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Executive Order Allows Use of Security Deposits for Rent, Extends Moratorium on Evictions and Foreclosures. On May 7th Governor Cuomo issued Executive Order 202.28, which provides in part that (i) residential landlords and tenants can agree with each other to use security deposits to pay rent arrears; (ii) requires landlords to use a security deposit for rent at the tenant’s request, provided the tenant is “eligible for unemployment insurance or benefits under state or federal law or are otherwise facing financial hardship due to the COVID-19 pandemic;” and (iii) bars landlords from charging late fees on rent arrears accruing between March 20th and August 20th.” Any security deposit applied against rent is to be reimbursed by the tenant in 12 monthly installments beginning no earlier than 90 days after the security was applied.

In addition, the Order bars commencement of any new nonpayment of rent, eviction or mortgage foreclosure proceedings against “someone that is eligible for unemployment insurance or benefits under state or federal law or otherwise facing financial hardship due to the COVID-19 pandemic” for a period of sixty days beginning on June 20, 2020.” That part of the Order applies from May 7th through June 6, 2020. (It is not clear what happens between June 6th and June 20th.)

How can a landlord or Community Association verify whether someone is “facing financial hardship” due to COVID-19? We are now incorporating a request for verification into our initial notices of default or non-payment. If the debtor fails to respond, this may indicate that they are not eligible for forbearance.

PPP Updates. The SBA extended the “safe harbor” until May 14th for the return of improperly obtained funds under the PPP loan program without penalty. The SBA also issued an updated set of “Frequently Asked Questions” that reiterated the same question and answer to Question #35 as we noted in our May 5th E-blast regarding the entitlement of “cooperatives” to PPP loans.

Preparing for Reopening: Construction. The Governor’s office has laid out a plan for reopening certain businesses in different regions of the state that meet its criteria for a decreasing pandemic caseload, availability of personal protective equipment, and the like. The first types of businesses include construction, which should be a relief to all those buildings with half-completed construction projects.

“Social Distancing” required for contractors. The reopening plan contemplates that contractors will comply with recommended “social distancing” and personal protection guidelines. OSHA has also published its own “Construction Guidance”, comprised of recommendations for best practices rather than mandatory requirements (available here). The Department of Buildings also issued construction guidelines similar to OSHA’s (also available here), but like OSHA’s, they are phrased as “best practices.” In contrast, the state of California has published guidelines which also require contractors to provide (a) mandatory training to workers in ways to protect against infection at the work site; (b) disposable wipes containing CDC-approved disinfectant; and (c) a designated “COVID-19 Officer” to observe and promote compliance.

We have developed a sample “Social Distancing Rider” for owners for use in construction contracts, incorporating some of the above ideas as well as OSHA procedures. Although no Rider survives first contact with the Department of Buildings, it may provide useful parameters if the DOB publishes additional guidelines. Please click here for a copy of the Rider.

Issues with Reopening.  “Reopening” is in the eye of the beholder. Owners may want to resume deferred repairs, alterations and moves. Others may seek to start using previously closed building services and facilities. All of these involve increased interaction between staff and owners, and among owners, that raise sticky questions for Boards.

• Employee Protection. Do you have sufficient personal protective equipment for your staff? If your staff enters an apartment, what distancing guidelines should be observed? Can staff direct owners to keep proper distancing as well?
• Employee Cooperation. Is your staff willing to engage in more “risky” behaviors in service of reopening the building? Have you investigated the right ways to deal with a refusal to participate out of fear, or due to other caretaking obligations?
• Priorities for Staff and Services. Who gets first priority for use of elevators and other building services – owners with deferred but non-essential repairs, owners with alterations, or moves? (And should alterations and moves be prioritized by “seniority” or need?)
• Priorities for Reopening Facilities. When should the gym or pool be reopened? How about the day care center or community room? What additional safety protocols should be implemented as part of reopening? Do you have adequate staff to monitor the new activity?
• Additional Fees. Should owners pay an additional charge for daily disinfection by staff after an alteration or move, or for the additional costs of making common facilities safer and monitoring them thereafter?
• Elevators. Should physical distance restrictions on elevators be relaxed? Could any restriction be enforced except voluntarily?
• Deliveries, Visitors, Showings, Parties. What new protocols will the Board establish for food deliveries? Open houses and showings? Individual visitors and parties?
• Liability. Should the building require “coronavirus” waivers before allowing restrictions to be eased (that is, acknowledging that coronavirus is highly contagious and can be acquired from numerous sources, so the person giving the waiver agrees that the association will not be liable if anyone contracts coronavirus after entering the building or using a renewed service or facility)? What about from persons involved in newly resumed activities like moves, alterations, or use of the pool or gym? What standards (if any) should the Board adopt to avoid a claim by an owner that the Board negligently conducted disinfection that it had committed to perform within reopened facilities?

We are currently exploring all of these issues with managing agents and Boards, and will share their ideas and ours as they become available. Please feel free to share your own methods with one of our partners or let us know if we can be of assistance.

More Fun with PPP. The scramble by cooperatives and condominiums for a definitive decision about eligibility for Paycheck Protection Program loans has generated further confusion. The list of Frequently Asked Questions published by the SBA on April 24th included this one:

“35. Question: Are agricultural and other forms of cooperatives eligible to receive PPP loans?

“Answer: As long as other PPP eligibility requirements are met, small agricultural cooperatives and other cooperatives may receive PPP loans.” [Emphasis added.]

Armed with that response, more cooperatives and condominiums crowded to the plate. However, later in the week a reputable sister law firm published a conversation with an SBA representative holding an impressive title, in which the representative stated that the above answer was “a bit confusing,” and repeating the portion of the SBA regulations providing that applicants for an SBA loan had to be an “agricultural cooperative or for-profit business entity.” Based on that, the law firm recommended that all co-ops and condos who have received loans return them by May 7th (the “safe harbor” date for the return of improperly taken loans under current SBA rules).

Are cooperatives “for-profit business entities”? New York State cooperatives are organized under the Business Corporation Law, like typical business concerns. They raise money to pay for operating expenses. A cooperative lacking commercial tenants has only one source of funds, its shareholders, so it charges them for their share of costs (let’s call it a “continuous capital call”). A cooperative with commercial space, though, needs less capital from its shareholders to survive, so it charges what the market will bear and makes up the deficiency by seeking less from its shareholders.

Above a certain point, shareholders are disqualified from taking deductions for mortgage interest and real estate taxes paid by the building on shareholders’ individual returns. The same Section 216 of the Internal Revenue Code that sets the threshold for special shareholder tax deductions, though, also declares that a cooperative corporation cannot make any distributions to shareholders “except out of earnings and profits.” [Emphasis added.] So the more money that a cooperative received from commercial tenants, the less its shareholders have to contribute to maintain their homes. And if commercial income exceeds operating expenses, the difference can be distributed to shareholders as – profit, without violating any tax laws or requiring any change in its organizational structure. We leave it to the reader to decide whether cooperatives are organized and operated as “for-profit” entities, regardless of whether most of them actually make a profit.

No “Double-Dipping” for PPP Loan Recipients. The IRS has announced that anyone who receives forgiveness on a PPP loan cannot also deduct for income tax purposes the expenses that the forgiven portion of the PPP loan was used to pay. It says something about the creativity[?] of “for-profit business entities” that the IRS feels the need to publish that rule.

Pennsylvania Supreme Court Defines Coronavirus as “Natural Disaster.” Does This Support Claims of “Damage” for Businesses Forced to Close due to Lockdowns?

In Friends of Danny DeVito et al. v. Tom Wolf, Governor et al., the plaintiffs – various types of businesses affected by the Pa. Governor’s Executive Order shutting down “non-life-sustaining” businesses due to COVID-19 — argued that the Governor lacked the legal authority to issue such a broad order. They asserted that a broad lockdown was excessive because their individual businesses could be operated with appropriate safeguards in place. The defendant State argued that in a public health emergency, the Governor had the authority to issue broad orders to protect the public at large, and that the Order was the only reasonable way to stop the spread of the disease.

As detailed in an article by attorney Donald Ottaunick in the Insurance Journal on May 1, 2020, the Pennsylvania Supreme Court ruled that the Governor had the authority to protect the public from “damage, injury and loss of life and property resulting from disasters,” and that power included the ability to order the shutdown of certain business and other operations. More important, the Court stated that COVID-19 qualified as a “natural disaster” that would justify the actions taken by the Governor.

In Pennsylvania, a natural disaster includes events which create “substantial damage to property, hardship, suffering or possible loss of life.” Because the Coronavirus can spread so quickly and unpredictably, any business might lie within a potential disaster area. Accordingly, the Pennsylvania Executive Order, like other states’ orders, is a declaration that business property [throughout the state] is deemed to be “damaged” by a “natural disaster” (coronavirus) and hence unsafe and subject to closure.

“Insurance companies are denying coverage for business income losses under standard property insurance policies based in part on the policy requirement that the loss must be caused by ‘direct physical damage to insured property’ and that the coronavirus does not cause such damage,” states Mr. Ottaunick. “Based on DeVito, if a pandemic is indistinguishable from other natural disasters where coverage for losses would be expected, insurance companies may have a difficult time maintaining a denial of coverage on that basis alone.”

New York law also allows the governor to issue Executive Orders in the event of a “disaster.” A “disaster” is “the occurrence or imminent threat of wide spread or severe damage, injury, or loss of life or property resulting from any natural or man-made causes…” Could New York’s definition of a “disaster” be applied in the same manner so that businesses could be construed to have suffered a “loss” or been “damaged” by the pandemic so as to qualify for business interruption coverage under their policies?

Why Policy Holders Should File Business Interruption Claims.

There are multiple pending lawsuits seeking to clarify the question of whether businesses may claim business interruption coverage. Among other arguments, they assert that 1) coverage is available because the closure was mandated by “civil authority”; 2) there is a meaningful distinction between a “direct physical loss of property” and “damage to property”; and that 3) certain “all-risk” policies cover losses from the pandemic because the language of the policies does not expressly exclude such coverage. The decision by Pennsylvania’s highest Court supports arguments that COVID-19 related closures are the result of “civil authority”, and that the loss of use of a property for its intended purpose might trigger coverage.

The bottom line is that policy holders should not be discouraged from filing a claim and that they should do so using the broadest possible language to describe the nature of their claim. A simple claim letter stating that the insured is seeking any and all possible coverage under their policy for losses sustained by the COVID-19 pandemic is a prudent step. Receiving a denial of claim is not the end of the story since policy holders then have the ability to appeal that determination. Until these issues are resolved by the courts, policy holders should not assume that they have no coverage for their losses.

Many commercial tenants are asking their landlords for rent relief due to their business losses during the lockdown. How are landlords responding?

Spoiler Alert: No Magic Bullet or Standard Formula. We have consulted with landlords with billion-dollar portfolios and with only a single tenant. All of them have advised us that they are dealing with their tenants on a “case-by-case” basis. However, as a general proposition, we suggest that landlords should work with their lender prior to offering any relief to tenants.

Landlord’s Analysis. Both landlords and tenants have the same goal: to survive the lockdown with a minimum of damage, and to maintain fiscal security for the long term. For the landlord, that means covering their costs and making mortgage payments. For the tenant, that means being able to reopen their premises after they are allowed to, and to weather the inevitable ramp-up to pre-lockdown levels. A landlord’s evaluation may include the following:

Has the tenant applied for PPP or EIDL Loans? Tenants with under 500 employees can take advantage of the Paycheck Protection Program, which allows tenants to receive forgivable loans from the government as long as they utilize at least 75% for payroll and the balance for qualified debts, which include rent. Debt that is not forgiven bears interest at a 1% rate and matures in two years. If they get the loan, that should alleviate rent concerns for at least 30-60 days.

Other tenants may be eligible for EIDL loans. These are mostly not forgivable but have reasonable repayment terms and include an emergency grant of up to $10,000 that might be forgiven if it is distributed within three (3) days. NYC also advertises “Business Continuity” loans, but the program has run out of funds.

How much of the tenant’s business is on-line? Some retail tenants also have a robust on-line business that may not have been affected as deeply.

Will the landlord’s lender allow rent adjustments? Most mortgages require the landlord to procure mortgagee approval before modifying a lease to reduce rents. Landlords should check whether their mortgage includes that covenant. The feedback from our clients is that lenders will usually cooperate with a landlord who seeks to preserve its longer-term financial stability by granting a rent adjustment, as long as the landlord is not in default under the loan documents.

Will the landlord’s lender consider mortgage forbearance? FNMA and Freddie Mac have directed lenders servicing or insuring multifamily mortgages held by them to grant a 90-day forbearance (to be repaid over the following 12 months), provided that the mortgagors do not seek to evict or charge late fees to tenants during the forbearance period. Several of our commercial clients have successfully negotiated mortgage forbearance with institutional lenders holding loans in their portfolios. (Note that such negotiations might also include extension of reporting deadlines for financial or other statements or a temporary relaxation of DSCR or other valuation requirements in order to take into account the potential rent reduction.)

Servicers of securitized commercial mortgages (“CMBS” loans) currently are not authorized to grant forbearance. These loan packages face major default risks unless (say) the Federal Reserve decides to purchase them to preserve liquidity. However, some FNMA securitized mortgage pools have been placed in a “forbearance period” (review the FNMA website for more details.) A fuller discussion of the effects of COVID-19 on commercial mortgage-backed securities is beyond the scope of this update.

Negotiation Options. Both landlords and tenants should have a longer-term strategic plan in place to guide their negotiations. Fortunately, as a general principle both parties have a common goal to ensure a profitable business for a good longer-term tenant.

“Blend and Extend.” Unsurprisingly, landlords considering forbearance usually seek a compensatory benefit. For some, this may be an extension of the lease term, which enhances fiscal stability for the owner. Others may seek repayment of the foregone rent over a period of months (perhaps in steps) while business levels return to normal. Landlords also consider elimination of renewal or expansion rights in return, or allowing the security deposit to be used to fund the rent (possibly for replenishment later).

Immediate rent reductions to ensure cash flow sufficient to cover landlord’s fixed costs in the short term. A number of landlords have based the size of any forbearance on the amount that the landlord needs to receive monthly in order to cover its fixed costs. That way the landlord doesn’t fall further into debt, but the tenant receives some relief. This may be harder to calculate for multifamily owners, which have a mix of residential and commercial rents.

Cooperatives and condominiums may have less leeway because they don’t make “profits,” but there may be certain reserve contributions that can be deferred, such as lender-required operating reserves or capital repair reserves. If they have FNMA, FHA or Freddie Mac mortgages, they may also receive forbearance as detailed above.

Would reducing the size of the premises help? Some tenants may not be able to support the full premises they have leased for some time. In that case, perhaps a sublease of a portion of the premises would be feasible. This may seem to be only a band-aid, but that may be all the tenant needs.

Non-Disclosure Agreements. An honest dialogue is essential if a mutually satisfactory agreement can be reached. Some landlords may want detailed information on a tenant’s financials or loan status under the PPP before considering forbearance, or a landlord may wish to keep the details of an abatement confidential if an agreement is reached. In that case, the parties should sign a Non-Disclosure Agreement so that information leading to forbearance stays between the parties.

Modification vs. Forbearance. Conceivably, a temporary forbearance might not be subject to lender consent, especially if it were to be repaid at a later date. Landlords should check their mortgages for the precise wording. On the other hand, if a tenant were to declare bankruptcy, then unless the lease has been formally modified other creditors might seek to claw back money paid to other creditors that otherwise would have gone for rent, claiming a preference. Tenants should consult their bankruptcy counsel in that regard.

Conclusions. Right now the way to deal with the inevitable shortfalls in commercial rent payments remains subject to significant governmental, bank and economic business decisions. We will keep you informed as the landscape shifts.

Spring Annual Meeting Season is Here! But how can associations run effective meetings without owners being physically present to participate?

Even though “social distancing” seems to be slowing the spread of COVID-19, we expect that Governor Cuomo will extend the portions of Executive Order 202.8 that suspend longstanding legal requirements that ownership meetings must be noticed and held at a physical location. How can a Board conduct an effective “virtual-only” member meeting, though, if it wishes to do so?

1.Notice of Meeting. The notice of meeting should be sent in the usual manner; it can also be sent by e-mail to all owners who have designated an e-mail address to receive notices. The Notice should (a) inform owners that the meeting will be conducted by electronic means only, (b) identify the method (Zoom, GotoMeeting, etc.) to be used and the hyperlink to enter the meeting on the appropriate day; and (c) request that owners provide e-mail addresses to the managing agent for future notices.

Assure members when you send the Notice that they can join the meeting using a PC, laptop, tablet, Mac or smartphone. Zoom also provides for audio participation only so that no one will be excluded. Proxies can always be sent before the meeting as well, either by mail or electronically.

Send additional invitations electronically to remind owners of the date and Zoom address, and post additional reminders with the meeting’s web address included. If possible, include the Meeting ID and password in case people enter from the website rather than the hyperlink.

2. Preparing for the Meeting. Consider sending the topics of the Board members’ reports to all owners by e-mail (and posting them on the website) 48 hours before the meeting, AND ask owners to comment or provide questions on topics to the Secretary by noon the day before the meeting. That way Board members are able to include the comment and answer the questions during the Board presentation of the topic. This also reduces observer comments. If someone wants to hammer their point – already made – the Chair can thank them and reiterate that “Board member xyz already made that point. Please only bring up new points, something that hasn’t been brought up previously.”

3. Conduct of Meetings. A properly hosted electronic meeting can be surprisingly efficient. Using a platform such as Zoom, voting during elections is streamlined as owners are directed to a “chat room” where they can all cast their votes simultaneously (and confidentially). The meeting host can mute all attendees while board members, management and accountants give reports and conduct elections. Similarly, the host can also recognize (and un-mute) individual owners during Q&A. The effective use of the mute function also reduces cross-talk and interruptions and allows for more orderly handling of questions from the floor.

4. Voting. Nominations can be solicited from the “floor.” Nominees may be introduced and given an opportunity to make a brief statement (if the host has muted mics, they can be unmuted). The host directs computer participants to the chat room to privately cast their votes.

Chat room voting is automatically recorded by Zoom. The host can limit disclosure of individual votes by setting privacy parameters in the chat room before the voting begins, so that votes are directed only to the host or designated inspectors of election. Any participant (including telephone participants) also may cast votes privately by e-mail to a designated e-mail address or by texting to a designated number. Proxies/Ballots received prior to the meeting are accounted for separately. Inspectors of Election tally the results, complete a Certification, and the results of the election are announced.

5. Practice Session. We recommend that the Association consider a practice session to familiarize participants in the use of Zoom or other platform of choice and how the meeting will be conducted. [Saturday Night Live recently performed a very realistic parody of first-time Zoom meetings, which we will not hyperlink.] Prior practice to reduce technical difficulties on the day of the meeting is likely to improve the overall day-of-meeting experience.

Boards may be pleasantly surprised that their Spring “virtual-only” owners meetings may be more effective on many levels.

If you would like our firm to host your Annual Meeting, please contact Eric Blaha at eblaha@sbjlaw.com.

Cooperatives and condominiums appear to be adjusting to the “new normal” – limited access, leaner staff, frustration at so many halted projects, etc. Below is a status report on current and upcoming issues that we see.

Face Coverings for Building Employees. Executive Order No. 202.16, finalized yesterday, requires employers to provide “face coverings,” at employer expense, to essential employees in the workplace when in “direct contact with customers or members of the public.” The Order does not define “face coverings” or “members of the public”, but since building service workers are deemed “essential,” it would seem to apply to residential buildings. Members of the public would seem to include owners, tenants, other employees, visitors, vendors, or contractors, so you are required to provide your staff members with face coverings. The Order is effective on Wednesday April 15th at 8:00 PM.

How to Handle Arrears? Many Boards are asking whether to continue sending default notices and taking legal action against owners in arrears, given the moratorium on evictions and the limitation imposed on most court action. We are recommending the following:

1. Foreclosures and evictions have been suspended in NY by Executive Order through April 19th. Foreclosures and evictions are suspended for mortgages owned or backed by FNMA or FHA through May 17th. We expect that both moratoriums will be extended for some period.

While suspensions are pending, Boards should take all administrative and legal steps that you can at this time, including sending warning letters, formal notices of default and notices of termination, serving 14-day notices, preparing notices of petition and petitions, recording Notices of Lien and demanding assignments of rent. There will be a surge of court proceedings when the courts reopen, and you want to be in the best position to take appropriate collection action. Co-ops should notify shareholders’ lenders of shareholder arrears, since they frequently pay on the shareholder’s behalf. Condos should formalize their liens on the units and note that recording Notices of Lien does not require court action, and recording offices currently remain open.

2. We understand that Boards may want to make exceptions for certain situations and will always have the right to modify the approach for an individual case. For example, an owner who has been in arrears for several months before March, or who is a chronic with a long history of arrears, may not be entitled to the same consideration as one who fell behind in April. This does not mean that we recommend deferring collections; if maintenance/common charges are not paid, the association can’t keep the lights on.

Employer Benefits Available to Co-ops and Condos. The CARES Act also includes the “Employee Retention Credit,” under which employers will receive a credit against their employment taxes equal to their share of FICA contributions (6.2% of wages up to $137,700) between March 13th and December 31, 2020, up to a maximum of $10,000 of “qualified wages” per employee. This credit can be taken by cooperatives, condominiums, HOA’s and non-profits regardless of whether the employee remains on the job or was laid off. Every little bit helps.

PPP Impasse. As of this date, the House and Senate are pushing different plans for additional aid. The Senate wants to pass a $250 billion infusion to the Paycheck Protection Program since almost 80% of the initial appropriation was used up in a week. The House wants to increase that by another $250 billion to include aid to the states and hospitals. Since Congress is not physically present in Washington, only bills that can pass by “Unanimous Consent” can be enacted quickly, so additional funding remains problematic. Since the SBA hasn’t changed its official position barring cooperatives and condominiums from applying, though, associations still may not receive any benefit from additional funding.

We will continue to keep you updated on COVID-19 related issues affecting cooperatives and condominiums.