California lawmakers are weighing bills that would reduce regulatory barriers to revive condominium construction, which has dropped significantly from its peak in the years before the Great Recession.
Assembly Bill 1406 would raise the state’s liquidated-damages limit on new condominium sales from 3% of the purchase price to 6%. Backers frame the bill as “condo deposit reform” to modernize a rule that is among the strictest in the country.
The other bill, AB 1903 filed in February, proposes changing condo construction defect liability rules to create a true “right-to-repair” process for condo defect claims so developers can fix problems without immediate high-stakes litigation. If enacted, the law would line California up with many other states that have similar laws on the books.
Challenges in condo construction
Condo construction has fallen to a fraction of its peak levels in 2005 and 2006, according to a 2024 study by the Terner Center for Housing Innovation at the University of California, Berkeley. In Los Angeles, for example, construction starts topped 8,000 units, dropped considerably during the Great Recession, and never recovered.
The same pattern played out across California’s major metropolitan areas, the study found.
Construction defect litigation and insurance costs shoulder much of the blame. A Terner Center follow-on study estimated the impact on hard costs on an L.A. project could be $8,100 to $18,300 per unit.
“While construction defect liability and related costs are certainly not the sole or even primary cause of relatively tepid condominium development in California, it is an important contributing factor among many others,” the study noted.
Developers have shifted their focus to building apartments instead of for-sale condos.
Reforming condo deposits
The long-standing 3% cap on condo deposits applies to most new, owner-occupied homes with up to four units and is widely treated as a bright-line rule 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 lenders view California condo projects as riskier because builders can only retain a small share of deposits if buyers walk away, making it harder to finance projects and pushing up borrowing costs.
In response, the bill that has passed the Assembly and awaits Senate action would let condo developers keep a larger share of buyers’ deposits when deals fall through, which supporters say is needed to jump-start construction of entry-level ownership housing.
California YIMBY leaders describe the 3% cap as the lowest in the country and note that other states allow higher presale deposits or treat larger liquidated-damages clauses as valid if they are reasonable. In Washington state, for example, a 2021 law lets condo developers collect presale deposits up to 5% of the purchase price.
Supporters say nudging California’s cap to 6% would keep the state on the consumer-protective end of the spectrum while giving lenders more confidence that projects can withstand cancellations. They link the change to the state’s sluggish condo pipeline, arguing that low deposit caps are one reason California builds far fewer condos per capita than states like Washington and Hawaii.
“This proposal is about making it possible to finance the kinds of starter homes that are missing from our market,” Ward said in a January statement after the bill cleared the Assembly. “By updating outdated rules around condo deposits, we can help expand homeownership opportunities for families who are currently shut out.”
Opposition to condo deposit reform
Realtors warn it will expose would-be homeowners to much bigger losses if life changes or financing problems force them to back out. The California Association of Realtors issued a “red alert” on the bill, arguing it would more than triple the effective cap on liquidated damages in some cases and erode long-standing consumer protections.
Opponents also question whether raising the cap would meaningfully increase construction. They say the change would shift risk onto buyers instead of addressing high land costs, fees and other barriers to building.
They make that argument even as Gov. Gavin Newsom signs laws to cut barriers and boost housing construction.
Ward and allied housing groups counter the opposition by noting that other safeguards in the state’s Subdivided Lands Law would remain intact and that the higher cap would simply allow deposits to function as true security for complex, multiyear projects. They also say larger deposits could deter speculative buyers who lock up units early and then abandon contracts, destabilizing project financing.
