Paycheck Protection Program Up in the Air for Co-ops and Condos

The $349 billion Paycheck Protection Program, which just went into effect, is designed to provide a lifeline for financially strapped businesses during the coronavirus pandemic – though there's some confusion if co-ops and condos are eligible for the federal aid. The Real Estate Board of New York has asked the Small Business Administration to clarify which businesses are eligible. Meanwhile, Habitat spoke about this new legislation with Michael Wolfe, president of Midboro Management, and David Berkey, a partner at the law firm Gallet, Dreyer & Berkey. 

Habitat: How does the Paycheck Protection Program work?

Berkey: It was designed to give relief to businesses that are adversely affected by the Covid-19 pandemic. It allows businesses to apply for a loan in the amount of two and a half times the business's average payroll expenses in 2019. They define payroll to include the salaries and benefits and state and local taxes paid with respect to the employee, as well as health insurance and retirement benefits.

Habitat: So businesses with staff on their payroll are affected by this act?

Berkey: If a business used an independent contractor to provide services, those costs would not be counted. You take your average payroll for the eligible employees – there’s a $100,000 cap – and then you multiply it by two and a half. That gives you the amount you can apply for. The good aspect of the loan is that it’s forgiven if you retain the employees through June 30 of this year and do not reduce their compensation by more than 25 percent. If you fire employees, lay them off or reduce their compensation by more than 25 percent, then the amount of loan forgiveness is adjusted by a formula.

Habitat: Michael, you’re on the front lines. You’ve got clients who want to apply for the loans, despite the eligibility questions. How have you been handling this?

Wolfe: First, we asked all of our co-op and condo clients if they’re interested in participating in the program. A co-op might be perfectly fine today with very little arrears, but we don't know what the future's going to bring. And with 10 million people unemployed in the past two weeks – which is probably going to rise – our clients might need that protection. Co-ops and condominiums could certainly fall into hardship, so we had all our account executives reach out to our clients, and I would say the vast majority of our portfolio of 140 buildings want to participate. 

Now, there's been some recent chatter whether or not co-ops, condos and rental buildings are even eligible. I think that's going to work itself out the next 24 to 48 hours, whether they are ineligible or not. But we're treating it as if everyone is eligible because it's better to err on the side of caution. So we engaged a third-party Small Business Administration (SBA) lender through a bank, and we've placed all of our buildings in a queue and they're waiting for the SBA to come out with their final guidelines. 

Habitat: If you're a self managed co-op, do you go to your bank? How do you do this?

Berkey: You need to get the financial information collected so that you know what size of loan you're going to be applying for. The applications are currently available online. Your bank, where you keep your deposits or have borrowed, will likely have a slightly modified form. Talk to your banker today and say you're interested, get the bank’s form, or tell them that you'll be supplying the SBA form with the required information and try to get in the queue. Because there are so many applications, we have advised all of our clients to try to get in the queue.

Habitat: Is there legal liability for a board that decides not to get in the queue?

Berkey: If the board acts as a reasonable board would act under similar circumstances, then there probably is no liability. But if every other board is trying to apply, then the board really has to have a discussion and reach a decision that not applying is in the best interest of all of its shareholders or unit-owners. That way they’ll get the protections or the Business Judgment Rule.