cycle, and there will be some people who love the downtown lifestyle but want to own the equity of their home.......but it's not going to be as mainstream as other places.

MobJob
Block E
Posts: 20
Joined: July 31st, 2014, 12:07 pm

Re: Nicollet Hotel Block

Postby MobJob » August 2nd, 2015, 1:35 pm

Tyler wrote:A couple guys at sherman have used the warranty excuse as essentially the entire reason they are not building condos. Or more specifically insurance issues/cost because of the warranty law. At some p/sq ft it would still make sense, obviously.

Certainly there are developers out there that won't build condos because they say insurance costs are too high. Specifically, many developers are indirectly forced to to buy OCIP/CCIP/"wrap-up" insurance policies for each project. Insurers increasingly only offer "wrap-up" policies to developers instead of traditional CGL policies. Because developers cannot obtain financing without adequate insurance, they are indirectly forced to buy these wrap-up policies. Developers that self-insure and/or are not highly leveraged (perhaps Stanton is one such developer?) may not be susceptible to these pressures, however.

"Wrap-up" policies are bought by the developer and cover everybody that works on the project (e.g. subcontractors, architect, project manager, etc.). Because of this expansive coverage, wrap-ups must demand high premiums. Those covered by the project don't have to purchase their own insurance, so a wrap-up transfers the entire cost of insurance to the developer. However, developers using wrap-ups would almost certainly have agreements with the subcontractors, architects, etc. which would require each covered party to reimburse the developer for their share of coverage. As a result, the developer would be reimbursed for a large part of their insurance costs.

Moreover, if there are reimbursement agreements between the developer and all others covered, "wrap-ups" should theoretically be cheaper. This is because they eliminate duplicative coverage that would otherwise be present if each member carried their own CGL policy. Likewise, there wouldn't be any coverage disputes between insurers, because only one policy covers then entire project. Policy administration should therefore be cheaper, and hence net insurance premiums should be cheaper under a wrap-up policy than aggregate premiums paid under multiple CGL policies. In addition, wrap-ups are increasingly used on large projects regardless of whether they are apartments or condos (as I understand it).

That said, I haven't been able to find any empirical data substantiating claims that say wrap-ups are more or less expensive than traditional CGL policies in aggregate on a project. If anybody works directly with wrap-ups or has any any credible info on this, I'd definitely like to hear about it.

I know high insurance premiums are frequently cited as a reason condominiums are not built, but frankly, I don't actually see how construction defect laws or the advent of wrap-up policies have made condos cost-prohibitive if they don't also make apartments cost-prohibitive. There must be some other factor causing low condominium supply, and until recently that factor, as I see it, has simply been low condo demand.

User avatar
Anondson
IDS Center
Posts: 4027
Joined: July 21st, 2013, 8:57 pm
Location: Where West Minneapolis Once Was

Re: Nicollet Hotel Block

Postby Anondson » August 2nd, 2015, 2:54 pm

In numerous interviews and public forums developers are saying they are withholding building condos because of the lawsuits allowed by the defect laws. For example, at the Blake Corridor workshops a representative from Ryan told the entire room during a Q and A with the audience that Ryan was avoiding condos because of the lawsuits such as ones Stanton is dealing with right now, the three other developers at the table all nodded their heads.

Are the representatives of the developers lying to the public and the press? Why do they say it is so, with conviction, if it isn't?

MobJob
Block E
Posts: 20
Joined: July 31st, 2014, 12:07 pm

Re: Nicollet Hotel Block

Postby MobJob » August 2nd, 2015, 4:34 pm

Anondson wrote:In numerous interviews and public forums developers are saying they are withholding building condos because of the lawsuits allowed by the defect laws. For example, at the Blake Corridor workshops a representative from Ryan told the entire room during a Q and A with the audience that Ryan was avoiding condos because of the lawsuits such as ones Stanton is dealing with right now, the three other developers at the table all nodded their heads.

Are the representatives of the developers lying to the public and the press? Why do they say it is so, with conviction, if it isn't?

No, that is not what I meant to imply at all. I too have heard developers cite construction defect laws as impeding condo development--it is a common theme for developers across the US. Interestingly, Minnesota does not have anomalous construction defect laws. Most states allow construction defect claims for a extended period. For a state-by-state table, see:

http://www.mwl-law.com/wp-content/uploa ... states.pdf

You will notice that extended construction defect laws are not a distinct Minnesota issue. Most states impose liability upon the developer for 5-10 years, yet condos are being built in other cities. (as a side note, Minnesota and Colorado seem to have an abnormal amount of press calling attention to condominium supply as affected by construction defect laws).

My argument is that the issue is more complex than mere construction defect laws. As further support, Minnesota's 10 year statute of repose (541.051) for construction defect laws has been in effect since 1965, so it is not as if developers have only recently been exposed to construction defect liability. Perhaps plaintiffs' are becoming more aggressive with construction defect litigation, but the laws themselves are not new.

As it turns out, you can't just go get a quote for a wrap-up policy, so it is hard to know the cost of insurance in practice. Developers clearly have first hand knowledge of their insurance costs, so I don't doubt what they are saying. I just think there is more to the seeming condo drought than construction defect laws.

Specifically, I think the recent condo drought is the predictable result of the the Great Recession. Condo completion rates are not out of line with historical trends based on the US Census's American Housing Survey and Survey of Market Absorption. I think it is easy to blame construction defect laws, but in reality, the recent condo drought is probably more the result of the market turndown following the Great Recession. We have seen several new condo proposals in the past year, no? I predict we will continue to see more condo proposals as supply reacts to demand, albeit on a somewhat delayed timeline.

MobJob
Block E
Posts: 20
Joined: July 31st, 2014, 12:07 pm

Re: Nicollet Hotel Block

Postby MobJob » August 2nd, 2015, 4:38 pm

I'd really be curious to see some hard data on insurance costs for developers.

User avatar
Nick
Capella Tower
Posts: 3000
Joined: May 30th, 2012, 9:33 pm
Location: Loring Park, Minneapolis

Re: Nicollet Hotel Block

Postby Nick » August 2nd, 2015, 6:04 pm

Someone should absolutely adapt this conversation into a streets.mn post

mattaudio
Stone Arch Bridge
Posts: 7927
Joined: June 19th, 2012, 2:04 pm
Location: NORI: NOrth of RIchfield

Re: Nicollet Hotel Block

Postby mattaudio » August 2nd, 2015, 8:53 pm

Maybe.... Developers don't build condos... because they can make more money with less work by building apartments.

John
Capella Tower
Posts: 2248
Joined: May 31st, 2012, 2:06 pm

Re: Nicollet Hotel Block

Postby John » August 3rd, 2015, 6:27 am

mattaudio wrote:Maybe.... Developers don't build condos... because they can make more money with less work by building apartments.
Yes, A developer can build the apartment complex , then sell it to a real estate investment company in virtually brand new condition. Much quicker ROI and less risk than attempting to sell condo units individually.

nate
Landmark Center
Posts: 296
Joined: February 26th, 2013, 2:01 pm

Re: Nicollet Hotel Block

Postby nate » August 3rd, 2015, 7:27 am

I'd argue apartments are better for the city:

1) Faster development cycle.
2) Flexibility for residents to move in/out as lives change. Wanna give downtown living a try for a year and see if you like it? Rent an apartment. You're not married to the neighborhood. Wanna give downtown living a try but your company might relocate you in the near future? Rent an apartment.
3) Easier to redevelop if the market calls for it in X years.
4) Less NIMBYism to block future adjacent development.

acs
Wells Fargo Center
Posts: 1378
Joined: March 26th, 2014, 8:41 pm

Re: Nicollet Hotel Block

Postby acs » August 3rd, 2015, 8:46 am

Regarding point #2 though, what if you try out city living in an apartment and find you really like it and want that lifestyle long-term? That's where we need Condos. It's more than just a renting vs owning thing too. Condo's are usually larger for the cost, signify long-term commitment to a neighborhood (a good thing IMO, we don't necessarily want downtown's population to go way up and down in cycles), plus you get to remodel them with way more flexibility as your own lifestyle changes.


Return to “Anything Goes”

Who is online

Users browsing this forum: No registered users and 1 guest