Q: Does our condominium association qualify for any federal aid due to the COVID-19 pandemic?
A: This is one of the many issues where there is no clear answer and I hear diametrically opposed opinions from people whom I consider to be well-versed in legal matters pertaining to community associations.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is an extensive statutory enactment allocating $2 trillion aimed at combating the economic damage from the coronavirus crisis. As part of the CARES Act, Congress allocated in excess of $300 billion to the Small Business Administration (“SBA”) to underwrite various funding programs to small businesses nationwide.
There are two key lending prongs of the SBA funding: Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan (“EIDL”).
The PPP is a loan designed to provide a direct incentive for small businesses (businesses with fewer than 500 employees) to keep their workers on the payroll. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. There are specified percentages of what percentage of the loan can be used amongst various expense categories.
If recipients follow all the protocols of the PPP, the SBA can forgive the funds taken. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. This loan has a maturity of 2 years and an interest rate of one percent.
The general legal requirement is that the applicant “be organized for profit.” This will be a threshold impediment for many (if not most) Florida community associations, which are generally organized as not-for-profit corporations.
Congress expanded the PPP to make “nonprofit organizations” eligible for PPP as well as certain “veterans’ organizations.” The CARES Act defines a “nonprofit organization” as, “an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and that is exempt from taxation under section 501(a) of such Code.”
I have discussed this issue with several certified public accountants and the general consensus appears to be that most associations file taxes under IRS Code 528 or 277. Conversely, 501(c)(3) organizations are organized for the purpose of providing goods and services for the public good. In other words, there is an IRS distinction between “not-for-profit” organizations and “nonprofit” organizations. As with many issues related to COVID-19, we are dealing with unchartered waters. The SBA has not rendered an official final position regarding the applicability of PPP to community associations. Until such a position is released, we do not have concrete guidance on how community associations will be dealt with by the SBA with respect to the PPP.
As of the writing of this column, the U.S. Treasury Department has not issued any specific guidelines applicable to community associations, so one could argue this is still an open question. I am also aware of lobbying efforts on several fronts to specifically include associations as PPP eligible entities. Stay tuned.
The EIDL program can provide up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury) to small businesses or private, non-profit organizations that suffer substantial economic injury as a result of the declared disaster, regardless of whether the applicant sustained physical damage. Substantial economic injury means the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses.
EIDLs provide the necessary working capital to help small businesses survive until normal operations resume after a disaster. Unlike the PPP, most not-for-profit organizations are eligible to apply.
It should be noted that unlike PPP, EIDL is not a forgivable loan. Rather it is a traditional loan with a capped interest rate of 2.75% with the ability to extend repayment terms up to 30 years.
Whether an SBA loan is a viable option for community associations, appears to be an open question, which should be discussed with management, accounting advisors and legal counsel. Among the issues to consider are internal limitations on borrowing imposed by the governing documents or other loans, and whether the requisite injury can be established.