Architecture & Design, Commercial Lending, Commercial Real Estate, Development, Housing Trends

Finance & Commerce: Will Minnesota law change revive condo development?

Original Article

Date: June 7th, 2017

By: Brian Johnson

 

A change in Minnesota law that makes it more difficult for homeowner associations to sue over construction defect claims may or may not revive condominium and townhome construction. But builders, developers and real estate agents who pushed for the change say it’s a good start.

House File 1538, signed by Gov. Mark Dayton last week, requires homeowner associations to implement a preventive maintenance plan, go through mediation, and get the majority of association members on board before they can proceed with a construction defect lawsuit.

“None of us have a crystal ball as to whether any of this will change the market,” said Ryan Hamilton, associate legal counsel for the Minnesota Association of Realtors, which supported the bill. “It is an effort to improve the risk environment. We hope it does that.”

Builders and developers have been clinging to that hope for a while. In recent years, they have been hesitant to move forward with condo and townhome developments for fear of litigation, despite growing demand for such homes. Another barrier: Some still feel the sting of the condo bust in the previous decade, and the lenders do, too.

As Finance & Commerce has reported, state law allows a condo owner or association to sue project teams for “major construction defects” for up to 10 years after the unit or building was completed. The law was amended in 2010 to add commercial contractors to the list of liable partners. That 10-year statute still applies, said Minneapolis attorney Peter Coyle, who worked with the Housing Options Coalition.

Homebuilding has been on the upswing overall. More than 7,600 new multifamily units were added in the seven-county metro area in 2015, up from 2,329 in 2007, according to the Housing Options Coalition, which pushed for the new law. Coalition members include the Minneapolis Downtown Council, the Associated General Contractors of Minnesota, the Builders Association of the Twin Cities and the Minnesota Association of Realtors.

But because of the liability issue, condos and townhomes represent a much smaller share of new housing units. Two years ago, 3 percent of new multifamily units were condos and townhomes, down from 23 percent in 2007, the coalition said.

Speaking to the demand side, Herb Tousley of the University of St. Thomas points specifically to downtown Minneapolis and the city’s North Loop.

Demand is solid for condos there, but “hardly any” units are for sale, said Tousley, director of real estate programs at St. Thomas. Still, he noted new ones are coming online, including developer Jim Stanton’s 374-unit Legacy Condos project at 121 12th Ave. S. in the Mill District of Minneapolis.

“I think you will see people moving in to fill that supply,” he predicted.

Abbey Bryduck, legislative director for AGC-Minnesota, hopes the change will encourage more development. In particular, the preventive maintenance requirement “goes a long way in making sure these buildings are maintained properly,” she said.

The bill, which was approved by a wide margin in the Legislature, had a Republican author in the House and a DFL author in the Senate.

Despite the bipartisan support, some language in the bill, including the requirement to get the majority of condo owners on board with a lawsuit, gives pause to David Hellmuth, an Edina attorney who represents homeowner associations.

Hellmuth said the requirement puts an “unnecessary restriction” on the association when legitimate claims need to be addressed.

A typical defense against construction defect claims is that the association didn’t do enough preventive maintenance. In other words defendants claim the association “caused their own problems,” he said.

“Whether or not that is true is debatable,” Hellmuth said.

Even so, housing industry advocates like David Siegel of the Builders Association of the Twin Cities expect to see more condo and townhome projects sprout up in the metro area and across the state with the changes in effect.

How far has townhome ownership declined?

A number of years ago, BATC held an event that showcased townhomes, condominiums and other for-sale multifamily properties. “We could not do any such thing today,” Siegel said, because the options are too limited.

“I think this legislation will lead to more condo development, and will similarly result in more townhome construction,” Siegel added.

The Builders Association of Minnesota also supported the legislation, said Remi Stone, BAM”s executive vice president.

Stone said it “improves the landscape” for builders and developers looking to produce condos and townhomes, which appeal to younger buyers just entering the market as well as empty-nesters. That goes for markets such as Rochester, St. Cloud and Duluth, as well as the Twin Cities, she said.

Stone hopes the statute changes will spur more development. “This is one feature,” she said. “We still have issues of financing, we still have regulatory costs. But there is demand. And where there’s demand, the market will go.”

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