Tag Archives: construction defect litigation

Winn

Winnresidential Adds Apartment Portfolio in Arizona

WinnResidential, the property management arm of WinnCompanies, announced today that it has assumed management responsibilities for Highridge Costa Investors, a leading developer and asset manager, at six of their multifamily communities in the state of Arizona.

As a part of this partnership, WinnResidential will take over the property management, maintenance and leasing for all six communities. The portfolio includes Casa Bonita, a 60-unit community in Tucson; Florence Park Apartments, an 88-unit community in Florence; Quail Run Apartments, a 156-unit community in Peoria; Sonora Vista Apartments, a 65-unit community in Douglas; Valle del Sur Condominiums, a 60-unit community in Tucson; and Village Square Apartments, a 116-unit community in Phoenix.

The Arizona properties are a welcome addition to the Winn portfolio,” said Deirdre Kuring, Chief Operating Officer of WinnResidential. “We look forward to providing superior service to our new residents and our client.”

The portfolio consists of a very diverse group of properties spread throughout Arizona. The furthest West is in Peoria, Ariz. and extends all the way to the Mexican border in Douglas, Ariz. These six properties are very well-maintained assets that offer senior housing, affordable housing, market-rate housing, and some properties were designed specifically for special needs residents. Each one provides community programs and activities to create a real sense of community.

WinnResidential is a well-known and highly respected property manager across the country, and we are excited to partner with them on our Arizona portfolio,” said Michael M. Snowdon, Vice President of Asset Management at Highridge Costa Investors. “We are confident that through their quality operations practices, they will provide the best possible service to residents.”

Mixed Use Development

Mixed-Use Developers Urged To Plan For Defect Claims Before Signing Contract

Developers of mixed-use projects can reduce the likelihood of costly construction defect litigation by anticipating risk and allocating responsibility at the time of contract. Unfortunately, developers often assume that the standard industry forms provide sufficient protection.

These forms, however, rely heavily on good faith for resolution of issues in the future. There are certain approaches developers can take to protect them, prevent construction defects and resolve issues arising from them.

Determine project function and likely defects prior to contract
The developer’s contracts with contractors and designers are best structured after the developer has arrived at a clear “big picture” understanding of how the project will function. Gaining this understanding includes consideration of regulations, financing, insurance and marketing plans specific to the development. It would behoove the developer to conduct a “what if” analysis to determine the defects most likely to result from failures in the design or construction.

Knowing how the project will function and what defects are most likely to arise places the developer in the best position to craft project-specific core objectives for negotiation of the contract.

These core objectives related to defects should include:
A clear allocation of responsibility and accountability for preventing critical defects.

A determination of comprehensive insurance and bonding requirements based on an assessment of which risks can and should be covered.
A clear statement of how disputes will be triggered and resolved during and after completion of the project.

Resolution of disputes deserves particular attention given the implications of technical issues and the possible need to involve numerous categories of potentially responsible parties. The solution will differ from project to project.

Beware of the economic loss rule
Developers sued for construction defects invariably look to the designers and contractors for indemnification. If the designer or contractor is not held financially responsible however, the developer may remain on the hook even if subcontractors are truly at fault. Subcontractors can be immune from liability for construction defects under a principle known as the “economic loss rule,” which provides that a party whose claim is based upon a financial loss caused by construction defects is only entitled to recover under contract theories against those with whom it has a direct agreement. To the extent the economic loss rule applies, it prevents the developer from suing the responsible subcontractor, unless the subcontract provides otherwise.

Developers concerned about the economic loss rule typically require in the prime contract that each subcontract include text specifically indemnifying the developer from suits for construction defects caused by the subcontractor, and names the developer as an “intended third-party beneficiary” of the subcontract with the right to directly sue the subcontractor.

Require indemnification and defense
Developers typically do not cause construction defects, and assume the insurance furnished by the designer or contractor should be the primary source of payment for all related costs, including defense costs. Yet, under the standard industry form indemnity, the primary responsible party does not provide for defense. To address this gap, developers can explicitly require a defense obligation in addition to indemnity.

Nip the issue of warranty claims in the bud
There is the potential for confusion and discord in efficiently responding to warranty claims, given there will likely be multiple parties potentially responsible for the design and construction. Developers concerned with this concept should negotiate contract provisions for a “warranty response contractor” to ensure warranty/defect claims from third-parties are responded to and accommodated promptly, with allocation of responsibility being addressed later.

If the developer envisions the project to be above average in quality of design or construction — which is normally the case in upper-end developments where quality of construction administration is considered important to minimizing defects — the contract should memorialize that expectation. Otherwise, the enforceable measure of performance could be the minimum standard, which may make it more difficult for the developer to prove a breach of the standard of care and increase the likelihood of defects due to lower performance standards. To avoid disputes, the contract should reflect any understanding that performance will exceed minimum standards.

Contractual language dealing with any or all of these concepts is only as effective as the effort given to integrate them with the other contract provisions, as well as the core objectives, so that the entire contract clearly addresses the parties’ expectations for the specific project.

The Long View 2008

The Long View

By Melissa Bordow

In real estate, as in love, beauty is in the eye of the beholder. So when you ask major players in the Valley’s office-condominium market how attractive it is, you’ll get wildly divergent answers.

long view 2008

On one hand, brokers, bankers and economists can tell you what the numbers say: Office-condo sales have lost velocity, slowed by a struggling housing market and banks that have reined in credit to commercial and residential borrowers.

On the other hand, you have developers who know that even during slow economic times, there always is growth on the Arizona horizon. They see beauty in the Valley’s long-term prospects and say they are committed to a long-term relationship.

Growth that occurred three years ago during the freewheeling days of the housing boom, they say, has produced enough roof tops in far flung areas of the Valley to still require their services.

What happened
Four years ago, office-condos were an up-and-coming niche market, and real estate advisory firm Grubb & Ellis touted Phoenix as “the office-condo capital of the nation” in a survey of 41 cities. With plenty of property available and under construction, Phoenix was “ground zero” for office-condos, according to the survey.

Today, construction has slowed and transactions are down, figures compiled by commercial brokerage firm CB Richard Ellis show.

“It’s kind of like a bouncing ball, what goes up must come down,” says Kelley Ahrens, a director in the brokerage side of CBRE’s office-condo division. “It’s down now, but like a ball hitting cement it will bounce back up.”

According to CBRE’s figures, between 2005 and 2006, developers added 3.69 million square feet of office-condo space for a total of 10.93 million square feet.

Calculations show absorption that year was about 3.3 million square feet. By the fourth quarter of 2007, with 2.63 million more square feet added, absorption was 1.4 million square feet. By the second quarter of this year, only 360,000 square feet was added to inventory, with about 330,000 square feet sold.

Figures from commercial brokerage firm Lee & Associates show the vacancy rates are hovering around 29 percent in the East Valley and 24 percent in the West Valley. Scottsdale vacancies are at 17 percent.

“Is the market overbuilt? I would consider it overbuilt, but not grossly,” says Andrew Chaney, an associate at the firm. “You need to get that vacancy number down close to 12 (percent) or the mid teens before you get people excited to build.”

Developers and brokers say less activity is due in part to banks tightening credit and underwriting requirements.

“It’s just harder to come by capital,” Ahrens says. “Developers still believe in the office product. It’s getting someone on the financial side to believe in the product.”

Valley bankers, on the other hand, say they are willing to lend, but potential buyers must show they have a viable business plan with enough potential earnings to withstand the economic downturn.

“If I have a real good, strong buyer, I’m going to finance that office-condo,” says Kevin Kinerk, vice president of Western National Bank.

There simply is not the same demand, as many small businesses that bought office-condos were affiliated with the construction and housing industries, Kinerk says.

“The last thing they’re going to do right now is buy a piece of real estate,” he adds.

In the last six months, Kinerk says he’s approved financing for 20 office-condos, about half of what he approved in the first six months of 2007. Valley wide, transactions dropped from 410 in 2007 to 130 in the first two quarters of this year, according to CBRE figures.

Troy Toolson, vice president of Valley Capital Bank in Mesa, agrees that well-established businesses that meet due-diligence requirements should be able to get a loan. Startups, though, may have a tougher time.

“We’re really positive about office condos, particularly end-users, right now. It’s just the tough economy. People are a little gun-shy right now, but there are loans available,” Toolson says.

Bob McGee, president of Southwestern Business Financing Corporation, a nonprofit corporation that partners with banks to administer Small Business Administration loans to commercial borrowers, says conventional lenders are analyzing businesses more closely and asking for more equity, historic cash flow and cash flow to debt service.

Location, location, etc.
Office-condo developments that were strategically placed and well constructed still are luring small business owners who want to own their own space.

Sales are occurring in areas where housing is built-out, but necessary amenities have yet to reach, developers say.

“It’s a good time to be strategically aggressive,” says Terry Tobey, senior vice president of business development for UTAZ. Pinal County and Queen Creek, she says, are prime locales for office-condos designed for the professional doctor, dentist or insurance agent.

“Not everyone is in a recession,” Tobey says. “There is no recession for death and taxes and health. People still need to go to the doctor.”

And they would prefer to do so, she says, close to home.cover october 2008

The medical end of the office-condo market has held up better than most, Tobey says, and UTAZ has projects under construction across from the Banner Ironwood Hospital under construction at Combs and Gantzel roads in Queen Creek, and Mercy Gilbert off the 202 Freeway and Val Vista Drive, among others.

“We’ve always picked great locations and we are still getting people wanting to purchase,” she says.

Siting an office-condo well is the key to maintaining sales, agrees Steve Beck, a vice president at COBE Development.

COBE does extensive research on an area’s demographics,schools, hospitals, traffic patterns, freeway systems, and potential growth before building. That has helped thecompany absorb 20,210 square feetthis year, says T.J. Zaharis, vice president of sales and marketing, an increase of 50 percent from 2007.

“As the market has its ups and downs, location will always pull you through,” Beck says.

www.cbre.com
www.lee-associates.com
www.wnbank.com
www.vcbaz.com
www.swbfc.com
www.utaz.com
www.cobedevelopment.com