Significant benefits may be afforded cooperatives and condominiums through the Paycheck Protection Program contained in the CARES Act passed by Congress and signed into law on March 27th. The Program is intended to ameliorate the impact of the COVID-19 pandemic on employers of fewer than 500 persons. Details as to the benefits available under the Program cannot be confirmed until the Small Business Administration publishes implementing regulations, which the Act requires in 15 days, or the government issues other guidance, but cooperatives and condominiums, and their managing agents and accountants should be aware of the possibility in assessing the impact of the pandemic on management and finances.
The Act states that the benefits of the Payroll Protection Program are available to any “business concern, nonprofit organization, veterans organization or tribal business concern.” It incorporates the definition of “business concerns” from the Small Business Act that includes entities, including associations and cooperatives, “organized for profit.” Whether residential cooperatives and condominium associations, which are organized under New York statutes as business corporations and associations that are potentially profitable, will be included among the program’s beneficiaries may depend on the future regulations or program implementation. We believe that there are sound statutory arguments that they are.
Program applicants must provide an acceptable certification that “the uncertainty of current economic conditions makes necessary the loan request to support [their] … ongoing operations.” The nature or extent of the required impact upon the applicant’s operations is not further defined. Possibilities may include increased payroll or other costs incurred, or loss of income if shareholders, unit owners or commercial tenants are unable or unwilling to pay their rent, maintenance or common charge obligations. Applications may be required to document such costs or potential losses. We will not know what support for the certification the SBA will require until regulations are published.
Eligible program beneficiaries may receive SBA loans up to a maximum amount equal to the beneficiary’s average monthly payroll for all employees multiplied by a factor of 2.5. Loan proceeds under the Paycheck Protection Program may be used for a variety of purposes, including salary, payroll taxes, pension and health care benefits and interest payments on a mortgage or other indebtedness.
The most attractive feature of the Program is that the principal amount of the loan is eligible in general for a forgiveness equal to the amount paid by the loan recipient for payroll, mortgage interest and utilities during the eight week period following the date that the loan was made. Many cooperatives and condominiums would be able to qualify for forgiveness of virtually the entire loan amount.
In general, applications for participating in the Paycheck Protection Program can be submitted to any lending institution that is approved to participate in the program through the existing SBA 7(a) lending program and such additional lenders as may be approved by the Department of Treasury. This could be the bank already used by the cooperative or condominium or its managing agent.
Once again, we cannot state with certainty that benefits from the Paycheck Protection Program will be available to cooperatives and condominiums, but the program is certainly worth monitoring.
Should you require legal assistance or additional information, please contact a member of SGR’s Cooperative and Condominium Practice Group.