Schwabe, Williamson & Wyatt’s

Real Estate and Business Seminar Series

Risk Management Strategies For Multi-FamilyAnd Mixed Use Development

May 10, 2006Seattle, WA

Dennis DunphyShareholderSchwabe, Williamson & Wyatt

David MacGregorSenior Vice PresidentW.G. Clark Construction Co.

Dwight JarvisVice PresidentParker Smith & Feek

Schwabe, Williamson & Wyatt | Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Risk Management Strategies For Multi-FamilyAnd Mixed Use Development

Agenda

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Common Risks, Project Team Structure and Selection (MacGregor)

Key Risks Addressed Through Contract Terms/Associated Legal Principles (Dunphy)

Insurance and Related Risk Management Issues (Jarvis)

Panel Discussion re Hypothetical Multi-Family Project, with Q&A (Dunphy, MacGregor & Jarvis)

Project Team: Structure and Selection

1.Owner2.Design Team3.Contractor

Key Risks Addressed Through Contract Terms and

Associated Legal Principles

Dennis Dunphy

Schwabe, Williamson & Wyatt | Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Express Warranties:

Condominium Act

1.Written affirmations of fact or promises must be kept

2.Models/examples must be met3.Specified uses are lawful

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Implied Warranties:

Condominium Act

1.Unit in as good a condition as when conveyed

2.Unit and common elementsa.Free from defectsb.Meet sound engineering and

construction standardsc.Workmanlike constructiond.Compliance with law

3.Appropriate for residential use

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New Permitting Required:

Condominium Act

1.Building enclosure design review

2.Inspection and testinga.Water resistance testb.Periodic review/inspection of

construction3.Certification prior to issuance of

C.O.

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Conversions:

Condominium Act

1.Inspection of envelope with intrusive testing

2.Report with recommendations3.Inclusion in offering statement

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Other Contract and Common Law Warranties

A.Owner warranty to construction contractor

B.Liability of design professionalC.AIA repair warranty

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Residential Warranties

A. Implied Warranty of HabitabilityB. CPA Claims

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Indemnity

1.Alignment of obligations to third parties

2.Use to transfer risk3.Limitations on risk-shifting4.Workers’ Compensation issue

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Statutes of Limitation

1.Breach of written contract – 6 years

2.Warranty claims under Condominium Act – 4 years

3.Statute of Repose – 6 years4.Claims against a dissolved LLC – 3

years

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“Sans Surprises Domaines”1. Developer owns a ¾ block which is currently leased to a

self-park operator. Site is located in the City of Seattle.2. Developer sees it as a very good site for either

apartments or condominiums. Hasn’t decided which makes sense.

3. Developer has authorized some preliminary design work based on apartments, but is concerned that he is missing the boat on what s/he has heard are much better profit margins in condominium versus apartment development.

4. Architect thinks the site, with a 65 foot height limit, will accommodate 5 floors and about 150 units.

5. Developer doesn’t like surprises, just as the concept name suggests.

6. Condos vs. Apartments: How will the choice affect risk and the concepts already discussed?

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Issue Prompts: “Sans Surprises Domaines”1. How does the choice between Condominiums and

Apartments affect:

a. Team Selectionb. Project Delivery Method/Team Functionsc. Insuranced. Contract Documents and Termse. Budgetf. Riskg. Reward

2. What impact will adding street level retail (i.e. mixed use elements) have?

3. How do these issues play out in a scenario where apartments are converted to condominiums?

Schwabe, Williamson & Wyatt | Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Insurance and Related Risk Management Issues

Dwight Jarvis

Parker, Smith & Feek

Overview

• Why are condominium projects so challenging to insure for liability?

• What to do about it?• What to watch out for?

Why are Condominiums Challenging?

• Poor construction in the 1990s• Homeowner’s Association

Lawsuits• Insurance carrier exclusions

What is a “Wrap–up” Policy?

• Types – OCIP, CCIP, Rolling Wrap, Conversions

• Project specific rather than annual• Covers Owner, General Contractor

and Subcontractors of every tier• General Liability coverage only• Premises/Build-out coverage,

Completed Operations coverage• One insurer, one set of Limits

Wrap-up Policy Pros/Cons

• Pros– Control of claims– Control of policy placement– Uniformity in coverage– Less administration

• Cons– High cost– Limited coverage– Large deductibles

What to Watch Out For

• Deductible “pass through”• Warranty work• Defense costs within the

limit• Site designation• Subsidence exclusion• Final premium may increase

Cost of Risk

• “Wrap-up” Insurance Premium• Fees & Taxes• Builder’s Risk Insurance Premium• Quality Assurance Specialist

• Mold Coverage• Home Builders Warranty • Professional/Pollution Liability• Deductibles/SIRs