Both sides of the political aisle have expressed interest in legislation to promote affordable housing and to correct what many believe is a problem with Colorado’s construction defects law that is preventing construction of condominiums in the Denver metro area.  One option currently under consideration is Senate Bill 15-177.

As reported here by The Colorado Statesman, whether SB 177 gets to a vote this session remains unclear.  There is some indication that Speaker of the House Dickey Lee Hullinghorst, and other House Democrats including Representative Max Tyler (D-Lakewood) as reported here by the Denver Business Journal, may soon propose alternative bills.

We are among the many who are curious to see the details of what Speaker Hullinghorst and other House Democrats propose.

As the outcome of Reed v. Town of Gilbert hangs in the balance, another case challenging a local sign code has been filed with the Supreme Court. This week, the plaintiff in Central Radio Company, Inc. v. City of Norfolk filed a petition for writ of certiorari seeking review of the Fourth Circuit Court of Appeals’ January decision upholding the City of Norfolk, Virginia’s sign regulations against a First Amendment challenge.

The history of Central Radio began in 1998, when Norfolk approved a redevelopment plan allowing for a taking by eminent domain of Central Radio Company’s property as part of an Old Dominion University campus expansion and redevelopment plan. In response to the city’s action and a Virginia state court ruling allowing the city to proceed with its plans, in 2012, the property owners placed a 375 square-foot protest banner on the building which was the subject of the eminent domain proceeding. Because the banner was placed without a permit and exceeded the size limits applicable to temporary signs, the city took enforcement action against Central Radio Company. The trial court denied the plaintiff’s motion for summary judgment, and the Fourth Circuit affirmed. During the course of the proceedings on the plaintiff’s First Amendment action, in 2013, the Virginia Supreme Court found that the city was barred from taking Central Radio Company’s property.

Much like the Gilbert, Arizona sign code in Reed, the Norfolk code regulates signs based upon categories of speech. Category-based regulation of speech is the subject of a federal circuit split that is expected to be resolved by the Reed decision, which will likely be released in June. In upholding the Norfolk sign code, the Fourth Circuit opinion in Central Radio applied logic similar to the Ninth Circuit’s challenged Reed decision. The Central Radio cert petition requests that the Supreme Court require the Fourth Circuit to revisit its decision following the release of the Reed opinion, or in the event that the split goes unresolved following Reed, to resolve the circuit split in favor of the plaintiff. No brief in opposition to the petition has been filed by the City of Norfolk.

The reform of Colorado’s construction-defect law took an important step when the Senate Business, Labor and Technology Committee passed Senate Bill 177 (“SB-177”) on a 6-2 vote.

Prior to voting on SB-177, the Committee heard nearly eight hours of testimony, most notably from Denver Mayor Michael Hancock, who testified in favor of SB-177. Many attribute the historically low rate of condo construction in Colorado—a mere 3% of housing starts today vis-à-vis more than 20% in 2005—to Colorado’s current construction-defect law regime. Count Mayor Hancock among them. He testified that multi-family construction has been curtailed because of developers’ fears of construction-defect litigation and that Colorado’s current law operates as an “artificial barrier to for-sale multi-family housing being built in Denver.” SB-177’s main purpose is “to try and get homeowners and builders to achieve resolution in a dispute before it falls too deeply into the legal system.”

One consequence of the lack of multi-family construction is a shortage of more affordable housing options in Colorado. Mayor Hancock is acutely aware of this issue, stating that “any vibrant, successful city will depend on a true mix of housing types to accommodate the needs of various populations. This includes attainably priced for-sale, multifamily homes that appeal to our growing population of young Millennials, first-time home buyers and older residents looking to downsize their homes.” According to Mayor Hancock, the dearth of multi-family housing options is “pushing our city into a high-cost category and beginning to price out too many of our hard-working residents.”

But the problem goes beyond housing for Mayor Hancock. In his view, by limiting housing options, Colorado’s construction-defect law is also undermining a number of Denver’s goals, including promoting multi-modal transportation options, encouraging density and environmental sustainability, offering a mix of retail uses and diversity of housing types; and connecting residents with opportunities for jobs, healthcare and education. Mayor Hancock believes SB-177 will help increase housing options and advance these goals because it “offers a substantive solution to a pressing impediment to construction of for-sale affordable multifamily housing. It offers a substantive solution to help keep Denver a city of opportunity for all.”

SB-177 now moves to the full Senate. SB-177 is sponsored by Rep. Mark Scheffel, R-Parker, Sen. Jessie Ulibarri, D-Westminster, Rep. Brian DelGrosso, R-Loveland and Rep. Jonathan Singer, D-Longmont.

Until recently, crowdfunding was thought to apply only to startup tech companies seeking alternative financing sources to launch their business or develop a product. Crowdfunding was not something used to fund real estate development projects. That all changed with a company called Fundrise, that uses crowdfunding to source equity investments for real estate development. By using crowdfunding, Fundrise gives individuals the ability to invest directly in real estate projects, which is an opportunity they might not otherwise have. Fundrise also makes investments more efficient by eliminating various middlemen and associated fees. Fundrise has funded dozens of multi-million dollar developments around the country including 3 World Trade Center and, most recently, a $15 million dollar project at Larimer and 35th Street in RiNo. Crowdfunding at first disrupted the way entrepreneurs launched their businesses. Now, it seems to be disrupting traditional real estate finance.

The CU Real Estate Annual Forum, held on March 11, 2015, highlighted Fundrise along with two other innovative real estate technology companies: Pivot Desk and Hightower. Pivotdesk seeks to match those with extra space with those in need of such space on short term basis on much more flexible terms than a typical sublease. Hightower helps owners aggregate and display leasing data in real time. These companies indicate a trend of disruption within the real estate industry – changing the rules and potentially displacing competitors.

As we’ve written in the past, Millennials have played a significant role in the revival of Denver’s economy. As increasing rent payments threaten to exceed monthly mortgage payments, however, Denver’s popularity among Millennials may diminish. Although worsening affordability has not discouraged Millennials’ interest in living in Denver thus far, as Millennials age and begin to consider home ownership, some believe a supply of more affordable home ownership options may be necessary for their retention.

Condominiums, which often serve as a key transition into home ownership for first-time buyers, are being built at a much lower rate than in years past.  Although a few condominium projects in the Denver metro area are underway (see here and here), the price point may be beyond what Millennial buyers are able to afford and in any case, the number of units remains low.

Some cite the inability to qualify for financing and low demand as the reasons for the decreased number of condominium projects. Others, including Denver’s Mayor Hancock, credit the chill on condominium construction to Colorado’s construction defect laws, which they say have resulted in increased insurance costs that make condominium development economically infeasible. Apartments, which are not subdivided into individually-owned units, are not subject to laws governing common interest communities that have resulted in increased liability exposure for condominium developers. A 2013 report quantified the difference, finding that insurance costs associated with condominium projects are 2 to 3 times greater than those associated with apartment developments. Based on this finding, it makes sense that some developers otherwise interested in condominiums elect to build apartment projects instead. .

A bill introduced in February aims to revise the current construction defect laws applicable to condominiums. Senate Bill 15-177 would amend Colorado’s Common Interest Ownership Act, C.R.S. § 38-33.3-101 et seq., as follows:

  • Encourage alternative dispute resolution of construction defect claims by requiring a homeowners’ association to mediate the claim and by limiting the ability of homeowners’ associations to unilaterally amend the declaration applicable to their community to remove a commitment to resolve construction defect claims by mediation or arbitration.
  • Require homeowners’ associations to inform their members of, among other things, the projected cost and duration of a construction defect claim and the effect that the claim could have on the value and marketability of their condos (both those subject to the claim and those not subject to the claim).
  • Require a majority of unit owners to vote to file a class-action lawsuit, rather than just a majority of homeowners’ association members (the current requirement).

In attempting to reform its construction defect laws, Colorado joins a number of other states concerned about the overall reduction in the number of condominium projects in their respective states. Senator Jessie Ulibarri, a Millennial and co-sponsor of Senate Bill 15-177, hopes that reform will mean that members of his generation who have been driven into Denver’s expensive rental market will be able to buy a home. Whether Millennials are truly interested in home ownership and are economically positioned to become homeowners remain questions to be answered.