Washington Community Associations Are Subject to New Reserve Study Laws

On January 1, 2012, the state laws that govern Washington condominium and homeowners associations (RCW 64.34 and 64.38) were amended in significant respects with regard to reserve studies. For condominium associations, the most important change is a new legal obligation placed upon their boards to disclose the following to the owners when providing the budget summary each year:

(1) The current amount of regular assessments budgeted for contribution to the reserve account, the recommended contribution rate from the reserve study, and the funding plan upon which the recommended contribution rate is based;

(2) If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each unit per month or year, and the purpose of the assessments;

(3) Based upon the most recent reserve study and other information, whether currently projected reserve account balances will be sufficient at the end of each year to meet the association's obligation for major maintenance, repair, or replacement of reserve components during the next thirty years;

(4) If reserve account balances are not projected to be sufficient, what additional assessments may be necessary to ensure that sufficient reserve account funds will be available each year during the next thirty years, the approximate dates assessments may be due, and the amount of the assessments per unit per month or year;

(5) The estimated amount recommended in the reserve account at the end of the current fiscal year based on the most recent reserve study, the projected reserve account cash balance at the end of the current fiscal year, and the percent funded at the date of the latest reserve study;

(6) The estimated amount recommended in the reserve account based upon the most recent reserve study at the end of each of the next five budget years, the projected reserve account cash balance in each of those years, and the projected percent funded for each of those years; and

(7) If the funding plan approved by the association is implemented, the projected reserve account cash balance in each of the next five budget years and the percent funded for each of those years.

For homeowners associations, the 2012 changes are more far-reaching. A legal obligation (subject to exemptions) to obtain a reserve study that meets certain criteria and periodically update it is placed upon those associations for the first time. The annual disclosure obligation placed upon condominium associations discussed above is placed upon homeowners association boards as well.

Washington community associations face an ever-changing and increasingly complex set of federal, state, and local laws that regulate their actions. Boards of such associations should consider establishing a relationship with an attorney to help them comply with those laws.

New Washington Laws Affect Private Transfer Fees, Resale Certificate Charges, and Reserve Study Obligations

Three significant new laws affecting Washington condominium and homeowners associations were approved during the 2011 legislative session. These laws restrict the imposition of private transfer fee obligations, permit higher resale certificate preparation charges, and require various actions relating to reserve accounts and studies. They will be discussed in the order that they take effect.

Effective April 13, 2011, a new section restricting private transfer fee obligations (“PTFOs”) was added to Title 64 of the Revised Code of Washington. A PTFO is a provision in a declaration or covenant that requires money to be paid to the association when a unit or lot is sold. The new law states that PTFOs recorded on or after April 13, 2011 are not binding or enforceable. It goes on to state that PTFOs recorded before April 13, 2011 are not presumed to be valid and that they will become unenforceable on December 31, 2011 unless the associations that benefit from them record documents containing certain notices before that date. Fortunately, transfer-related assessments payable to community associations in accordance with the state laws that govern them (such as resale certificate preparation fees and priority liens for delinquent assessments) are exempt from this new law and can still be collected in connection with transfers of ownership.

Effective July 22, 2011, the Washington Condominium Act will allow condominium associations to charge up to $275 to prepare resale certificates. The previous limit for this service was $150. To learn more about the obligation to provide resale certificates, please review my previous post on that subject.

Effective January 1, 2012, the Washington Condominium Act and Washington Homeowners’ Associations Act will contain a number of new provisions relating to reserve studies and accounts. Two of the changes affecting condominium associations deserve special mention. First, those associations are now only required to prepare and update reserve studies if this does not pose an unreasonable hardship and if the current total cost of major maintenance, repair, and replacement of reserve components is fifty percent or more of the gross budget of the association, excluding reserve account funds. Second, condominium associations are now required to make certain disclosures about reserve studies and accounts as part of the budget summaries they provide to owners.

This third law also imposes new requirements on Washington homeowners associations to prepare and update reserve studies and to make certain disclosures about reserve studies and accounts as part of the budget summaries they provide to owners. However, such associations are exempt from those requirements if: 1) the cost of the reserve study exceeds five percent of the association’s annual budget, 2) the current replacement value of the major reserve components is less than seventy-five percent of the gross budget of the association, excluding reserve account funds, or 3) there are ten or fewer homes in the association. To learn more about reserve-related obligations, please review my previous post on that subject.

Community association boards should keep in mind that the laws governing them will change from time to time. Establishing a relationship with a lawyer who focuses on representing Washington condominium and homeowners associations can help to ensure that your association fulfills its legal duties.

Evaluating Condominiums from the Buyer’s Perspective

The March edition of the King County Bar Bulletin includes an article written by yours truly. The article focuses on helping prospective condominium buyers make more informed decisions. Board members may find the overview of resale certificates and reserve studies to be useful, and the article may also cause them to view their associations from a different angle. Without further ado, the text of the article appears below.

The origins of the condominium concept stretch back two thousand years to the Roman empire. Condominiums involve individual ownership of units (living spaces) and joint ownership of common areas (such as siding, roofs, and recreational areas). This form of ownership is currently popular with individuals on either end of the adult age spectrum because condominiums are generally less expensive than single-family homes, allow people to live in more desirable areas, and greatly reduce owners’ direct role in maintenance and repair work.

Persons interested in buying a condominium unit should conduct a thorough inquiry to make sure that they understand what kind of community they are joining and what their obligations will be once they are a member of that community. Condominium owners are responsible for common expenses and must comply with the restrictions contained in the association’s governing documents. It is therefore important for potential purchasers to evaluate a condominium association’s financial health and the types of rules that it expects owners to follow.

People considering condominiums should know how to spot warning signs that this is not the place to call home. Paying close attention to four key R’s - resale certificates, reserves, records, and residents - can help buyers make the best choices and savor condominium life.

Resale Certificates

A resale certificate must be given to a prospective purchaser of a condominium unit. The owner of the unit is legally obligated to provide such a document before the sale. An officer or agent of the condominium association is legally required to sign that document based upon actual knowledge.

Resale certificates contain a plethora of useful information. If delinquent assessments are owed by the current owner, this must be disclosed. If repair work is anticipated that will cost more than 5% of the annual budget, this must be disclosed. If any alteration or improvement of the unit or limited common area violates the declaration, this must be disclosed. A statement of the association’s reserves must be disclosed, along with financial statements, balance sheets, and operating budgets. It is important to review historical financial data as well as current reports. A reserve study must be provided or a mandatory disclosure about the lack of a reserve study must be given. Most importantly, a copy of the declaration, bylaws, and rules must be provided. These governing documents contain the rules by which a condominium buyer must live.

One broad entitlement to information in resale certificates that should not be overlooked is “any other information reasonably requested by mortgagees of prospective purchasers of units.” The Act states that information typically requested by entities like the federal national mortgage association and the department of housing and urban development is reasonable (and therefore discoverable in a resale certificate) if it is reasonably available to the association. Fannie Mae and HUD have recently begun requesting much more information about condominium associations, including owner occupancy rates and delinquency rates. Obtaining this type of information can help prospective purchasers make informed decisions.

Reserve Studies

Reserve studies have been legally required for most Washington condominium associations since June 12, 2008. If funded, reserve studies ensure that major common expenses will be collected in small increments over time. The alternative is paying for major repairs with loans and/or special assessments, and that approach tends to result in foreclosures and strife. Associations that have not obtained reserve studies pose an increased risk of financial disruption that should be taken into account when condominium shopping. Any potential buyer of a condominium unit should find out if the association in question has its financial life in order.

A closely related issue is the amount of money that is in an association’s reserve account. Washington law does not require condominium associations to place any money in reserve accounts. As a result, some associations have a reserve study but have not set aside enough funds to fully or even mostly fund the expenses described in that study. This raises the risk of a future special assessment on the owners to make up the difference.

Records

Association records reflect important events in the life of a condominium. Minutes of the meetings of the board and the owners provide a particularly revealing window into the affairs of an association. It is prudent to obtain and review (at some length) the association’s governing documents and meeting minutes before pulling the trigger on a transaction. This can help identify sources of future conflict.

The governing documents of a condominium are usually long and difficult to understand, but taking the time to evaluate their contents can prevent major headaches down the road. A few associations ban smoking in units and/or the common areas. Some associations ban pets or place severe restrictions on their behavior. Some associations restrict the ability of owners to lease their units or run businesses out of them. Most associations limit what can be placed on windows, doors, and porches to preserve a uniform exterior appearance. Almost all associations have the general authority to punish behavior that an owner’s neighbors reasonably find annoying, and this can lead to heated disputes over noise and odors. The severity of fines for violations of the governing documents varies greatly. If people want to live in a condominium, they must be willing to subject themselves to the restrictions contained in the governing documents and the board’s reasonable elaborations on those restrictions.

Residents

Perhaps the most overlooked method to learn about a condominium is to speak with residents. Conversations with several board members and several other owners can provide a glimpse of the challenges facing the association and the general philosophy of those in power. This is often a valuable way to discover what life is like in that community.

Assessing condominiums’ strengths and weaknesses is difficult and time-consuming work, and many people seek out professionals that can guide them through this process. In light of the misery that can ensue if the wrong choice is made, this is time and money well spent.

Understanding the Reserve Study Requirements in the Washington Condominium Act

My wife Elisabeth does her best to place a small portion of our income into a savings account each month. She is currently in good company. The New York Times reported last month that the national savings rate is at its highest rate in over 15 years. In a similar vein, the Washington Legislature took action last year to nudge Washington condominium associations towards a more saving-oriented mindset by requiring them to obtain and update reserve studies. Condominium board members should be aware of the obligations imposed by those new provisions of the Washington Condominium Act.

A reserve study attempts to project how much an association must save each year to pay for certain common expenses (including major projects such as replacing a roof) that will need to be paid in the future. Condominium associations must prepare and update reserve studies unless this imposes an unreasonable hardship. Associations must also establish reserve accounts. Initial reserve studies must be based upon a visual site inspection conducted by a reserve study professional. Existing reserve studies must be updated annually unless this imposes an unreasonable hardship, and they must be updated at least every three years based upon a visual site inspection conducted by a reserve study professional.

The Washington Condominium Act does not require condominium associations to place any funds in their reserve accounts. The Act permits associations to withdraw any funds that are deposited in such accounts to pay for unanticipated expenses subject to certain notice and repayment conditions. The Act states that owners holding at least 20% of the voting power can demand that an association obtain a reserve study prepared by a reserve study professional if more than 3 years has passed since one was obtained. An association can overcome such a demand if it demonstrates that obtaining a reserve study would impose an unreasonable hardship, and the Act provides that an unreasonable hardship definitely exists if the cost of preparing a reserve study exceeds 10% of an association’s annual budget.

Subject to the general guidelines described above, condominium board members have broad discretion to make decisions regarding reserve studies. The Act provides that condominium associations and their board members may not be held liable for monetary damages for failing to obtain or update reserve studies. The most significant legal consequence for failing to comply with this part of the Act is that an association must include a specific disclosure in resale certificates warning potential purchasers of units that the association’s lack of a current reserve study increases the risk that they may be forced to pay a large special assessment at some point.