Content provided by Harmony Taylor of Black, Slaughter & Black P.A. Original article can be found here.
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. Loans newly made available by the federal government may be an option for 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 or general money issues, see Jim Slaughter’s articles Association Loans: What You Need to Know and Help, Our HOA (or Condo) Needs Money!)
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. 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. 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.
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 usually allow voting to be conducted by mail or electronic 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 this 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 an 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.