New state law requires condo associations to report money set aside for long-term maintenance

Attention, condominium shoppers: Washington soon will become one of a half-dozen states requiring condo associations to provide a financial-wellness check that can predict whether the place is a potential money pit.

The check, called a reserve study, estimates how much money an association must set aside to pay for expensive long-term maintenance, such as repaving a parking lot, replacing a roof or rebuilding rotting decks.

Although many associations require reserve studies, many have ignored their own requirements, local condo experts say. That will have to change June 12, when updates to the state's condo law take effect and associations must prepare and annually update such a study and make it available to buyers.

Calling it the "biggest thing to happen since the Condominium Act of 1990 was passed," longtime condo attorney Kris Sundberg says the new provisions will address "the dirty little secret of the condo world: Most condos are severely underfunded."

However, what the law does not do is to require that associations actually save the money their study finds is needed to cover future maintenance. Laws in a few states, including Hawaii, do.

"While this law may not put Washington in the vanguard, it clearly puts them toward the top of the list in being progressive on the issue," says Frank Rathbun, of the Community Associations Institute, a national nonprofit educational organization for homeowners associations and their members.

The reserve study must be done by a professional and can be waived only if it would "impose an unreasonable hardship," something the law does not define. Still, the associations group, condo attorneys and property managers call the change necessary, if somewhat overdue, for a growing segment of the housing market. A quarter of King County home sales are condos, and many buyers are homeowner novices.

"It will act as consumer protection for a lot of potential buyers and give them a better perspective of the true costs of ownership in a condominium association," says Marshall Johnson, president of The CWD Group, which manages about 90 condo associations in Seattle and Bellevue.

Sundberg, of Mercer Island, says that's been sorely lacking.

"We're seeing a substantial increase in litigation from unhappy purchasers who bought a condo then found out there's a huge special assessment being levied," he says. These irate buyers "go after the board, the manager, the real-estate agents, the seller," he says.

Considered a one-time cost to pay for major repairs, a special assessment is what associations turn to when they haven't built sufficient long-term savings in what's called a reserve account.

The account is separate from the annual budget, which pays for regular, ongoing expenses such as insurance.

When a special assessment is levied, owners are billed for their portions.

"We regularly see assessments in the $60,000 to $80,000 range per unit," Sundberg says. "Most condominium associations have neither a current reserve study nor adequately funded reserves."

That wouldn't surprise Jim Talaga, president of Association Reserves Washington, a reserve-study provider. Many 20-year-old communities have had little serious maintenance, he says.

An older 50-unit building could face $200,000 for a new roof and $70,000 for new exterior paint — with no money set aside to pay for them.

A first-time reserve study, on the other hand, costs about $2,500, although that depends a lot on the size of the community, Talaga says.

Matt Reed had first-hand experience with the reserves issue when he served on the board of a South Everett condominium. His underfunded complex faced at least $1 million in serious repairs because of delayed maintenance," he says.

The root of the problem, Reed says, was a membership of mostly first-time owners who hadn't made the mental transition from apartment dweller to homeowner.

"They were trying to defer all the responsibility and remain renters," he says.

After the board voted to levy a substantial special assessment, a group of angry owners successfully voted to override it, and the work went undone.

Faced with an emotionally draining stalemate, Reed sold his condo and bought a house.

The new law will make it harder for condo associations to conceal from buyers a lack of long-term financial planning. Those that use the hardship exemption to forgo a reserve study must disclose that to prospective buyers along with this warning:

"The lack of a current reserve study poses certain risks to you, the purchaser. Insufficient reserves may, under some circumstances, require you to pay" a special assessment.

Sundberg thinks having that in print may dissuade some buyers and lenders from investing in underfunded condos.

It will also affect their prices, Johnson predicts. "The unit that has minimal reserves is going to be cheaper than one with high reserves, so what they're saving by not putting into reserves will be lost in the price they get for it," Johnson says.

Once associations realize the true cost of scrimping on savings, reserve accounts will grow and the problem will correct itself, Sundberg says.

Meanwhile a real concern for associations is finding a qualified pro to do a reserve study. Several firms exist locally, but demand may overwhelm supply as associations attempt to comply with the new law.

Condo lawyer Brian McLean, of Leahy.ps in Kirkland, worked on the law's passage. He recommends that associations address this issue in their next budget cycle, research whether a reserve specialist is available and find out what the cost will be.

"This is a great planning tool, but no one wants this to cause a sense of undue urgency," McLean says. "I'm comfortable saying everyone has time to do this and do it right."

Elizabeth Rhodes: erhodes@seattletimes.com