Individuals, businesses, and
organizations across the United States are struggling to come to grips with the
new financial realities created by the COVID-19 pandemic. Nonprofit community
associations are no exception. They will
likely face reductions in revenues in the coming months, at least, as a result
of members who simply are not able to pay their ongoing obligations for
assessments. Â Loans newly made available
by the federal government may be a good option for these community associations
to consider. In this blog we will look at federal disaster loans offered
through the U.S. Small Business Administration (SBA). (For a more general explanation
of HOA and COA loans in a non-disaster context, see Jim Slaughter’s earlier
article Association
Loans: What You Need to Know).
When the SBA declared a federal
disaster as a result of the coronavirus epidemic, it cleared the way for small
businesses to take out loans to replace lost funding and avoid some of the
expected economic injury they will face.Â
SBA loans are intended to fund temporary losses in revenue related to
the disaster. Associations can apply for these loans directly through the SBA
Disaster Assistance Program, and not a bank.Â
In order to be approved for a SBA loan, a community will need to be able
to establish a credit history and ability to repay the loan. The association
will also need to document what losses it has occurred directly related to the
disaster. We suspect, but are not yet sure, that the SBA will require that an
association show that it is not simply in need of funds, but that its revenues have
dropped off directly because of the pandemic, or that it is not bringing in
other revenue it would have related to the pandemic. For example, the SBA loan
is probably not going to be extended to cover existing accounts receivable that
go back for years. SBA loans can be used to cover debts such as ongoing
payments on contracts for pool services and landscaping, payroll, accounts
payable and other bills of the association. They are not intended for new improvements
not already underway and for which the association is already responsible for
paying.
Please note that the
eligibilities and terms of the various disaster loans are in a state of flux,
and information is changing constantly. The information that follows is our
best understanding of the loans potentially available to HOAs and COAs now:
SBA Economic Injury Disaster Loans (EIDL)
Nonprofit community associations
may be eligible for EIDL loans for amounts of up to $2 million dollars. If an
association wants to borrow any amount over $25,000, it will be required to
post some collateral. This collateral could include real property or personal
property (which would usually mean  the
right to collect assessments). Applicants
can apply for an advance on the loan funds of $10,000, and it appears that this
advance may not be required to be repaid- effectively making this a grant. SBA
Disaster Loan interest rates are set at 2.75%, and can cover terms of up to 30
years. They can be used to cover payroll, employee paid sick leave, rental or
mortgage payments, fixed debts of the association and other accounts
payable.Â
Importantly, unlike some other
federal disaster relief, SBA loans are not subject to loan forgiveness.
Associations will need to consider carefully whether taking on a loan
obligation makes sense in the short term and the long term, and whether, once
the economy improves, the ongoing debt payments will be possible out of
existing revenue streams.
Most communities who need SBA
loans will require more than $25,000, and if this will require membership
approval, the association will need to get creative about getting any approval
that will be necessary to pledge the necessary collateral. Obviously, an
in-person meeting and vote is out of the question at this point. For nonprofit homeowners
associations and condominiums in North Carolina or South Carolina, the
Nonprofit Act in either state will allow voting to be conducted by mail ballot.
SBA Paycheck Protection Program (PPP)
SBA’s PPP program is also
designed to help small businesses struggling financially because of Covid-19,
but differs in some important aspects. The fundamental goal of hits program is
to avoid layoffs. The SBA will forgive loans to eligible borrowers if they keep
all of their employees on payroll for eight weeks and use funds received for payroll,
rent, mortgage interest, or utilities. The list of lenders who can assist with
this type of loan is constantly changing. Currently, you can apply through any
existing SBA 7(a) lender or through any federally insured depository institution,
federally insured credit union, and participating Farm Credit System.
We have not yet seen clear
guidance on whether nonprofit community associations would be eligible for this
type of loan. For now, it looks like perhaps only 501(c)(3) nonprofits are
eligible, but this may change. Eligible entities could borrow up to 2.5 times
its average monthly payroll for the last twelve months, or up to $10 million
dollars. Payroll would be capped at $100,000 per employee. Some portion of the
funds can be used for interest on mortgages, rent, and utilities, but it is our
understanding that at least 75% of the forgiven amount must have been used for
payroll). Other important elements: loan payments will be deferred for six
months, no collateral is needed, and no fees are charged on the loan. If the
employer retains all of its employees during the relevant period, this loan
will be completely forgiven.
We encourage communities to begin
thinking about this issue sooner rather than later. Our firm and almost every
one of our clients has seen requests from owners to waive or delay dues
collection. We are only weeks into the pandemic, and won’t know for several
more weeks how many owners will actually stop paying their assessments. When
they do, the financial crunch may be immediate. If your community is already
running a tight budget, and does not have substantial reserves that would allow
it to continue operations in light of a 5, 10 or 15% reduction in revenue, we
encourage you to go ahead and start thinking about whether a SBA loan is in
your future.
Further information on the SBA Disaster
Loan Program can be located here.
In the coming days communities
will have to get creative to continue operations in light of the pandemic, and
a loan may be one way to allow continued operations while offering some relief
to your members. If you wish to discuss this or any other community association
related matter, please reach out to one of our North or South Carolina licensed
attorneys in any of our four offices.
Author: Harmony Taylor
Articles have been Reprinted with permission from Black, Slaughter, Black.
* These articles and related content on this website are provided without warranty of any kind and in no way constitute or provide legal advice. You are advised to contact an attorney specializing in Association Management for legal advice related to your specific issue and community. Some articles are provided by thrid parties and online services. Display of these articles does in no way endorse the products or services of Community Association Management by the author(s).
