Coronavirus: CO-OP ELIGIBILITY FOR PPP LOANS QUESTIONED BY SBA. DOES A PPP LOAN MAKE SENSE FOR YOU?
A. SBA Questions Co-op Eligibility. In our earlier E-blast, we suggested that the SBA might take the position that Co-ops might not be eligible for PPP loans. So far that appears to be the case.
The SBA appears to be basing its position on portions of its “Standard Operating Procedure” handbook for loans to businesses, which states in part that certain types of businesses are ineligible for loans (except in limited circumstances), including:
“1. Businesses organized as a non-profit…
“3. a. Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds…
“c. Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose…
“f. Apartment buildings and mobile home parks….
“g. Residential facilities that do not provide healthcare and/or medical services…”
In many other states, Co-ops are organized as non-profits. (In New York, though, they are business corporations.) One could also see the SBA claiming that Co-ops fall under one of the other exceptions noted above. As a result, many lenders have informed us that (for the moment) they are not treating Co-ops as “eligible businesses.”
We strongly disagree with the SBA’s current approach, especially for New York State cooperatives. Please Contact Your Representative and let them know that New York cooperatives must be included as businesses eligible for PPP protection. Attached are sample letters for association members to send to their representatives in Washington. Locate their e-mail addresses on the Web and make sure you make your position clear.
What about Condos and HOA’s? As we stated in our prior E-blast, the SBA may have similar concerns for Condos and HOA’s as it does for Co-ops, e.g., deeming them to be “non-profits” or “passive” real estate operators. As with Co-ops, we can think of several technical distinctions – for example, that they are “Managers” or “Operators” rather than passive “owners” — but their status remains uncertain.
B. Putting “Forgiveness” in Perspective.
Granted, the PPP is potentially “free money.” But 75% of the amount forgiven has to be used on payroll. (“Payroll” includes benefits other than FICA.) The other 25% can be applied to amounts used largely for utilities, mortgage interest or rent. Therefore:
Monthly Payroll Maximum Forgiveness (2 mo. Payroll /.75)
$ 6,000 $16,000
Note that only a limited amount of your non-payroll costs can be forgiven. So in the first example, if your utilities are $10,000 per month you can borrow a maximum of $150,000 [2.5 x allowable costs], but you can only get forgiveness for $133,000.
From this you also need to subtract the fees of your professionals to compile the information to make the application, the 1% interest charge while the loan is pending, the difficulty of finding a bank willing to process your application, the cost of administration and the value of any unpaid time. You also need to consider the “moral hazard” of borrowing more money than you may need to pay operating expenses.
In short, even if the SBA changes its position, for non-doorman buildings with lower payroll costs, the actual benefits of the loan are relatively lower in absolute terms.
We will continue to keep you updated on new PPP developments. If you need assistance on any of our topics, please contact one of our partners on our Co-op/Condo team.