Since the second week of January, many co-op boards have been busy working with their banks to complete Paycheck Protection Program (PPP) applications. The inclusion of co-ops in the Fed’s forgivable loan program was the result of a joint effort of local co-op advocacy groups and several elected officials representing areas with a large number of co-ops. The inclusion of co-ops in the PPP initiative will provide much-needed relief to the many cooperative communities that have experienced financial uncertainty or instability during the COVID pandemic - but many questions remain for boards, managers, and shareholders alike. This article will review more details of co-op eligibility and detail the long fight to include residential co-ops in this legislation.
How it Started
On December 27, 2020, the COVID Stimulus Relief Bill (Consolidated Appropriations Act ) was signed into law by the Federal Government. This legislation included relief for many hard-hit industries (airlines, restaurants, etc.) and provided direct relief to many Americans in the form of enhanced unemployment benefits and $600 direct payments to qualified persons making under $75,000. Buried away in this 5,000+-page document was a provision that makes co-op corporations specifically eligible for forgivable loans under the PPP.
The PPP works as follows: a small business completes a loan application to their bank and/or lender, which then submits it to the Small Business Association (SBA). Although co-ops are now considered eligible entities, there are further eligibility requirements an individual co-op must meet in order to obtain this forgivable loan. In order to be eligible, a co-op will have to certify that they are currently experiencing financial uncertainty due to the pandemic. In addition, they must certify that the loan is necessary to support their ongoing operations.
Obviously, this threshold for financial or economic ‘uncertainty’ is vague at best, and there is no clear standard or clarification from the SBA as to what exactly this means. Although many co-ops have struggled with reduced income from both shareholder maintenance and commercial tenant rent arrears, as well as increased water/sewer charges due to residents being home all day and using more utilities; increased expenses for sanitizing common areas and supplying personal protective equipment to staff members, and overtime and other administrative expenses, it is still imperative that boards and managers review their particular facts and circumstances with their professionals to confirm they meet all criteria for the PPP loan before they submit an application for funds.
Some features of the PPP loan are: the loan can be forgiven if at least 60% of the funds are used for payroll expenses and the remaining 40 percent used for qualified expenses such as utilities; cleaning supplies; personal protective equipment (PPE) and mortgage interest. Keep in mind that the money must be spent within certain time perimeters, and a second application must be made to the SBA in order to have the loan forgiven. Any loan proceeds that are not forgiven must be repaid over a 5-year period, at 1% interest. The formula for the amount of the loan is 2.5 times the co-op’s payroll, capped at a maximum loan amount of $2 million. It is extremely important to check with your co-op’s legal and financial professionals to determine the appropriate loan amount, and how much of it is forgivable.