Financial Relief for Co-operatives Is Finally Here

January 21, 2021

Financial Relief for Co-operatives Is Finally Here

By Darya Shneyder and Fionne Pham

There is finally some relief for co-operatives that are suffering as a result of COVID-19.

In April 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which included the creation of the Paycheck Protection Program (PPP) implemented by the Small Business Administration SBA) that provides forgivable loans to small businesses. The PPP was designed to help small businesses retain their employees during these difficult economic times. However, the previously existing SBA section 7(a) loan program excluded housing associations. Many professionals, including attorneys and accountants, agreed that the reference to “apartment buildings” in that section included co-operatives and condominiums, thereby excluding them from applying for PPP loans. This exclusion left them with no assistance, while their shareholders and commercial tenants were beginning to reduce their monthly payments due to a reduction in their income.

On December 27, 2020, President Trump signed the Consolidated Appropriations Act (“new Act”), which included welcome relief for Co-operative Housing Associations (“Co-ops”). Under this legislation, some businesses are eligible for a second PPP loan if they can demonstrate that the loan is necessary. The new Act provides Co-ops the opportunity to apply for the initial PPP loans but not for a second PPP loan. If it is a second filing, then there is a 25% quarterly reduction of receipts analysis that needs to be performed prior to submitting the application. Unfortunately, at this time the new Act does not apply to Condominium and Homeowners Associations.


In order to apply for a PPP loan, the Co-op must employ not more than 500 employees and must certify that “current economic uncertainty makes the loan request necessary to support the ongoing operations” of the Co-op.

The “current economic uncertainty” certification is subject to interpretation by the Co-ops and their board members. Co-ops that are currently struggling financially need to be able to identify the reasons for their financial difficulties and document them in the Co-op’s minutes. One reason may be a loss of a commercial tenant. The pandemic closed many restaurants, retail stores and other storefronts, which were often located on the bottom floors of the Co-op. Commercial income is generally a great subsidy for Co-ops and can lower the monthly maintenance fees. The lack of commercial income could be an indication of economic uncertainty. Another reason may be the need to perform required local law repairs and the lack of sufficient reserve funds to pay for these projects. The total financial health of the Co-op needs to be considered in order to determine if there is indeed an economic need to receive the funds provided by the PPP loan. The Co-op’s accountant, attorney and managing agent should be contacted to assist in the analysis of the financial data.

It is also important for board members to consider reviewing their bylaws to determine if shareholder approval is necessary, in addition to approval by the board. The Co-op corporate documents may require additional steps to be taken before a loan can be obtained. Additionally, for those Co-ops that have previously taken out a mortgage or a loan, financial covenants need to be reviewed to ensure a second loan (which would be considered the PPP loan) is permitted. Mortgage lenders should be contacted if there is a clause in the mortgage document that prevents a Co-op from taking an additional loan, and waivers should be obtained.

Calculation of the Loan

If the Co-op believes it is eligible to apply for the PPP loan, the loan amount needs to be calculated and the calculation included on the loan application. The loan amount is based on the applicant’s “average monthly payroll cost” for 2019 or 2020, augmented by such items as health insurance, retirement costs and certain taxes. The maximum PPP loan amount is 2.5 times the average monthly payroll costs, up to $10 million. The first PPP loan was based on payroll costs for 2019, but with the updated guidance rolled out with the new Act, applicants can choose to use either use the 2019 year or 2020 year for the calculation, whichever year had higher costs. The 2019 year would typically yield higher payroll costs for a regular business, but it may be more advantageous to analyze the 2020 numbers as Co-ops usually have hourly wage increases due to union contracts. Eligible salaries are capped at $100,000 on an annual basis per employee, so the most that can be borrowed for any particular employee is $20,833 ($100,000/12 x 2.5).

What Can the Loan Be Used For?

PPP loans made to eligible borrowers qualify for full loan forgiveness at any time up to the maturity date of the loan, and there are specific areas for which the PPP loan proceeds can be utilized. The PPP loan cannot be used for general building needs. The main expense that can be paid for by the loan is payroll costs. Payroll must be at least 60% of the loan amount and the proceeds must be used towards payroll costs, which is important to consider before applying for the loan. If that is not fulfilled, the loan forgiveness amount is reduced to the amount in which the total payroll makes up 60% and the rest will need to be repaid. There is also a $100,000 limit on salaries per employee, prorated by the number of weeks of the covered period chosen. For example, if the applicant chooses to elect a 24-week covered period, the most that the Co-op can pay any single individual employee during the 24-week period and have it count toward loan forgiveness is $46,154 ($100,000/52 x 24), excluding retirement and health insurance benefits.

The PPP loan can also be used to pay for nonpayroll costs, such as mortgage interest payments, business rent (or lease payments made on real or personal property), as well as utilities. These costs or services are required to have been incurred prior to the loan or February 15, 2020. With the new Act, additional types of expenses can be paid with the PPP loan. This includes the cost of the supply of goods that are essential to the operations of the entity, personal protective equipment (e.g., face masks, shields or other protective gear) and costs related to property damage or vandalism that was caused by public unrest in 2020 and not covered by insurance. Business operations payments such as business software or cloud computing are also eligible expenses that are covered by the PPP loan.

Covered Period

Borrowers have a specific period in which they can utilize the loan, called the “covered period.” Prior to the new Act, the applicant would elect 8 weeks or 24 weeks as their covered period. Now, they can elect a covered period of at least 8 weeks, but no more than 24 weeks. The covered period begins the date the loan is disbursed.

The revised application has been issued by the SBA and is available on their website. The process to apply for the loan is on the participating bank’s website and must be completed with a participating SBA lender. We are advising our clients to prepare by gathering the necessary documentation and working with their accountant on calculations for the loan. Some documents that are required to be submitted along with the loan application are quarterly payroll returns such as 941s and state payroll tax filings. The deadline to apply for the loan is March 31, 2021, or until the funds run out.

Once the elected covered period is over, borrowers can apply for forgiveness of the PPP loan. They will have to show what eligible expenses were paid with the loan and that they satisfied the requirements relating to employee retention. Calculating the eligible payroll costs can get tricky, but borrowers, in conjunction with their accountants and managing agent, can work with their payroll providers to obtain reports that will assist them in the process. The process to apply for forgiveness is electronic and must be filed with the same SBA lender that provided the loan.

The opportunity for Co-operatives to apply for PPP loans should not be taken lightly. The PPP loan funds can be obtained for those Co-ops that are struggling financially and believe they need to apply for the loan due to the current economic uncertainty. We urge Co-ops to act swiftly and make the proper educated decisions by involving their accountants and attorneys to ensure the PPP loan application process is handled properly.