Resale Certificates and Significant Assets

Significant Assets and Resale Certificates, by Brian McLean

Perfect legislation is aspirational but impossible. The meaning of words change over time. Social customs and values change. These are not novel concepts.

In the newly revised Washington State reserve study legislation 2011 Wash. Laws 189, the duty to obtain a reserve study is triggered by “significant assets”. The 2011 law affects condominiums and, for the first time, non-condominium associations. It is not perfect legislation, but it aspires to do good things for owners and associations.

“Significant assets” is defined differently in RCW (Revised Code of Washington) 64.34 (condos) and RCW 64.38 (non condos). It is not clear why lawmakers chose different definitions for condominiums and non-condominiums.

RCW 64.34.020:

(43) “Significant assets” means that the current total cost of major maintenance, repair, and replacement of the reserve components is fifty percent or more of the gross budget of the association, excluding reserve account funds.

RCW 64.38.010:

(19) “Significant assets” means that the current replacement value of the major reserve components is seventy-five percent or more of the gross budget of the association, excluding the association’s reserve account funds.

At first blush, I think they are two ways of saying essentially the same thing. Perhaps the condominium definition places more emphasis on major maintenance and repair because these expenses are typically significant for a condominium, less significant for a non-condominium property.

Either way, both definitions appear to be looking at the current cost of restoring your reserve components to their original functional state. We would expect in many cases this would involve ongoing maintenance and repair. At some point, when a component reaches the end of its useful life, it would involve replacement. A good reserve study will equitably spread these expenses over thirty years.

Let’s say it will cost your condominium association $1 million dollars today to restore your reserve components to their original functional position. Under RCW 64.34, if the association’s gross budget is $2 million or less, excluding money earmarked for reserve funds, then the association has to obtain a reserve study. Under RCW 64.38, assuming the same cost, the duty would kick in if the budget were $1.5 million or less.

The concept is graceful for two reasons. One, if an association has insignificant assets, it can avoid the expense of obtaining a reserve study (it still might want to obtain one for transparency and financial planning purposes). Two, brand new construction would, at least in its early years, face reduced costs of maintenance and restoration. So the need for frequent updates is arguably lessened.

To paraphrase Tolstoy, most associations are dysfunctional in their own way, so applying imperfect legislation to unique circumstances doesn’t lend itself to a cookie cutter solution. But if more associations obtain reserve studies, providing financial guidance and transparency, and make a concerted effort to fund on an ongoing basis, then the legislation has accomplished a significant goal.

Updated 1/11/2013