Customer Demand Loosens the Reins on the Condo Market; Extra Precautions Necessary

Insurance is available, but architects and contractors are taking the extra precaution of hiring consultants to approve acoustial and moisture concerns.

By Melody Finnemore

Basic Fire Protection is a name commonly found on lists of team members building projects throughout Portland, including the city's blistering condo market.

Unfortunately, the company's name also can be found in several condo-related lawsuits.

"It may be three years down the road and you get a class-action lawsuit where you're lumped in with 20 different subs, and it's through no fault of your own because it's not about your workmanship," said Kirk Boyd, Basic Fire Protection's vice president.

Examples of shoddy work do exist, but condo builders face a higher risk of lawsuits no matter what the work quality. Warranty laws are stricter for condos than single family residential or apartments. Multiple owners can easily be classified into a group, making lawsuits easier to pursue. The result was skyrocketing insurance premiums.

"The insurance companies said, 'We're done paying and if you want to build in this market you've got to pay a higher premium to make up everything we've paid out,'" said George Schuchart, president of Seattle's Schuchart Corp.
Recently passed legislation in Oregon and Washington gives builders more leeway to fix faulty construction, before a lawsuit can be filed. Still, general contractors, architects, engineers and others who specialize in condo construction are attempting to mitigate their exposure to lawsuits while pursuing a lucrative market.

One step has been to have more consultants approve the building plans, before construction starts.

"You will not get a building permit today without stamped drawings from a building envelope engineer and a sound engineer," Schuchart said.
Schuchart Corp., the general contractor on the Metropole off Market condo project in Ballard, is among many companies within the industry that now hire consultants to document work. Hoyt Street Properties, the owner of several condos near Portland's Pearl District, devotes a significant portion of its budget to consultants that evaluate potential liabilities.

"We've gone to great lengths to bring on envelope engineers and consultants to evaluate the waterproofing, and it's all to mitigate my liability exposure," said Doug Shapiro, HSP's vice president of construction. "When I build something with a curtain-wall or window-wall system, I've got to add hundreds of thousands of dollars just to cover the cost of consultants."
Bruce Brown, associate principal at Portland's GBD Architects, oversees risk management for the firm and said he reviews several factors each time GBD considers a condo project.

"The biggest thing we try to do is look at those issues that are hot buttons in the condo litigation arena, such as water intrusion and acoustics," he said. "We also tend to hire specialty contractors in those areas much more than we used to."

Other companies, such as Hoffman Construction Co. and Peninsula Plumbing, both of Portland, have in-house staff devoted specifically to document their work on condo projects. Bart Eberwein, Hoffman's vice president of marketing, said the company is more selective about the condo projects it takes on.

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"We are being very choosy with owners because of the risk," Eberwein added.

GBD Architects has implemented a selectiveness strategy of its own, preferring to work with the same contractors and subcontractors whenever possible to minimize exposure to litigation. For example, incorporating a design-build model for certain components such as skin elements designed and built by the same subcontractor helps reduce risk, Brown said.
"Probably, in general, there's a strategy of risk distribution so the designer isn't shouldering most of the risk," he said.

GBD has taken other steps to mitigate litigation over condo construction, such as working with project owners to create educational materials that inform homeowners' associations about the necessity for maintenance as buildings age. "A lot of issues come up because buildings aren't maintained the way they should be," Brown said.

In addition, GBD networks with other design firms to share lessons learned about various systems. "We feel we're all in there together, so we might as well help each other," Brown added.

Legislative action also has helped address the condo insurance quandary. Washington's Legislature initiated several reforms that, among other things, ease warranty requirements for contractors and foster mediation and arbitration to settle claims disputes, according to Timothy Harris, general counsel for the Building Industry Association of Washington.

The measures were necessary not only to manage the firestorm of litigation, but also to encourage condo construction as a means of growth management. The challenge now is to preserve affordability as project owners increasingly pay more for materials and insurance premiums, Harris said.

"We'll see more reliance on condos as a percentage of property ownership in order to meet growth management goals, but it still doesn't address the issue of housing affordability, which is another goal of growth management," he said. "Condos were kind of the last bastion of affordability in the urban market and that's changed dramatically."

Schuchart said another problem is that, in Washington, insurance companies lump all multifamily projects under the condo umbrella. It makes things tough for contractors specializing in apartments, town homes, duplexes and other multifamily projects when many have condo exclusion clauses in their liability policies.

"We keep paying more for premiums but the market keeps getting smaller and smaller," he said, noting limited avenues for obtaining insurance add to the difficulty. "There were only three carriers before and now there may be four. Or you might be negotiating with your broker and find out the insurance company has called a moratorium and put you on a waiting list."

Despite the higher costs and limited accessibility associated with condo insurance, many say there are benefits to the more stringent standards.

"I think what this has done is level the playing field and everybody has to build to the same standards now," Schuchart said. "Clearly, if you're a customer and you're buying a condo, you're going to get a much better quality product than 10 years ago." Hoyt Street Properties' Shapiro agreed. "It's a checks and balances system," he said. "It allows the good contractors to get better and it weeds out the contractors who aren't building up to industry standards."