Residential Cooperatives May Now Get Paycheck Protection Program (PPP) Loans
The most recent federal Coronavirus stimulus law, finally signed on December 27, 2020, extends the PPP loan program to residential cooperatives.
PPP loans are loans made by banks that are 100% guaranteed by the United States Small Business Administration, with up to 100% of the loan being eligible for forgiveness if the borrower spends an amount equal to the loan proceeds on specific types of expenses. Unfortunately, the extension of the law does not cover condominiums and homeowner associations.
Although some banks made PPP loans to residential coops under the original statute, others did not because they believed that the loans were not allowed. The new law removes the uncertainty, so coops are now unquestionably eligible. Therefore, if your coop suffered financial hardship as a result of the COVID-19 pandemic, it may be eligible for a PPP loan. A coop cannot borrow a PPP loan just to support operating or capital expenses unless it can show COVID-related financial hardship. However, if proprietary rent payments have slowed due to financial stress that residents are suffering, or if operating costs have increased due to the need to assure social distancing or to satisfy other government directives, or if commercial tenants have stopped paying rent, then a PPP loan may be available.
The SBA is required to adopt regulations that establish procedures for the new PPP loans within the next two weeks. If the original PPP loan program is any indication, there will be a flood of applications when the regulations are adopted, so we recommend that residential cooperatives that suffered financial hardships and want to consider applying for a loan act immediately to be able to be at the front of the application line when the SBA regulations are finalized. We recommend that interested coops immediately take the following steps:
- Review the bylaws and proprietary lease to determine what steps the coop must take to approve a loan. If board or shareholder approval is required, the coop should get the ball rolling, but should not delay preparing and filing a loan application while the corporate approval process is undertaken. We are, of course, available to help coops satisfy the corporate governance requirements necessary to obtain loan approval.
- Contact your regular bank to determine if it is participating in the PPP loan extension and whether it will take applications from non-borrowers. If the response is “no,” or “we do not know yet,” then contact us because our Banking and Finance Law Department has relationships with banks that may be willing to take an application from a non-customer residential coop.
- Speak to your accountant and your managing agent and ask them to collect payroll and mortgage interest payment data for 2019 and 2020, with documentary backup. Although we will not be sure exactly what the SBA will require to support a new loan to a residential coop until the SBA adopts its new regulations, it is likely that such data will be required.
- Let us know of your coop’s interest in obtaining a PPP loan so that we can advise you as soon as the SBA issues regulations implementing the expansion of the availability of PPP loans to coops.
As always, we are here to help you with all of your legal and practical needs.