We all know how crazy the Denver real estate market has become. Our challenge is to figure out ways to keep it from turning completely irrational. As buyers comb listings and neighborhoods for desirable properties, they’re still finding a dearth of starter-level condominiums in the $200,000-$400,000 range.
If you ask developers, the main culprit is Colorado’s construction defects laws, which make it easier for disgruntled homebuyers to bring lawsuits against their builders. Legislative efforts to amend the statutes have failed so far, leaving the inventory problem unresolved. We sat down with Reid Davis of Riverpoint Partners—the developer behind the upcoming Decatur Point apartment complex in Jefferson Park—to discuss the industry’s legal concerns and the overall dynamics of Denver’s market.
5280: Your firm is relatively new to the local scene. How did you break into it?
Reid Davis: We made some land acquisitions in Jefferson Park and the Tennyson Street area, and we were able to get to the right people, design the projects, and begin going vertical. It was somewhat difficult to break in here, but I surrounded myself with a good team, including Craine Architecture and FirstBank. We closed a loan in May for the 200-unit Decatur Point project at 27th and Decatur. There’s a ton of residential development in that area, and we’re also exploring retail additions nearby.
This is an apartment-only project, presumably because of our construction defects laws. Are they really as restrictive as some people claim?
Absolutely. The laws place a ton of burden on the condo developers, contractors, and pretty much everyone involved in the process. If a frivolous lawsuit comes up it’s guaranteed to slow the building process. We’re trying to mitigate that by putting a team in place that monitors quality control from the beginning and goes into a project knowing there’s a potential for future litigation. [Condo complexes are] scary because you’re paying a premium for insurance and quality control. You’re documenting and testing everything throughout the project, so you need contractors who are willing to go through all that and take the risk, too. There are ways to mitigate the risk [of lawsuits] and not be a developer who cuts corners just to get something to market, but your investors have to be onboard form start to finish. We have to be transparent in getting that message out, because you might have to set aside potential profits for seven or eight years to basically create a legal defense fund.
The effects of this building slowdown seem to mostly affect the entry-level buyers.
There’s such a high demand for that product right now. You have tons of people moving here, but they most likely want to buy in that $200,000-$400,000 range, and with the constraints of litigation, it’s impossible to build a quality condo and sell it for that price. We try to mitigate the risk by building with the highest-quality materials we can afford, but that affects the price points, which leaves lower-end buyers out of the market.
The area around Decatur Point is seeing a lot of apartment construction lately.
There are almost 1000 units going up within a quarter mile of our site. We broke ground in May and are scheduled to complete Decatur Point by next summer. We also are doing a 49-unit project in the Tennyson Street area that we’ve submitted to the city for review. We hope to break ground on that in early 2016 and complete it within 12-14 months.
Back at Decatur Point, we had a site plan done for the adjacent Clay Street site that included 93 condos, but we decided it was too dense. It’s important to us to protect Decatur Point and add value to the neighborhood. There’s still a need for better small retail and walkability in that area.
One of the reason construction defects reform failed was because it didn’t provide enough affordable housing. What are the economics of that for a developer?
If you build a complex with 29 units or more, 10 percent of it has to be [officially] affordable. But if you’re using high-quality materials, you’re losing money on those units. That’s a deterrent, but there’s definitely a need for affordable housing. We look at everything we do as a long-term hold, but we also have a fiduciary responsibility to our investors. A change in the law would allow for more development. Most people don’t understand that once you have a pending lawsuit, owners can’t refinance or sell their properties, and that can drag on for years.
Can you quantify the effects the current laws have?
It’s five-to-10 percent more expensive to build a condo project under the current conditions. Typically, up to one percent of a project is allocated to insurance costs, but the current laws make that more like two-to-five percent, which is a big number when you’re talking about a $20 million-$30 million project. It eats away at your returns. And even as much as the area is growing, I don’t think demand could ever get high enough to make the construction deflects laws irrelevant.
Follow 5280 editor-at-large Luc Hatlestad on Twitter at @LucHatlestad.