Why developers in Minneapolis love apartment complexes (and hate condos)

MinnPost photo by Peter Callaghan
The 39-story Carlyle in the Mill District

Four Minneapolis developers walk into a room at St. Thomas School of Law … and mostly agree about the current state of multi-family residential real estate.

The market, they all say, is hot, with projects being announced with a regularity not seen since before the Great Recession. But those projects are mostly apartment buildings — not condominiums.

The reasons, said the four men invited to speak on the topic last week by Minneapolis City Council Member Lisa Goodman as part of her monthly “Lunch with Lisa” program, are complex: Getting financing for condo projects is harder than it is for apartments. Both millennials and older baby boomers are showing a preference for the greater flexibility of renting.

But there’s another reason, too, one that’s become a perennial complaint among developers and builders: the 10-year liability exposure for construction defects.

“I’m 48,” said Curt Gunsbury, a principal in Solhem, a company that has built apartments in Uptown, around the University of Minnesota and in the North Loop.“When I’m 63, people are still going to be suing me” if he built condos.

San Diego: a warm Minneapolis?

Gunsbury and partners recently tried to venture into condos in the North Loop, but decided to restructure the project into apartments when the higher-priced units — they were on the market for more than $1 million — weren’t selling.

“What I learned from this is that Minneapolis is not a destination market for long-term investment by somebody in their 50s or 60s who wants to spend money in a condo,” Gunsbury said. “They’d rather be in Naples or Tucson or San Diego or someplace warm.”

Without that market, he said, it is more difficult to build projects like the one he’d envisioned, since the most expensive units support the construction costs for the lower-priced ones.  

‘Fifteen attorneys yelling at each other’

Bob Lux, principal of development firm Alatus, said that when the recession hit, financing for the construction of condos disappeared. When it came back, it went into apartments because lenders knew there was a market for them. But he also said millennials and those a bit older are choosing “not to be burdened by the commitment of owning a home or a condo.”

Bob Lux
Bob Lux

Lux has been involved with many of the largest residential projects in the city. The first was Grant Park, in the Elliot Park area, a pioneer in downtown high-rise condos that he said was risky (but one Goodman, among others, was adamant about). “You could buy any drug you wanted around the corner,” Lux said of the location.

The project was helped by city sponsored tax increment financing that Lux said helped “over-improve” the project. The project was successful enough to pay off the 20-year TIF financing in seven and a half years.

Lux was also part of developing the 39-story Carlyle in the Mill District and the rebirth of Block E downtown. He is currently helping develop the Latitude 45 apartments on South Washington Avenue. “I am totally, 100 percent devoted to downtown Minneapolis,” he said. “We are really creating what are landmark developments that will benefit the community long after I’m gone.”

But he said he too will avoid doing condo projects for now because of the liability issue. What often happens, he said, is that after nine-and-a-half years, a lawyer representing a homeowners association will file a claim seeking damages for problems.

Rock Island
MinnPost photo by Peter Callaghan
The Rock Island Lofts in North Loop is a condo project built by Jim Stanton’s Shamrock Development.

While Lux said the law was meant to require a warranty for structural defects, it has been broadened by litigation and court rulings to include nearly everything, “from sheetrock cracks to flooring to everything.” Attempts to amend the law at the Legislature have been unsuccessful, resisted by the attorneys who bring the suits and homeowners associations that don’t want condo owners to be on the hook for major repairs due to defects.

In these lawsuits, not only will the developer and contractor be named, so too will be architects, subcontractors and anyone else involved. “So now you have a room of 15 attorneys yelling at each other and they’re all charging 500 to 1,000 bucks an hour,” Lux said.

The need for flexibility

Kit Richardson, of Schafer Richardson, is both a principal at the firm and an architect, and said that even if the developer is willing to risk a condo project, the contractors and architects are not. On one recent apartment project, the Gurley Lofts in North Loop, the architect only agreed to sign on after Richardson promised, in writing, that “we will never, ever, convert it to condos, for all the reasons you’ve heard.”

Kit RIchardson
Kit RIchardson

Schafer Richardson has done many condo projects downtown, and recently finished the Red 20 apartments in Northeast Minneapolis. They are also trying to redevelop the Nye’s Polonaise restaurant site on Hennepin, which will be apartments as well.  

But Richardson said he also sees a desire for flexibility among millennials and baby boomers. While millennials might want flexibility to pursue a job elsewhere without worrying about having to sell a home, older baby boomers want flexibility for medical reasons. One spouse might become ill and need to move into a care facility, Richardson said. He also sees the same trend mentioned by Gunsbury: older boomers are not putting money from the sale of their longtime homes into buying condos, at least not here. Instead, they’re buying in warm-weather areas and renting in the Twin Cities.

‘The only damn fool building condos’

Not every developer has eschewed building condos, though. Jim Stanton, who owns Shamrock Development, is building the Portland Tower condos in downtown East and has developed condos in the Mill District  and in North Loop. “I guess I’m the only damn fool in the crew to still be building condos,” Stanton said.

Jim Stanton
University of St. Thomas
Jim Stanton

He said he has a good relationship with his lender, a relationship that withstood the recession. And he said that while lawsuits are an issue, he said he hasn’t been sued a lot and has never had a suit reach court. “I don’t mind warranteeing my buildings. I’ve never built a perfect building. But if something goes wrong you go in and fix it,” he said.

He has at least one condo project in mind after Portland Tower, a 15-story building near the river in the Mill District. “I guess I’ll keep building ‘em but I’m not going to be a threat for long,” he said. “I’ll be 80 next month.”

Responding to a need

Despite all the complaints about condos, when Goodman asked the developers to make predictions about the future, Lux said he predicted that in a short amount of time there will be an announcement for a 35-40 story condo project in downtown Minneapolis. That’s likely in reference to a long-discussed project on the site of a funeral home near St. Anthony Main. While Lux has not confirmed whether it would be apartments or condos, Lux’s “prediction” suggests it will be the latter.

The panelists were asked if they thought the apartments now being built would be converted later to condos. Lux, for one, said the long liability tail would remain in place so there is no advantage legally. And he said units in buildings such as his Latitude 45 on Washington Avenue are smaller than what is typically desired by condo buyers.

Latitude 45
MinnPost photo by Peter Callaghan
The Latitude 45 apartments on South Washington Avenue

They were also asked their opinions about mixed use development, where street-fronts are reserved for restaurants, stores or commercial spaces. None seemed thrilled about the economics of that type of development.

“Nye’s will be mixed use because it has to be,” Richardson said, citing city plans and neighborhood desires. “But they’re tough.” He lost a restaurant tenant for his Red 20 because they could not reach agreement about had to manage noise. Even in concrete buildings it is hard to keep noise from ground floor spaces from reaching apartments above, he said. Mixing residential and office presents fewer conflicts.

“I would not do it if I didn’t have to,” said Stanton. “Given a choice, I wouldn’t build ‘em.”

Afterward, Goodman said she understands how developers are responding to the market and the legal environment. But she also said she laments that there are not more condo projects being built. “Developers are building homes to make money and to respond to a need,” she said. Apartment are easier to build right now. “At the same time, I lived in a condo for 20 years and I lament the lack of condos because people want to live downtown and live in a dense environment and be able to close the door and walk away and visit family. Condos provide an easy lifestyle.”

She said there is a healthy role for apartments as well but wishes the new offerings were more affordable. But she said she didn’t think the condo/apartment construction mix was “completely off kilter because if there was a huge demand built up someone other than Stanton would be building them.”

Comments (9)

  1. Submitted by Neal Rovick on 09/04/2015 - 12:11 pm.

    I’m somewhat flummoxed by the idea that it is “safer” for the developer and contractor to build an apartment building than a condo due to legal/warranty issues.

    After all, the investors (and their management companies) that are buying the completed apartment buildings will not willingly accept leaky windows and walls, jammed doors, wall cracks, faulty plumbing, or structural issues, etc., any more than a HOA. Anything that affects the rentability of a unit or building will be contested. The investors are far more likely already lawyered-up than a HOA and not deterred by stonewalling. Even the build-and-hold apartment units will encounter design

    Unfortunately, in my opinion, the design and construction of many of these buildings are not built to last 30 years and will lead to problems not to far down the road.

    • Submitted by Harris Goldstein on 09/04/2015 - 01:48 pm.

      Not built to last 30 years

      Having watched a number of apartments being built in North Loop, I think you’re right that many are not built to last 30 years.

      But I think that’s intentional and, in some respects, why there’s more of a recent focus on apartments. I believe that it’s makes financial sense to build a cheaper building (but with amenities), take the depreciation, tear down the building when fully depreciated, and rebuild based on what make sense at that point in time. Essentially planned obsolescence.

  2. Submitted by Connie Sullivan on 09/04/2015 - 12:31 pm.

    I’m intrigued by the difference between developers here on the issue of legal claims against defects for up to ten years post-construction. Stanton, a condo builder, seems able to do business and build well, with few legal claims about defects in construction and none going as far as to court.

    The other guys are wary of condos because of legal claims? Anyone looking to live in a condo would do well to check out who built it, and avoid the guys who currently are avoiding responsibility for what they build.

    That might be true even for apartment renters!

  3. Submitted by Ray Schoch on 09/04/2015 - 01:21 pm.

    Hating condos

    Having lived in a condo in metro Denver for several years, I confess that I don’t share Ms. Goodman’s sanguine attitude toward condominiums. I didn’t like condo living any more than the developers in the story like building them. My experience was that living in a condo was the worst of both real estate worlds.

    I owned the space inside the walls, but not the walls themselves – a legal fiction that will, at some point die the ugly death it deserves. I had to pay taxes, buy new appliances (both furnace and water heater: big bucks), and watch an inept grounds crew butcher what few plants existed on the grounds that did not qualify as “lawn.” For this, I paid a hefty fee on top of my mortgage payment. In hindsight, I don’t think the tax deduction for the mortgage compensated for the extra expense imposed by the HOA. In the meantime, I had most of the same issues with noise from the neighbors, someone’s washer overflowing on the floor above me, etc., that people usually complain about regarding apartment living, including a garage space that was – I measured it – only 9 feet wide. Even with a small, compact 4-door car, I could barely get in and out of the vehicle, and most of my neighbors had given up on using their garages (for which they paid a significant premium when buying their units) to store their vehicles, and instead used the space as a very large, rather inconveniently-located walk-in closet.

    My experience also revealed my HOA to be among the least democratic groups that purport to serve a given “public” that I’ve ever encountered. With all the drawbacks of living in an apartment, I’d happily do so again if the only other choice was a condo.

    As an old retired guy, however, I doubt I could afford to rent much of an apartment in Minneapolis. Rental is an issue in Minneapolis because it’s a hot market, with some of the most expensive residential space per square foot in the country outside of New York. So, I’m a somewhat reluctant homeowner in one of the city’s less-fashionable neighborhoods. My mortgage payment, including insurance and taxes, is far, far less than I’d be paying to rent equivalent residential space – I’ve checked that comparison at least once a year since I arrived, and the math still doesn’t work, at least it doesn’t for me.

    While I understand the reluctance of developers to take on liability issues, I’m not especially sympathetic. Will people still be suing Mr. Gunsbury when he’s 63? If shoddy construction characterizes his projects, I certainly hope so, and I hope they win. I also understand Mr. Lux’s distaste for the broadening of the law over time, but once again, am not especially sympathetic. If I’m the condo owner, I want the builder/developer to be on the hook for serious defects, including sagging walls and inferior floors. His description of a gaggle of expensive attorneys yelling at each other is probably pretty close to accurate. Build a quality building and it’s unlikely to happen, or at worst, the people suing you will lose. What I’ve seen far too much of in recent apartment and condo construction are multi-story stick-built structures which are unlikely to last beyond a single generation. They’re not “quality” buildings. They’re built to be “cost-effective,” with the result that, too often, renters or buyers will end up paying a hefty and unwanted price for dwelling units built quickly rather than built well.

    • Submitted by Dan Berg on 09/07/2015 - 09:04 am.

      “Quality”

      Unfortunately the gaggle of lawyers really don’t care if there is a real issue with the buildings quality or not. It is easy for general wear and tear or maintenance issues to be used as a pretext for legal action. I agree that many of what is built is not very good quality but the same thing hold true for single family homes as well. The materials available now are often poor and the craftsmanship is sketchy at best. The trouble is that if you think the current prices are high it would be much worse if things were built to a higher quality standard. Some of these higher end places are built but the market for them is small because of the premium price. People might not want the costs accosted with mediocre building methods but they don’t want to pay for quality either. They would rather have the fancy zip code and the stainless appliances, head parking or the well appointed exercise room.

  4. Submitted by beryl john-knudson on 09/07/2015 - 12:17 pm.

    Livng Units that Jack the developer built?

    Apartment, condo…but where are the city inspectors?

    Does it matter:
    Is it a matter of who pays for structural deficiencies when they exist…or possibly, who gets by with what unacceptable imperfections?

    Worst case scenario; merely a question here:
    If the building inspectors do the ‘appropriate inspection’ initially after the architect has designed the ‘complex-of-living-spaces’ and if any possible errors, he/they spot those errors…and the contractor follows with whatever quality of construction before developer begins putting the units up for sale…where’s the rub? The building inspectors are the eventual, or prime hands in the process ….you can shake on that,eh?

    Condo or apartment building units representing bad construction or unacceptable but promised amenities…both share responsibility for correcting those faults? It’s a matter of who pays…who demands; who receives equal considerations, whatever?

    Condos if we are to assume have a wealthier clientele and sue the developer for promises unfulfilled in contract…where was the inspector with a consistent inspection process?

    Which type of units can pass inspection with cheaper, flawed materials etc? I suppose that is at the heart of the issue at times?

    Lo the city Inspectors as final, structural gods…could be blind inspectors or do hopefully keep their hands out of the wrong pockets at times…who knows… others may wonder otherwise?

    • Submitted by Frank Phelan on 09/08/2015 - 08:46 am.

      By The Book

      Building codes are minimum standards. Inspectors are given some leeway, but by and large they know they can only enforce the codes as they are written. If codes aren’t up to snuff, that’s like blaming a traffic cop because you think the speed limit on your street is too high.

      Building codes are determined by panels made up of representatives from trades, inspectors, material manufacturers, builders and others. Recently there has been a push to have fire sprinklers installed in more single family homes, and builders have pushed back big time.

      If you a tougher rule, don’t whine to the umpire.

      • Submitted by Paul Udstrand on 09/11/2015 - 11:14 am.

        Building codes…

        Building codes are minimum standards. Don’t build to minimum standards and complain the judge.

  5. Submitted by Paul Udstrand on 09/08/2015 - 11:42 am.

    Kind of spooky if you ask me

    I think the comments of some of these developers are kind of spooky. We’re talking about structures that people live in, as far as I’m concerned anything that’s built by anyone in the State of MN that people will live in should have at least a ten year warranty against major design flaws or structural failure. I shudder to think what kind of crap these guys are building if they don’t even want to guarantee the work for a single decade.

    As for the burden of laws suits, well if your buildings weren’t failing people wouldn’t suing. These are by and large cookie cutter designs with familiar building materials, contractors should be able to assemble to meet basic standards. My house was built in 1954 and don’t have any cracks in my sheet rock for instance.

    I think the solution here is for the legislator to pass a minimum ten year warranty law that spells out exactly what is and is not covered, and that applies to any structure built for human occupation.

    Also, you notice that whenever we get these stories and builders complain about profit margins we never get actual numbers of any kind. How much does it cost per square foot to build, and how much per square foot do the various investors and builders make? When these guys complain about not making money on certain types of projects what’s the real difference? It’s not a matter of zero profit vs. profit, it’s margins.

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