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The Condominium conundrum: Washington state law effectively eliminates construction of the affordable-housing option in Spokane and elswhere

Representatives listen to speakers Tuesday, April 9, 2019, on the House floor at the Capitol in Olympia. (Ted S. Warren / AP)
Representatives listen to speakers Tuesday, April 9, 2019, on the House floor at the Capitol in Olympia. (Ted S. Warren / AP)

When Mike Gahvarehchee was planning the Rockwood Townhouses on East 10th Avenue on Spokane’s South Hill, he had another name in mind: Rockwood Condominiums.

Gahvarehchee, a Spokane-based general contractor who co-owns Muneris Inc., said he would’ve built condos on the prime lot at the entrance to the Rockwood neighborhood but state regulations put the project out of reach.

“We developed those as townhouses mainly because of the regulations on condos,” said Gahvarehchee, who finished the project in 2017 and has since sold the five units for between $400,000 and $550,000 each.

In 2009, the most recent iteration of the Washington Condominium Act was passed to address issues surrounding mold and water penetration in high-rise condo developments in Seattle, lowering the bar for condo owner associations to sue developers over shoddy work. The intent was sound and focused on consumer protection against shady developers.

Since then, however, the law has had the unintended consequence of squelching condo development across the state, including in Spokane for developers like Gahvarehchee, and led to a wholesale rejection of condos from the people who would normally build them – developers, builders, lenders, architects and contractors.

They say the law has made it too easy to sue for even minor defects that can be found in any building. The ease and threat of litigation have driven up insurance premiums, leading to untenable costs and developers opting instead to build single-family homes, townhouses or apartment buildings.

Between 2005 and 2008, the city of Spokane and Spokane County received building applications for 1,657 condo units, according to numbers collected by the Spokane-Kootenai Real Estate Research Committee. In 2011, the number amounted to zero. Since then, from 2012 to 2018, only 242 applications to build condominium units were filed.

Jim Frank, the founder of Greenstone who is behind the Kendall Yards development in the West Central neighborhood near downtown Spokane, said the law has effectively barred him and others from building condos, which he described as a “necessary tool” in building affordable housing.

“It’s really disappointing because there’s such a significant need for affordable housing and infill,” he said. “And it’s no longer available.”

Frank was hopeful the Legislature would fix the law this session, but said legislators instead essentially reaffirmed the 2009 law. However, Frank noted the work left undone this year may carry over to the next legislative session where lawmakers will “have something to work on so maybe next year they may be able to get something.”

In the meantime, Frank said he’s forced to build either single-family homes, townhouses or apartments around the region and in Kendall Yards – types of housing construction with less stringent rules than condos.

Decades undone

The 2009 update to the law followed more than 20 years of legislative tinkering to get the law right.

In 1989, the Washington Condominium Act was first passed, based on a 1980 law designed to “standardize condominium construction and governance standards across the state,” according to a 2016 report by the Washington Center for Real Estate Research. The 1989 update added rules applying to the financing, construction, sale and management of the state’s condos. It included “implied warranties of quality construction,” according to a ruling by the state Supreme Court.

These “warranties” led to a “groundswell of litigation,” a 2005 article in the Seattle University Law Review said.

“By the late 1990s, Washington’s condominium industry had run into serious problems, with condominium owners alleging loss of value and damage from water penetration. Resulting litigation led to damage awards or settlements that exceeded the insurers’ anticipated exposures. In response, insurers narrowed coverage, substantially increased premiums, or simply fled Washington’s condominium market,” the article said. “The resulting inability to obtain insurance threatened the legislature’s express desire to expand home ownership opportunities for low-income families and to meet the goals of growth management.”

In 2002, legislators tried to remedy the situation by passing laws requiring homeowners to give notice to developers about construction defects, and give them a chance to fix them, before a lawsuit could be filed. In 2004, the legislature created a higher burden of proof for defect claims.

But in 2009, the law was completely updated and flipped the equation, again making it easier for condo homeowner associations to sue.

In 2015, as part of his housing affordability plan, Seattle Mayor Ed Murray commissioned a report looking at ways to improve affordability in the city. The report criticized the condo law.

“Condominium developers are subject to an implied warranty for construction under the State’s Condominium Act,” the report read. “Courts in Washington have interpreted the statutory language broadly, resulting in a plethora of lawsuits against condominium developers, a chilling of condominium development in the state, and – often – adverse consequences for the condominium owners, despite significant improvements in condominium construction practices.”

Law blocked condominiums

in Kendall Yards

Frank’s seen that happen here, and described a dark future if the law isn’t changed.

He said the 2009 condo law has two aspects that have repressed development. It has rules that make the projects impossible to insure and rules that lead to high inspection fees.

The 2009 law was passed in response to some notable cases in Seattle where high-rise condo buildings weren’t soundly built, water infiltrated and mold occurred. The legislature, which had been tinkering with the earlier version of the law, responded by allowing homeowner association boards to easily bring forward litigation against the builder – without notifying or seeking permission from their membership.

“You create a situation where it make it easy for trial lawyers to enter,” Frank said. “They tell the boards, ‘Even though you’re not experiencing any problems right now, you may be liable as a board unless you perform a very thorough construction examination.’”

In turn, Frank said, that created a cottage industry of “forensic engineers” who go over buildings with a fine-toothed comb to find a defect.

“Every house, every building has something. They find it. Then they sue somebody. Then you have all these litigation costs,” he said. “Every single condominium ends up in litigation. Every single one. Insurance companies see this and won’t provide insurance. You can’t get insurance.”

The law also requires a detailed inspection protocol that demands the review of the architect’s plans before work begins, then a review of the work through the entire construction process.

Both aspects came to bear in Kendall Yards, which Frank said stopped him from building condos there.

In 2016, Greenstone filed plans with the city to build a 24-unit condominium building at the corner of Summit Boulevard and Elm Street. Frank hired a engineer to do the onerous review, but none were located in Spokane so he hired one based in Seattle.

“The guy wanted $120,000 and wanted an agreement saying we’d indemnify him” against any lawsuits, Frank said. “He isn’t taking any responsibility whatsoever for his work. Everybody else is responsible for their work. We said ‘this is crazy.’”

The city issued permits for the project, but no insurance company would insure the project’s subcontractors. Since the underlying land was zoned for higher, multifamily density, Frank was forced to convert the project into apartments.

Overrun with rentals

Frank has nothing against apartments other than that West Central neighborhood already has too many, which tears at the stability of the neighborhood, he said.

Compared to townhouses and single-family homes, with condos, he can build more and at a lower cost, which he can pass on to the buyers. The lower cost comes in part from the density. According to Frank, about four single-family homes can be built on an acre. Eight to 10 townhouses can fit on an acre. Multifamily construction, however, can bring 15 to 20 units an acre.

Some zoning requires such high density, but if condos are basically impossible, only apartments can be built.

“That’s what you get. A neighborhood overrun with rentals,” said Frank, adding the West Central neighborhood’s population is 65% renters and 35% homeowners. “What’s happening in West Central will happen in Kendall Yards. And the burden of this falls on low-income families. The burden does not fall on the South Hill. There’s an equality issue. They have no voice.”

Gahvarehchee, who built the townhouses on 10th, agreed.

“The laws were meant for the West Side but were passed on to the East Side,” he said. “We have a different climate here, but we have to pay for those consequences.”

Still, an issue that only really was felt west of the Cascade mountain range has come east, and Gahvarehchee, like Frank, said easing the rules on condo development could help.

“We need more affordable housing,” he said. “Part of our homeless issue is not having enough affordable housing. Real estate in the last five years has been appreciating, and it’s come to a point where it’s not affordable anymore. That’s a good reason to have more condos.”

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