July 10, 2009

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.