1. PLAN FOR STAFFING SHORTAGES
“There are three things you have to look at immediately,” says Deborah Riegel, a partner at the law firm Rosenberg & Estis and a member of her co-op board. First, she says, is to develop a contingency plan in case building staffers fall ill or are otherwise unable to report for work. “It’s similar to what a building-staff strike plan is,” Riegel says, “except there’s a public-health element here.”
Resident volunteers can pick up some of the slack, but there are limits. At one Upper West Side co-op where the super and another staff member contracted COVID-19, volunteers stepped in to help with garbage removal and other chores. But when the boiler faltered, the repair was beyond the skill set of the resident volunteers. So the board called on the super at the building next door, and he has been keeping the boiler running.
2. PLAN TO DEFER DISCRETIONARY SPENDING
This is where having a capital plan or a reserve study can be a lifesaver. Either one can help boards set priorities on discretionary spending during the pandemic and beyond. Riegel advises boards to ask: “Is it cosmetic or not-absolutely-necessary work?” If it is, boards might want to buy time. Instead of doing the planned roof replacement, for instance, it might be wise to patch the roof for the next year or two.
3. PLAN FOR INCOME SHORTFALLS
With 80 percent of expenses fixed, late payments of monthly maintenance or common charges can wreak havoc with a co-op or condo board’s finances. Riegel advises that boards might need to contact their underlying mortgage lenders if cash dries up. Some lenders, depending on the board’s needs, may be willing to provide an interest-only period or defer payments for a period of time, then put this on the back end of the mortgage.
National Cooperative Bank (NCB), one of the largest lenders in the co-op market, is showing a willingness to work with boards. “We don’t have a blanket relief program for our customers,” an NCB spokesman says, “but we are analyzing every request case by case. In most instances we will require additional information from the customer, and then we’ll work with them on the best solution. We want our borrowers to start a dialogue with us if they are experiencing problems so we can start the process early.”
Boards have been acting aggressively to protect their residents and staffs – clearly the right thing to do. But attorneys advise boards to make sure their actions, such as shutting down the gym, restricting deliveries, suspending alterations or stopping move-ins and move-outs, are appropriately documented. Formal resolutions, board votes and a recording of these actions will ward off future legal challenges.
“We’re already starting to get requests from shareholders, asking what authority a board has to do these things,” says Julie Schechter, a partner at the law firm Armstrong Teasdale. If apartment sales fall through because of the restrictions, she adds, there are going to be legal challenges. “It seems silly in the height of all this craziness to be discussing board procedure,” she says, “but it’s important to ward off future claims.”
If ever there was a time to turn to your insurance, it is now. The policy that comes into play here is called Business Interruption Coverage. Briefly, this insures against losses resulting from a covered peril that directly affects your building’s operations.
“It typically covers the co-op corporation or the condo association when it cannot collect income due to a covered cause of loss,” says Ed Mackoul, the president of the insurance brokerage Mackoul Risk Solutions. If a fire destroys an apartment and the resident has to move out for six months during repairs, he stops paying maintenance. “The association can collect the income they are losing because it is a covered cause of loss,” Mackoul says.
And there’s the rub – what constitutes a covered loss? “Insurance policies define what a loss of income is and how it’s covered,” Mackoul says, “and they use the words ‘physical damage.’ One, there is no physical damage caused by the coronavirus; and two, most policies exclude loss due to a virus or bacteria.”
If a board files a claim under its Business Interruption Coverage, it can expect the carrier to deny the claim – for now. While the insurance companies are taking this stand, there is movement to soften it. On March 10, the New York Department of Financial Services (DFS) instructed all insurers operating within the state to provide details about their Business Interruption Coverage, saying: “Given the potential impact of COVID-19 on business losses, particularly concentrated effects in local communities, DFS considers insurers’ obligation to policyholders a heightened priority.”
Two days later, a bill was introduced in the State Legislature that would obligate business interruption insurers to retroactively cover claims resulting from COVID-19. The reality, though, is that the insurance industry will probably not be able to cover the magnitude of such losses.
“Ultimately, it’s going to be someone who steps in and says there’s got to be some kind of a governmental backstop to the insurance companies to at least pay on a proportion of loss, or something like that to help out everybody,” says Allen Wolff, an insurance-recovery specialist and shareholder at the law firm Anderson Kill.
Despite the uncertainty, a practical question remains: Should boards file a claim with their insurance company? Doing so might mean that when the policy is up for renewal next year, it will come with a rate or premium increase. But if a board is experiencing a loss of income, Wolff offers the following advice: “I think notice should be given because there is not a single insurance company or policyholder who ultimately is not going to bear the effect of a rate and premium adjustment as a result of the COVID-19 pandemic. If everyone’s going to suffer higher premiums, then why would you distinguish yourself as the property that did not give notice to its insurance company?”
One of the biggest questions that lawyers, accountants and managing agents have been grappling with is whether coops and condos are eligible to participate in the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA). The program provides a loan to small businesses to keep workers on their payrolls, and it comes with a giant carrot. If all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest or utilities, then the loan will be forgiven.
When the program began on April 3, many managing agents jumped on it. Michael Wolfe, the president of Midboro Management, spent hours uploading the details of the company’s client properties into a web portal to get his properties into the queue. Before doing so, he had surveyed his boards to find out whether they foresaw potential problems at their buildings, and if they wanted to apply for a PPP loan. For many boards, this was a difficult decision, he says. Not only did they have to take stock of their own building’s financial strength, but many also felt that this program was really for companies that, without it, would not be able to keep staff on payroll.
As of mid-April, the question whether co-ops and condos qualify for the PPP loan remained unanswered. Meanwhile, though, many boards have applied for the PPP program, and some have received funding. Industry sources say different lenders have different rules, leading to different results. With two rounds of funding through April, and a possibility of more on the way, boards should check with their attorneys or managing agents for the best way to move forward.