By Bill Fulton, FAICP, Co-Director, Center for Housing Policy and Design, Professor of Practice in Urban Studies and Planning at UC San Diego, Terner Center Fellow.
The Center for Housing Policy and Design’s Bill Fulton recently published a piece for the Terner Center for Housing Innovation at UC Berkely exploring how construction defect liability down regulates condo construction. Read the excerpt below:
“Despite significant state legislation over the past decade to boost housing production, new housing construction in California has stagnated at 100,000 to 120,000 new units per year[1]—less than half of what’s needed to meet the State’s goal of producing 2.5 million units between 2023 and 2031.
One important part of the housing ecosystem that is particularly struggling is for-sale multifamily units known as condominiums. A recent Terner Center report suggests that the number of new condominium units in both the Bay Area and Southern California has dropped by 90 percent from the peak in 2005–2006.[2] With single-family homes now extremely expensive in many California markets, condos could be an important ownership option. But in order to unlock condominium construction in California, the barriers to development need to be better understood.
One key driver in the significant decline in condo construction appears to be California’s construction defect liability laws.
A new report, “The Financial Impacts of Construction Defect Liability on Housing Development in California,” highlights a particular challenge with construction defect liability laws: the enormous cost of insurance for condominium builders. The report, prepared by Economic & Planning Systems (EPS), finds that developers often pay three to four times as much for insurance for condominiums as they do for similar rental apartments.
For example, in Los Angeles, EPS estimates the insurance cost as between $8,000 and $18,000 more per unit for condominiums than for rental units. This finding is particularly problematic during a period that has seen insurance providers pulling out entirely from California or significantly raising premiums well in excess of inflation year after year in the face of increased costs due to climate disasters and regulatory changes.”
“Options for Reform
EPS finds several options for policy reform that could reduce insurance costs and make it more likely that condominiums of all sizes will be built. Their recommendations include the following:
- Shorten the “length of repose”—the time period during which litigation is allowed— from ten years to five.
- Give developers protection from liability for repairs if they follow the SB 800 process.
- Require that HOAs obtain member approval to file lawsuits and inform members of the risks of litigation.
- Require HOAs to perform better building maintenance and establish more robust financial reserves to cover routine maintenance.
- Limit attorneys’ contingency fees to less than the 33 percent typically charged.
One interesting alternative, which has been implemented in New Jersey and parts of Canada, is a so-called “warranty” system. Under such a system, the developer and contractor provide the HOA with warranties for various aspects of the building (workmanship, plumbing, major structural defects), usually varying in length depending on which aspect is being considered. In New Jersey, for example, warranties for workmanship might be one to two years, while major structural defects are covered for 10 years, the same as California’s current length of repose. A warranty system also holds the potential to reduce the role of litigation attorneys and therefore the cost of litigation.
Middle-income Californians deserve many options for homeownership. Given the fact that so many California communities are focused on infill development (building in existing neighborhoods), condominium ownership should be one of those options. State policymakers should consider lowering the cost of insurance, and addressing the overall challenge of construction defects, in order to see rates of new condo construction materially increase.”
Read the full piece here.
