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Thursday, Jun 8, 2023

State Law Failing to Result in New Condos

State Law Failing to Result in New Condos By SHELLY GARCIA Senior Reporter Nearly two years after the passage of legislation intended to ease the burden on condominium developers, the number of new condo constructions and conversions remains pitifully low. And while some say that the key reason for the problem, the difficulty and cost of obtaining insurance for condominium construction, is easing, builders are less than sanguine about the prospects. “You’ve got a physical need and you’ve got a buyer demographic, all of which tells you there should be tons of condos under development and there aren’t,” said Joel Shine, CEO of CityView, a housing development company founded by Henry Cisneros. Builders say they still can’t get insurance for condominium development, and when they can it is simply too expensive. The issue has become all the more important in recent years as single-family home prices have swelled and the supply of land has dwindled. Attached condominiums would appear to be the ideal solution for boosting the supply of starter homes because they can be built on smaller parcels of land and sold at lower prices than the average price of a single family home. But despite the market for condos, builders just say no. “It would be a natural for me to get into condominiums,” said Stephen Ross, president of Montage Development Inc. in Encino, a homebuilder that specializes in constructing entry-level units in urban infill areas. “I’m not comfortable with the liability of it. Let’s say you can make a bunch of money selling them, but you have a 10-year tail of liability.” Builders say that over the years a cottage industry of lawyers has emerged specializing in suing condo builders and subcontractors. It began they say, because years ago construction was shoddy, but it has evolved and flourished even as construction standards have improved. “I think the reason for the condo insurance crisis is really that lawyers have the economy of scale on their side,” said Michael Strech, director of risk management and insurance for the California Building Industry Association. “They have a homeowners association with a captive group of clients, and they just have numbers on their side. It’s very cost efficient for them to farm those cases.” As the need and the market for high density housing and a larger supply of starter homes has escalated, the CBIA moved to try to ease the burden on builders and remove some of the risk in condo development. State legislation The result was SB 800, a bill passed in 2002, which went into effect for homes sold after Jan. 1, 2003. “It allows the builder to have the right of first repair,” said Ray Pearl, executive officer of the Building Industry Association in Calabasas. “If there is a problem with construction, the current system has trial lawyers suing at the drop of a hat. What SB 800 requires is you have to work through a very detailed process that says you need to give us the right to repair the problem before you sue us.” Although those connected with SB 800 concede that “it wasn’t a silver bullet,” as Kimberly Dellinger, a legislative advocate for the CBIA said, they do say they have seen insurance companies taking a second look at the California market as a result of the legislation. But builders say the law does not address one of the key sticking points for them or insurance companies: The statute of limitations for suing a builder for defects is 10 years, longer than most say they can be held accountable for what happens to a home. The issue has become especially challenging now because a change in the demographics of homebuyers, from traditional families to childless couples, singles and other types of households, and the sharp increase in prices for condominiums, has sparked much more interest in these properties. “We were doing about 75 percent of our local residential work on apartment feasibility studies,” said Devang Shah, senior consultant with Robert Charles Lesser & Co., real estate development consultants in Century City. “Now we’re doing 75 percent on for-sale properties.” But because of insurance issues, the bulk of the interest is directed at the most exclusive neighborhoods where condominiums are often sold at prices far higher than the price of a single family home in other areas. That, said Shah, is a function of the market for condos and the economics of building them. “The market is driven by two groups, the primary group is the empty nesters and the second is young professionals which are generally dual incomes. The professionals want to be close to interesting places to dine and entertain themselves and the same is driving the empty nesters. So (builders) are catering to these two markets, an they’re forced to cater to them because of the cost of construction and insurance.” The insurance factor The cost of insurance for a condominium can run to 2 percent or 3 percent of the cost of construction, a percentage builders say is extremely high. To make a project pencil out, a developer must build a lot of very high-end units. Often too, insurance companies place a minimum on the amount of insurance a developer must carry, so the smaller the development, the more expensive it is to insure. That usually means that condominium projects are not feasible for the very groups that would most benefit by a larger supply. “This state has a huge housing crisis, and instead of promoting housing the politicians do nothing,” said Shawn Evenhaim, president of California Home Builders in Canoga Park. “They should have changed the construction defect law. It’s not happening and everybody cries why should they pay $600,000 for a 2,000-square-foot house in Reseda.” Data on condominium construction is hard to come by because building permits are issued for single family homes or multi-family residences with no information on whether the property will be available for sale or rental. But most builders active in the area say that there are few if any attached condominiums under construction in the San Fernando Valley. A few so-called condo conversions are underway. StarPoint Properties has acquired a 204-unit apartment building in Winnetka with plans to convert the units to condominiums. “It’s so cheap to borrow and money is so fluid, you look for other alternatives rather than buying apartments and holding them,” said Dean Zander, a partner with Hendricks & Partners, who brokered the StarPoint deal. “One of those alternatives to capturing a higher return is to go for condo conversions.” Prices for multifamily investment properties have risen so high that investors who buy now are having to hold onto the properties for a longer period of time before they are able to sell them for a sizeable return on their investment. Condo prices, on the other hand, have risen 61 percent in the West Valley market over the past year, Zander pointed out. Still, he added, “It’s not for everybody. You have to have pretty deep pockets to self insure or put in contractor liability insurance. But if you have a big enough spread between the value of the building as apartments and the exit value as individual condos, then you can support the additional amount that the extra insurance is going to cost.”

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