California lawmakers are weighing bills that would ease barriers to reviving condominium construction, which has fallen sharply since its peak in the years before the Great Recession.
Assembly Bill 1406 would increase the state’s limit on liquidated damages on new condominium sales from 3% of the purchase price to 6%. Supporters bill the bill as “condo deposit reform” to modernize one of the toughest laws in the country.
Another bill, AB 1903 filed in February, proposes changing condo construction liability laws to establish a true “right-to-repair” process for condo defect claims so developers can fix problems without a big lawsuit immediately. If enacted, the law would be in line with California and many other states that have similar laws on the books.
Challenges in condo construction
Condo construction has fallen to half of peak levels in 2005 and 2006, according to a 2024 study by the Turner Center for Housing Innovation at the University of California, Berkeley. In Los Angeles, for example, construction starts peaked at 8,000 units, fell sharply during the Great Depression, and never recovered.
The same pattern played out across California’s metropolitan areas, the study found.
Construction failure liability and insurance costs are a big liability. A subsequent study by the Turner Center estimates the impact on hard costs for the LA project to be $8,100 to $18,300 per unit.
“Although construction factor debt and related costs are not the only or primary reason for cool condominium development in California, it is an important contributing factor among many others,” the study notes.
Developers have shifted their focus to building apartments instead of condos for sale.
Adjusting condo deposits
The long-term limit of 3% on condo deposits applies to most new, owner-occupied condos of up to four units and is widely considered the rule of thumb in California residential contracts.
According to Assemblymember Chris Ward, the bill’s sponsor, and California YIMBY, that line is now part of the problem. Developers argue that lenders view California condo projects as risky because builders can only keep a small portion of deposits if buyers walk away, making it difficult to finance projects and raising borrowing costs.
In response, a bill that passed the Assembly and is awaiting Senate action would allow condo developers to keep a large portion of buyers’ deposits when deals fall through, which supporters say is necessary to restart construction of entry-level homes.
California YIMBY leaders describe the 3% cap as the lowest in the country and note that other states allow higher deposits or treat larger categories of damages as permissible if reasonable. In Washington state, for example, a 2021 law allows condo developers to collect early deposits of up to 5% of the purchase price.
Supporters say moving the California cap to 6% would keep the state on the edge of consumer protection while giving lenders more confidence that projects can withstand cancellation. They linked the change to the state’s sluggish condo pipeline, saying lower deposit caps are one of the reasons California is building fewer condos per capita than states like Washington and Hawaii.
“This proposal is about making it possible to finance the types of starter homes that are not in our market,” Ward said in a statement in January after the bill cleared the House. “By revising outdated laws regarding condo deposits, we can help increase the chances of families being foreclosed on.”
Condo deposit conversion objection
Brokers warn that it will expose would-be homeowners to huge losses if life changes or financial problems force them to downsize. The California Association of Realtors has issued a “red alert” on the bill, saying it would triple the applicable limit on liquidated damages in some cases and erode long-term consumer protections.
Opponents also doubt that lifting the cap will meaningfully increase construction. They say the change will put the risk on buyers instead of dealing with high land costs, fees and other construction hurdles.
They made that argument as Gov. Gavin Newsom signs legislation to cut barriers and boost housing.
Housing groups and cooperatives countered the opposition by noting that some protections in the Federal Zoning Act would remain in place and that the higher cap would simply allow the deposit to serve as a de facto safeguard for complex, multi-year projects. They also say that large deposits can deter speculative buyers who foreclose on units early and walk away from contracts, disrupting project financing.
