Case study examines impact of 2017 condo defect reforms

In 2017, the Minnesota Legislature reformed its condo-townhome construction defect law, but builders and developers say the reforms did not go far enough

Housing Affordability Institute, a Twin Cities-based housing policy think tank, reviewed the impact of a 2017 state law aimed at addressing the barriers to townhome and condo construction.

In 2017, the Minnesota Legislature reformed its construction defect laws for multifamily for-ownership housing to encourage more multifamily development in growing areas. This change was connected to Minnesota’s statutory home warranty requirement.

At the time, the development community said the litigation environment prevented the construction of more for-ownership housing projects. The risk of litigation over the lack of HOA maintenance, they said, was too high on condominium and townhome projects, despite the low inventory and high demand for new housing.

According to data from the United States Census Bureau, a surge in multifamily construction followed the passage of the reforms, but the data does not track occupancy type. After examining for-ownership vs. for-rent construction in the Twin Cities tracked by the Metropolitan Council, it appears that the increase in production was not tied to for-ownership.

For multifamily projects greater than five units, for-ownership production decreased after 2017 and became almost non-existent, despite the surge in multifamily construction. Production increased for townhomes, but that share of for-ownership and for-rent did not change meaningfully.

“Digging into the data, we can see that the reforms passed in Minnesota in 2017 did not go far enough in opening the market of for-ownership multifamily construction,” said Nick Erickson, executive director of Housing Affordability Institute.

The case study contains interviews with townhome developers that explain the increase in townhome production. These builders stated that the increase in townhome production is more related to the declining affordability in the Twin Cities region. Townhomes are the only new-home product largely available to buyers for less than $400,000, according to one builder.

“As other states look to pass multifamily construction defect reforms, they should use this report to see that leaving too much on the table can lead to a law in which not much changes,” Erickson said.