Financing & Insurance-

These two issues are intimately intertwined and are often the make-or-break issue for projects such as these, especially for first-time and/or inexperienced developer/investors. 

Up until just a few years ago, there were dramatic liability insurance problems with condominiums (as well as single family homes), most of which centered around the fact that the units often share common walls, floors, ceilings, etc. and also common outdoor/yard spaces, as well as parking areas.  This made it difficult for insurance underwriters to separate out the liabilities when some problems occurred on a shared area.  This made the owners and/or builders of the condominiums very vulnerable to often frivolous lawsuits and thus made them almost untouchable for insurance companies.  In January of 2003 Senate Bill 800 went into effect to significantly limit and reduce these liabilities and subsequent court rulings have upheld the bill's premises,  but the insurance companies are often slow to catch up with these things.  They are always, understandably,  looking to reduce their susceptibility to claims and lawsuits to a minimum, and will charge a premium if that is not the case.

Currently a "wrap" liability insurance policy, one that would greatly reduce the exposure to these risks, can add $40 per square foot to the constructions costs.  Given that actual "hard" construction costs may only run around $200 per square foot, this is a dramatic percentage of costs that are added to the project just through insurance.  This can total more than all of the design, engineering, and permit fees combined.  And all on top of all of the professional's own liability insurance, just to cover scenarios that are only imagined, only fairly remote possibilities, especially given recent legislation

Although there are no laws requiring liability insurance, general contractors and sub-contractors will often not work without the "warp" policy to help limit their liabilities.  The don't yet want to "stick their necks out" as far as their own liability insurance is concerned, as fears about previous lawsuits is still carrying over since SB800 was passed. This can present a Catch 22 situation because once you figure in all the insurance and other "soft" costs, the resulting profit margin based on projected sales revenues, just doesn't end up being attractive enough to an investor to warrant the higher risk investment.  They might as well put there money elsewhere.  I would too.

Solutions-

So, condominiums and other multi-family projects are built all the time, how does it get done?   The typical first-time developer (and this really is most developers) cannot just hire out all of the necessary work and pay for all the requested insurance and still make a reasonable profit, given the inherently risky nature of real-estate development.

In discussions with fellow contractors, architects, and other engineers I have known and worked with, there are several possible alternatives.  One is private and/or alternative financing.  Some companies specialize in these types of loans and have creative ways in which to finance and insure these projects.  Private financiers may not require the added liability insurance.

Secondly, it is good to find a contractor that specializes in multi-family projects and is familiar with the liability  issues.  Typically, a contractor that does other types of work as well, will not be able to carry the special liabilities involved with condominiums.  You need someone that can be competitive in this specific field.

Thirdly, it can be possible to have the contractor (or even architects or engineers) actually be one of the investors in the project itself, and have that person's financial interest in the project hinge, at least to some extent, on the profits in the sale(s) of the project.  This way the builder(s) can have an extra incentive for quality work and to ensure that no liability claims will be made, at least none that can stand the test of litigation.  This can make the project more like an "Owner- Builder" type of project, as opposed to one person hiring out all the work, and eliminate the need for that very expensive "wrap" policy.

Other "Soft" Costs-

Other costs to keep in mind are, in no particular order, and as an additional percentage on top of construction costs are-

Utilities (gas, electric, cable, etc.) - 1%

Real Estate transaction fees- 4-6%

Various Legal Documents- 1%

Carrying Costs of Financing- 6%

Some of these areas I think can also be creatively reduced if you put your mind to it and negotiate them ahead of time.

Conclusion-

If you want to be successful at this type of project, you will need to get a rough game plan together to address all of these issues prior to committing to the lengthy, and somewhat expensive designing and permitting phases of the project.  I offer a low-cost feasibility analysis, to address this, and many other preliminary issues to get you started in the right direction with no other obligation.

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