Are Minnesota’s Construction Defect Laws Causing a Condo Shortage?

It’s no secret that Minneapolis is experiencing both an apartment boom and condo dearth at the same time, which begs the question, “why aren’t condos being built at the same rate as apartments?” According to many,  Minnesota’s construction defect laws are to blame. The rhetoric usually claims Minnesota has unique construction defect laws for condos; it’s said that these laws make the developer liable for defects in condos for an extended period of time, and this long-tail liability increases the developer’s insurance costs beyond profitable levels for the project. But for a number of reasons, that argument misses the real story. The better explanation lies in basic principles of supply and demand.

First, Minnesota’s construction defect laws are not new. In fact, Minnesota’s statute of repose for construction defects has been on the books since 1965, which limits the length of time developers can be sued for construction defects to 10 years following “substantial completion” of the project. In addition, Minnesota’s statutory warranty has exposed developers to construction defect claims since 1977 by providing the buyer with an express cause of action against the developer. These laws haven’t changed recently and have never undergone more than minor revisions, so developers’ liability exposure hasn’t changed either. If construction defect laws were primarily to blame, we should expect the recent condo downturn to correspond with a change in Minnesota’s construction defect laws, but it doesn’t.

Second, Minnesota does not have unique construction defect laws. Nearly all states impute construction defect liability upon the developer for 5-15 years following completion of the project. At least one state (Maryland) imposes 20 years of liability upon the developer. Since other metro areas with equally harsh construction defect laws have seen condominium development in recent years, construction defect laws cannot be entirely to blame for the Twin Cities’ condo shortage.

Third, construction defect laws apply to all developments–not just condos. In particular, Minnesota gives the “vendee” (i.e. the purchaser of the apartment complex, condo, or home) a cause of action against the “vendor” (i.e. the development team). These construction defect laws do not single out condominium developers–they apply to apartments, condos, and single-family homes. Thus, if construction defect laws inhibit condominium development, they must also discourage apartment and single-family home construction. Yet, apartment and single-family home construction has boomed, which further suggests construction defect laws aren’t really inhibiting condo development.

Granted, it is also possible that owners are simply filing more construction defect lawsuits for condo projects under preexisting construction defect laws, thereby increasing insurance premiums. However, without any substantiating research, that is a hollow argument seemingly based on anecdote rather than hard data. Yet even accepting that developers are increasingly sued for construction defects in condos, that cannot be the whole story in light of the arguments outlined above. This is especially true considering that the current condo shortage is consistent with overall market trends.

Generally speaking, condos leading up to the Great Recession were built at historically high levels relative to apartments. Indeed, in 2006 nearly as many condos were built as apartments (see the graph below). But once the Great Recession hit, the housing market lurched to a stop as credit standards tightened; consequently, the country was left with a condominium surplus. It took several years for condo demand to pick up the slack, and only within the past couple of years has a condo shortage become apparent in the Twin Cities. However, the current shortage is predictable considering housing supply reacts to perceived demand, and since condominium projects are complex in nature, one should expect considerable lag time before supply catches up with demand. Nonetheless, the Twin Cities is beginning to see new condominium projects proposed or under construction. If this trend continues, the condominium shortage should disappear and most of this talk about unfair construction defect laws should go with it.

Multi-Family Completions

Ethan Mobley

About Ethan Mobley

Ethan is a Missouri transplant living in downtown Minneapolis. He is passionate about real estate development and spends most of his work, school, and free time studying real estate-related issues. Ethan is an editor for the Minnesota Journal of Law, Science & Technology and will receive his J.D. from the University of Minnesota Law School in May 2016.

10 thoughts on “Are Minnesota’s Construction Defect Laws Causing a Condo Shortage?

  1. Eric AnondsonEric Anondson

    I feel this is still missing something. Developers wail about this. They have said something changed to cause condo developments to be saddled with lawsuits that apartments aren’t. They are begging things to go back to the way it was before the change. Well, something changed in the past, what, fifteen years?

    I don’t think we have yet heard a complete enough explanation for the developer perception of this issue yet, but I’m willing to see this as a vital part of it. The developers have said something changed, I need to hear them out. While the law may not have changed, could it have been that a court case happened that changed how the existing law is interpreted and then pointing back and saying nothing changed since the 60s is somewhat incomplete? Just guessing here.

    Plus the chart shows condo numbers dipping to levels never seen before, to nearly zero. There is something to a dip that deep that it nearly disappears.

    1. Adam MillerAdam Miller

      From 1992 to 2004 it was very nearly flat. Then there was a big spike that ended with a credit crunch.

      It wouldn’t be unreasonable to look at the 1992-2004 levels as roughly the equilibrium level, and the post-2008 dip still not enough to work off that excess of the boom years.

    2. NiMo

      Based on nothing but intuition, I assume that the defect laws affect condo developers due to a higher ability and willingness to use the laws by Condo “Vendees” vis a vis single family home Vendees, apartment renter Vendees, etc. Condo’s have a legal entity and a pool of group resources, the Condo Owners Association, to fight on the behalf of Condo owners that single family home owners and renters don’t have. That could lead them to take legal action under the defect laws both more often and more successfully than other home owner types. Developers could be complaining about the defect laws as related to Condos simply because Condos are the only development types out of which successful use of the defect laws are borne. They may not even be aware that renters or single family home owners could be using the same laws against them.

  2. Adam MillerAdam Miller

    An anecdote to illustrate the supply and demand conditions: in 2010, I bought my condo for 10% less than the seller paid for it a few years before (I believe they had also renovated). This week, I agreed to sell it for 25% more than I paid for it.

  3. Wayne

    Wait, so the number of multifamily housing units constructed in general has been in decline since the 70s even as the population continues to increase and preference for urban living increases dramatically? Is it any wonder we have extreme gentrification and middle-to-low income renters being priced out in nearly every city? This graph is basically exhibit A for why we have such a housing shortage in cities and why prices are so high.

  4. UrbanDoofus

    How do our laws stack up against places that have big or bigger condo markets? Average? Longer period of warranty?

  5. Ethan MobleyEthan Mobley

    A couple notes:

    The general rule under 541.051 is 10 years as mentioned above. But if the defect is discovered in the 9th or 10th years, the developer can be sued at the outermost date 12 years after substantial completion. That doesn’t change the argument (because 12 years still isn’t abnormal), but after rereading my post, I wanted to clarify. There are other nuances you have to read the statute to pick up on, but I think my original post captures the thrust of the statutes.

    As a correction, there was a brief stint between 1980 and 1986 where 541.051 changed from 10 years to 15 years. However, it has since changed back to 10 years as the general rule.

    I’m trying to be as accurate as possible here, but if you are curious about the nuances in the statutes and their history, I encourage you to click the hyperlinks above and see for yourself.

    Also be careful because the graph isn’t just for Minnesota. I wasn’t able to find condo completions for Minnesota exclusively. If anybody has any Minnesota-specific data on condo completions, I’d like to know.

    In response to NiMo, that is definitely a consideration, but I fail to see why apartment complex owners would be any less apt to sue than HOAs. As Adam pointed out, shouldn’t apartment complex owners be concerned about defects in their investment too?

    1. Archiapolis

      My understanding is that most of the suits are very specific to noise – noise traveling laterally between units, noise traveling vertically between units, etc.

      Basically a client would come to them and say, “The sound isolation between my unit and the next seems faulty”, lawyer guy finds somebody to test it, and when the STC (sound transmission class) doesn’t meet the thresholds that it should, then there is a basis for a lawsuit.

      To go a bit deeper, because developers try to squeeze every last bit of savings out of a project, the walls are designed to hit the minimum STC required on the nose (and not a bit higher). In a perfect world, the walls and floor assemblies would be built to exceed the thresholds so that if caulk joints failed here or insulation settled there, the minimum STC ratings could still be met and there would be no basis for a lawsuit.

      Not to cast aspersions at lawyers but the *possibility* also exists that STC ratings could be performed in such a way to generate numbers that would lead to a lawsuit. The implication that I’m making is that lawyers may have found an area of vulnerability and subjectivity that they are exploiting.

      Finding a grey area in how wall and floor assemblies perform and how tenants perceive noise is MUCH different than a window install failure that is systemic and causing a building to leak. If these types of “black and white” failures were occurring you can be sure that apartment owners would be seeing lawsuits in the same rate as condos.

      As I said in the forum, all it takes is one condo owner to identify a sound issue, a lawyer willing to press the matter, a test to produce a number below a threshold and boom – class action lawsuit (as a result of said lawyer contacting every member of the HOA with information that their walls/floors are faulty).

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