Condominium and Cooperative Law

In the Consolidated Appropriations Act, 2021 (the Act), the Small Business Act was amended to make cooperative housing corporations eligible for PPP loans by way of an amendment to Section 7(a)(36)(A). Condominiums and HOA’s were not included, and it is not clear whether corrective legislation will be implemented to address these entities, or if the SBA will accept applications from Condominiums and HOA’s under the classification of a “cooperative”. This is probably unlikely because the federal definition of a housing cooperative found in the IRC Section 216, also fails to include condominiums and HOAs.

Before addressing the specific new rules which apply to cooperatives, it is important for any board to first check its own by-laws to ensure that the board has authority under its governing documents to borrow money. Therefore, any board curious about the current changes to the PPP program is well-advised to obtain guidance from its legal counsel, and not just management or a lender.

Turning now to the revised PPP program, in accordance with the interim Small Business Administration (SBA) rules found in 13 CFR Parts 120 and 121, there are two categories of borrowers in this “second round” of PPP loans. For most cooperatives seeking a loan in 2021, a first PPP loan will not have been taken. Therefore, many of the newest Small Business Administration rules found in 13 CFR Parts 120 and 121 will not apply. However, where a cooperative did obtain a first PPP loan, among other issues that may be involved in that situation, such a cooperative will likely have to demonstrate that it has experienced a 25% reduction in gross receipts in the first, second, or third quarter of 2020 compared with the same quarter in 2019.

For the majority of cooperatives, however, this will be its first PPP loan. Eligibility for a new PPP loan will therefore turn on the payroll of the cooperative’s employees, because the PPP loan program now allows a cooperative to obtain a federal loan representing two-and-a-half months of its payroll. This loan may subsequently be forgiven if certain criteria are met, and the process for many cooperatives has been made easier, as discussed below.

While one criteria, demonstrating that a coop has less than 300 employees, is likely not an issue, there are cooperatives that do not have any employees. Accordingly, it may be difficult for these cooperatives to obtain a PPP loan, because they do not have any actual payroll expenses. For example, many smaller cooperatives only rely on part-time independent contractors to meet their needs.

Unfortunately, in addition to a PPP loan relief being difficult to obtain, these smaller cooperatives have also likely been more affected by the pandemic because a default by just one shareholder could be devastating to the cooperative’s balance sheet.

Based on these SBA regulations, most medium-sized and larger cooperatives with payroll expenses for the employment of superintendents, porters and doorstaff, should now finally be able to obtain governmental assistance to address the coronavirus pandemic.

While two-and-a-half months of payroll may not account for all of the types of pandemic losses that a cooperative may have suffered, it may provide some relief.

For example, many cooperatives with retail tenants have experienced financial issues. We have seen many commercial tenants attempt to renegotiate their leases, and in extreme cases, some that have simply packed up, vacating the commercial space, resulting in decreased revenue for cooperatives.

In response to this loss of income, boards have been required to impose assessments or maintenance increases against shareholders in order to meet operating expenses, including payroll.  It comes as no surprise that shareholders have generally not welcomed increased charges during a time when they too may be struggling financially. Now, however for qualifying cooperatives, some, or all of these assessments implemented to meet payroll over the past 9 or 10 months can now be recovered through the PPP loan program.

Finally, borrowers of loans of $150,000 or less are now permitted to self-certify that PPP funds were used according to regulations. Self-certification will make the application for loan forgiveness simpler for cooperatives now receiving PPP loans.

We will keep you updated with any additional changes as the rulemaking process progresses, as the final SBA rule will not be implemented until after February 5, 2021, when the period for public comment has closed.

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For more information on condominium and cooperative law matters or the Paycheck Protection Program, please contact:

Andrew C. Gold at +1 212 592 1459 or [email protected]
Andrew B. Freedland at +1 212 592 1623 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.