The ABCs of Applying for PPP Loans

Some $284 billion in the second round of Paycheck Protection Program (PPP) loans have begun to flow from the federal spigot. Now that housing cooperatives are eligible for the forgivable loans for the first time, co-op boards need to get educated and get busy. As they prepare to apply for the loans, here are four critical things boards need to consider:

Eligibility: The money will not be available to all co-ops or to any condominiums or homeowners associations. To qualify, co-ops need to meet two ironclad criteria: they must have employees, as the program’s name implies; and they must be able to show that the pandemic has hurt them economically. “You can’t get a PPP loan or any other government bailout if you’re not suffering hardship,” says Jay Hack, a partner at the law firm Gallet Dreyer & Berkey who specializes in banking issues. There are, he adds, three ways co-ops will be able to demonstrate that they are suffering economic hardship: if shareholders are unable to pay monthly maintenance and have fallen in arrears: if the co-op has suffered a loss of rental income from commercial tenants; if the co-op has seen an increase in expenses related to the pandemic, such as hiring more staff to sanitize the building or enforce house rules.

Governing documents: At the most fundamental level, boards need to determine if they need approval to borrow money – even though PPP loans are 100% forgivable if the borrower spends the money on specified expenses. “You have to look at your corporate documents, the bylaws and proprietary lease, to make sure they don’t forbid borrowing without shareholder approval,” Hack says. “If the board needs shareholder approval to borrow money, it will need to call a special meeting. Boards need to get that notice out quickly.”

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Calculating the loan: Co-ops were ineligible for the first round of PPP loans last year, known as the “first draw,” and rules have changed slightly for first-time borrowers. Loans will be made to eligible cooperatives in an amount not to exceed 2.5 times its average gross monthly payroll expenses, including such costs as worker’s compensation insurance, from either 2019 or 2020. The maximum loan amount is $2 million. The loan will be forgiven if 60% of it goes toward payroll costs and no more than 40% goes to such eligible expenses as mortgage, utilities, operations, property damage, suppliers and worker protection. In determining average monthly payroll, Hack advises boards to choose the year with the higher average. “It should be relatively easy to look at your financial statements and decide which year to use,” he says.

Finding a lender: Most lenders, including banks, microloan funds and community-based lenders such as Community Development Financial Institutions, are allowed to make PPP loans, but some choose not to participate. “My advice to boards,” Hack says, “is that they should talk to their existing banker and ask if they’re going to be making these loans. If not, you’ve got to find another lender. The board’s lawyer, managing agent or accountant will be able to figure it out. It depends on who has the best connections.”

The Small Business Administration (SBA) is required to adopt final regulations that establish procedures for the new PPP loans within the next two weeks. In his law firm’s newsletter, Hack wrote: “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.”