State condo law aims to ease restrictions, but is it enough to spur development in Spokane County?

Spokane County’s brisk real estate market has caused a shortage of available properties and record-breaking prices, prompting developers and real estate industry officials to advocate for a variety of housing types to boost homeownership.

But condominium construction has been mostly at a standstill in the county with regulations in the Washington state Condominium Act that developers say make it difficult to pursue these types of projects due to insurance requirements and risk of litigation.

They say regulations lowered the bar for condo developer associations to sue for defects, leading to costly insurance premiums – if they can obtain insurance at all. Developers instead have opted to build single-family homes, townhouses or apartments.

A new state law went into effect in July that aims to reduce barriers and cost for condo construction by allowing a qualified architect or engineer to conduct inspections rather than a forensic engineer. The law also authorizes builders to use a portion of the purchase price of a condo toward construction if they obtain a surety bond.

The new state law is a step in the right direction, but it may not be enough to encourage condo development on a widespread level in Spokane County, said Jim Frank, Greenstone Homes founder and developer of Kendall Yards.

“In order to spur condo development, we need to do a lot more,” Frank said. “(The new law) is not going to result in a significant change in construction and development activity in condominiums because there are still too many barriers remaining at the state level.”

Sen. Mike Padden, R-Spokane Valley, spearheaded a push for easing condo restrictions and creating affordable housing beginning in 2018.

Padden sponsored Senate Bill 5024, which went through revisions before unanimously passing the state House and Senate earlier this year to become law.

“I think we want to see how this works for awhile and, hopefully, there is an increase in condos and homeownership,” Padden said.

One of the biggest changes was eliminating the requirement that condo inspections be done by third-party forensic engineers. In the past, developers had to pay for a forensic engineer to fly from Seattle to Spokane for inspections, Padden said.

“That was helpful. It does reduce some of the inspection costs by allowing the architect of record make those certifications that the building is being built according to their plans,” Frank, of Greenstone Homes, said. “It saves some money, but there is still all of these other barriers.”

Frank said a statutory-warranty requirement to provide protection to condo owners for building defects up to 10 years is a barrier because it has resulted in a scenario where condo owner associations are able to sue developers before they are notified of damages to make repairs.

The statutory-warranty requirement doesn’t apply to apartment, single-family home or townhouse developments, he added.

The statutory warranty has led to “rampant litigation” and caused insurance companies to hike premiums or deny coverage, Frank said.

“The insurance companies are telling subcontractors that we don’t want to buy a lawsuit, so subcontractors can’t get insurance,” he said. “So, it makes it extremely costly to build in those circumstances. Even some simple actions in part of the Legislature to alleviate the climate of litigation around condominiums have not gone anywhere.”

More than 36% of projects built in Spokane from 2010 to 2019 were apartment complexes, compared to 2% of condo projects, according to the city of Spokane’s housing action plan.

“We’ve been in a situation that no condos have been constructed since 2009,” Frank said. “(The new law) allows for a handful to be developed, but we are in a situation where we need hundreds to be developed a year.”

The state is considering relaxing regulations for single-family zones that would allow for more townhouse and attached home development, which Frank viewed as a positive development.

“It’s not condos, but it will help having the ability to do small houses on small lots and do townhouse development,” he said.

Spokane Home Builders Association Executive Officer Joel White agreed that condo projects face more restrictions than apartment complexes or townhouse developments.

As a result, insurance companies won’t cover even a small condo project. While developers in Seattle might be able to absorb the cost through building a high-rise condo project, it’s not the same in Spokane, White added.

Developers are looking to maximize their investment and liability insurance is a huge cost to cover if they can’t find a carrier to provide coverage, he said.

“If you are trying to build a six to eight unit condo project in Spokane, it doesn’t pencil out,” he said.

White said it will take a “massive overhaul” at the state level to make condo projects viable from an investment standpoint.

“We have a housing boom and housing shortage, yet no investors are choosing to take on those projects,” he said.

“I think we need condos as one of the solutions in a variety of housing types, but there is not a lot of incentive to build (them).”