Gary Godden used to specialize in designing condominiums for first-time buyers near Denver, often completing eight to 10 projects a year before the real-estate crash.

But while the Denver area has re-emerged as one of the nation’s hottest real-estate markets, Mr. Godden’s architecture firm has all but exited the condo business. The reason: The threat of litigation for potential construction defects in Colorado makes most projects impossible for developers to finance, he said.

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