Where Shelby’s Bar & Grill long stood on the corner of 18th and Glenarm streets, and before that the old Broadway Hotel, two towers are rising that will provide 461 for-sale condos, defying the odds in more ways than one.
The project represents a vote of confidence in downtown Denver at a time when office vacancy rates have soared above 30% and remote work has left the future of central business districts uncertain.
And it conveys a degree of faith by Amacon, the Canadian developer behind the project, that Colorado’s litigious environment around construction defects won’t come back to bite it once it completes the city’s largest condo project since 2009.
“We have been visiting Denver for years and over time we fell in love with the city and realized early on there was a need for and shortage of homes,” said Stephanie Badineau, vice president of sales and marketing with Amacon, which is based in Vancouver, British Columbia.
About 70% of residents in central Denver are renters, and only 30% are owners, she said, and Amacon expects to find a willing market for its luxury condos with their high-end finishes and central location.
The company has lined up its insurance coverage, is confident in its quality control measures and is pushing toward a 2025 completion date for its 38-story and 32-story towers, which will include structured parking and ground-floor retail.
“This is what we do all day — build condos. It seems like there weren’t that many developers willing to take on that risk,” Badineau said.
That wasn’t always the case. Before 2007, about one in five homes built in Colorado were condos, and many of those targeted first-time buyers transitioning from renting, Ted Leighty, CEO of the Colorado Association of Homebuilders, said during a panel on construction litigation reform hosted by the Denver Metro Chamber of Commerce on Nov. 8.
Currently, condos are running closer to one in 20, or about 3% to 6% of the total. Most of the condos getting built are high-end, like what Amacon is building in Denver. Although there was a brief spike in condo construction following defects litigation reforms in 2017, that quickly faded.
In 2005, there were more than 4,000 permits pulled for condos, according to a white paper on the lack of condo construction in the state, by Peter LiFari, a housing fellow at the Common Sense Institute and CEO of Maiker Housing Partners, a developer and operator of affordable housing based in Adams County.
Last year, there were only 515, despite the new rules in 2017 that required a majority of homeowners in an association to vote in favor of pursuing a lawsuit rather than just the board. The change was designed to make sure homeowners understood the road they were taking when they moved to litigate.
It isn’t that developers have shifted their focus away from multi-family to single-family. For every new condo built in Colorado, there are 14 new apartments built. In the ’00s, before the housing crash, that ratio was close to 1 condo for every 1.25 apartments, LiFari found.
Viewed another way, condo construction from 2018 to 2022 ran 76% lower than what it was from 2002 to 2008. Buyers are desperate for entry-level condos when they do come up on the resale market, a sign that new ones would also be snapped up if they were built.
Litigation, however, has greatly reduced the number of insurers and developers alike who are willing to tackle new condominiums. From 2007 to 2022, the number of condo developers in the state has dropped from 146 to 23, LiFari found.
While the housing downturn and financial crisis wiped out a large number of developers of all types, construction levels for single-family homes and apartments have rebounded. That isn’t the case for condos.
“This stark decline underscores the significant impact of construction liability litigation laws on the willingness of developers to engage in condominium projects,” he writes.
Kevin Walsh, an attorney with Brownstein Hyatt Farber Schreck who has both pursued and defended construction defect cases, said Colorado’s system is designed in a way that drives up costs without always resolving problems.
Plaintiff attorneys are paid primarily on a contingency basis with fees typically about 35% of damages. They are incentivized to scour for every defect possible once a case is opened and get the highest settlement or judgment possible.
They also bring in third-party contractors who charge 30% to 50% above the going rate for repair work. One reason contractors overcharge is that they fear being sued themselves and need to cover future liabilities. Colorado’s defects litigation system remains so broken that it has scared away insurers.
“There is only one insurance carrier in Colorado willing to cover condos,” he said during the chamber panel.
That contributes to much higher premiums than what a competitive market would generate. Given all the other escalating costs developers face from land to labor to soaring interest rates, higher insurance costs can make a project untenable and the fear of litigation makes them unpalatable.
Insurance premiums now account for 5.5% of the “hard” costs of building a condo compared to rates of 1.1% to 1.6% for apartments and other multifamily rental projects, LiFari estimates.
Whatever changes the state has made to address the construction defects litigation issue haven’t been enough in the eyes of insurers, and because of that, it isn’t enough for developers.
“It has driven us out of the market we are not alone. We have to make a change,” said Carl Koelbel, chief operating officer at Koelbel and Co.
Developers are fully aware that entry-level condos are desperately needed, and that they would sell quickly if they were built, benefitting people.
But because of insurance costs and fear of litigation, Koebel said his company will no longer touch them. The cheapest townhome the company can build in metro Denver right now is in the low $500,000s and that is hardly entry-level.
Resolving construction defects litigation is important but there are other roadblocks that need to be addressed, Koelbel said. Zoning restrictions and the lack of available land work against condo construction, and so does what Koelbel refers to as “bureaucratic gumming up.”
Even a use-by-right project, considered the easiest to get through the planning process, took more than three years for his company to get approval, he said. There was nothing expedited about the process.
What is needed
LiFari, in his white paper, doesn’t argue for repealing the existing Colorado Construction Defect Action Reform Act (CDARA), which was passed in 2001 and modified in 2003. The act tried to push disputes more toward arbitration or mediation, but many cases are still ending up in the courts.
He argues for the implementation of a “strategic series of incremental reforms” that balances the protections offered to homeowners and developers. One would involve creating a statewide warranty standard that would provide developers who meet specific quality levels of construction established by the state extra legal protections.
Another reform would require individual parties involved in the construction process to take specific responsibility for their expertise. A licensed plumber or electrician, any subcontractor for that matter, would be responsible for the work they do, rather than the developer, who is almost always at the center of defect disputes. Likewise, contractors wouldn’t get dragged into litigation that is the developer’s fault.
He also argues for stronger language to allow a right to remedy, meaning the responsible party has a right to fix a defect promptly or assign a qualified third party to fix it. One model could follow the state’s “lemon laws” where a car manufacturer is allowed to fix a defective car or if they can’t, a third-party vendor can be brought in.
“We can’t build perfect homes,” Leighty said, adding a way needs to be found that addresses defects when they do arise that won’t do long-term damage to either side and to Colorado’s housing market as a whole.
Denver attorney Chad Johnson, who represents homeowners and homeowners associations, said impacted property owners typically only consult an attorney after they have failed to get a contractor or builder to resolve a problem. It is not something they take lightly.
“They have spent more time trying to vilify homeowners and HOAs for discovering their defects than they have been to tighten up their own practices. I haven’t seen any difference in construction practices. We are busier than ever,” he said.
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Of around 1,000 requests he has filed under CDARA to request mediation or arbitration and avoid costly legal battles, none have been honored, Johnson said, adding that insurers encourage their clients to stretch out and delay cases rather than resolve them by making satisfactory repairs.
“I have had brand-new homes that have collapsed, where that builder and that insurer should know they will have to pay. They will do everything in their power to drag it out. It is a game of delay,” he said.
Johnson said many of the reforms builders have sought in the past failed because they don’t get to the core of the problem: bad construction practices. He disagrees that separating out liability among different parties is an answer. Owners often don’t know what specific contractors were involved in building their condos and homes and can obtain that information only from the developer or builder.
“A builder is 100% responsible for what they build. That would be a big mistake for a lot of reasons,” he said of separating out liability. Also, developers have contractual relationships with their subcontractors and can go back and sue them because of their shoddy work.
Changes made in 2017 requiring a majority of owners in a community to approve defects litigation also didn’t stem the tide, because builders were offering inadequate solutions when problems arose and losing the votes, he said.
He agrees that insurance is an important part of the equation and argues that solutions can be found. But he said insurers need to provide more information about the claims they are paying out, how they determine premiums, and why they are averse to lower-cost solutions like mediation.
“Immunity from defects won’t solve the problem,” he said. “You are just passing on the cost of fixing these builder mistakes.”
