What We Know So Far – New Paycheque Protection (P3) Program Provides Co-op Relief
As economic disruption from the COVID-19 pandemic continues, Congress has provided additional relief for small businesses to help them hold out until nationwide vaccination efforts are able to reverse the course of the crisis. The good news for co-ops is that it appears they are now eligible to apply for help with declining income through the Paycheck Protection Program (PPP).
The PPP was designed and launched in the spring of 2020 to provide top-up funding to employers who have experienced a sharp drop in income due to mandatory restrictions and closures imposed on business activities due to the pandemic. It’s easy to see how a restaurant can suffer such a devastating drop in income – but what about a co-op building?
Cooperative societies are non-profit organizations. Basically, the shareholders of the co-op pay their proportional maintenance costs each month to cover the expenses associated with the operation of their building. These fees are calculated and set to do just that, with some reserve cushion – not to make a profit. So what could cause a co-op to experience a reduction in its income that would prevent it from paying bills such as staff salaries, underlying mortgage payments, and property taxes?
From a practical point of view, there are two likely possibilities: arrears from shareholders unable to meet their monthly maintenance payments, and even more likely, arrears from commercial tenants who can no longer pay their rent.
Co-operatives with commercial tenants calculate their annual budget to include the rent of these tenants; this income offsets the amount needed to meet the obligations which is then distributed proportionately among the shareholders in the form of their monthly maintenance charges. If that business income suddenly disappears, what choices do the board and management have to meet the financial obligations of their community?
The payroll protection program
Avi Zanjirian and Stephen Beer of Manhattan-based accounting firm Czarnowski & Beer explain the federal PPP program as follows: “In order to qualify for [PPP loan] sorry, at least 60% of the funds must be used for payroll – including health insurance premiums and fringe benefits, such as the corresponding 401K contributions. These funds are usually sufficient to cover the maximum period of 24 weeks to spend the funds and be eligible for loan cancellation. If not needed for payroll, the rest of the funds – up to 40% of the loan – can be used to cover utilities, the mortgage or rent, or lease payments. The loan is only eligible for a discount if it is used correctly.
Regarding the link between this new embodiment of the program and co-ops, Beer and Zanjirian explain, “While we are still awaiting advice from the Small Business Administration (SBA) on several key elements – including whether co-ops, which are now eligible entities – have to prove a 25% reduction in their gross income to apply for this round, even if it will be their first draw. In the meantime, they suggest that potentially eligible co-ops use the steps below to gather information and prepare as potential PPP clients, both as first and second draw applicants:
Steps to take now
- Managing agents of co-ops should compile a list of all client buildings that wish to apply for funds. This list should include a contact name, phone, and email address for the board of directors for each building. Boards applying for loans should be prepared to submit quarterly or annual financial reports demonstrating that the building or community has experienced a 25% reduction in gross income. Verified reports will be requested upon loan cancellation, if available.
- Managers and / or boards should confirm that the bylaws of the co-op and the lender (if the company has an underlying mortgage) allow them to apply for a P3 loan.
- Borrowers must confirm that a board member is ready to apply and attest to all languages of the application (click here to view the full document: https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form.pdf). Even if the cooperative is not required to prove a 25% loss of income, the board of directors must still provide a good faith certification that: (a) the uncertainty of current economic conditions makes the loan necessary to support the day-to-day operations of the cooperative cooperative, (b) that the funds will be used to retain workers and maintain the payroll or make mortgage payments, lease payments and utility payments, and (c) that the cooperative has no pending application and / or has not received a duplicate loan.
- The board and / or manager should calculate the average 2.5-month payroll for the co-op. The formula for calculating the financing of your building is complex, so it is strongly recommended that you work with your accountant on this calculation, as well as on determining any other benefits that may be included. Forms 940 and 941 are preferred reports, but if you have a PEO or third-party payroll provider that cannot provide them to you while building, you can use other payroll reports that display this information.
- If you are an existing PPP borrower looking for a ‘second draw’ from the funding pool, you will need to confirm that you can achieve the 25% reduction in gross income quarter to quarter (T2, T3, Q4) from 2019 to 2020 or now “year after year” if that’s easier. Interim financial reports are acceptable.
- Either way, whether your building is a new P3 applicant or is coming back for another drink from the relief funding well, it is vitally important that you involve trained financial professionals in the process to avoid mistakes. that could delay funding or result in penalties of several months. or even in years.
A legal note
Under normal circumstances, individual board members – who are almost always initially volunteers – are covered by their board’s directors and officers (D&O) insurance policy, which protects them from harm. personal liability resulting from decisions taken in good faith, but which lead to damage of some kind. That may not be the case with PPP loans, warns Mark Hakim, a lawyer specializing in cooperative law at New York-based Schwartz Sladkus Reich Greenberg Atlas. “Any board member who signs the PPP application could be subject to criminal penalties for any false or misleading information,” he says. They would likely not be protected under their directors and officers insurance policy for any false or misleading statements. It’s not surprising ; in fact, it is similar to the protocol used when a member of the board of directors signs certificates on behalf of his cooperative in the context of a mortgage refinancing, for example. “There’s a lot of money invested in it,” Hakim says, “and the government is just trying to make sure it’s used for the right purpose. “
The Cooperator will follow this story as more guidance and information specific to cooperative communities emerges.