Here's Why Co-ops and Condos Can't Get Payroll Support

Habitat spoke with Stuart Saft, a partner at the law firm Holland & Knight, about the Paycheck Protection Program, which was created to give small businesses forgivable loans if they use the money to keep employees on payroll during the coronavirus shutdown.

Many co-ops and condos have been eager to apply for the Paycheck Protection Program, and a few have received funding. But many are concerned about the legality of doing so. Can you explain where the problem lies?

Saft: The problem is the way the Small Business Administration is interpreting the law. The CARES Act specifically says that any business can apply for the Paycheck Protection Program. The idea was to get as much money out as possible to keep people working so that they don't go on unemployment and make the coming recession even worse than it's going to be. The Small Business Administration took the position that, according to their regulations, the borrowers had to fall into certain categories. Among the businesses that were excluded were residential real estate ownership and operation, and specifically apartment houses. 

I contacted the president and general counsel of the National Cooperative Bank. They agreed with my interpretation, and then they tried to build support in Washington to get Congress to do something so that the funds could be available for co-ops and condominiums. 

Did they succeed?

Saft: There was no interest in doing that. By not questioning the Small Business Administration, Congress now has pretty much affirmed that the SBA’s actions are correct, and it would be virtually impossible for courts to reverse the SBA after Congress reauthorized the CARES Act. That's the position that we're in right now. If you just look at the legislation, absolutely any business should be able to apply and get the loan. But based upon the interpretation, a whole segment of the population is excluded.

A few co-ops have actually gotten funding from the SBA. Should these co-op boards keep the money? Should they turn it back? What's the risk to them?

Saft: If I was their attorney, I would advise them to take advantage of the safe harbor that the Small Business Administration has issued, basically saying, "If you weren't eligible for funding, and you got funding, or you applied for the funding, you have until May 7th to withdraw your application." I say that because no volunteer co-op or condo board should have to go through a federal investigation because they acted as a fiduciary and did something that made sense. Now the problem is that in the application that they signed, they affirmed that they understood what the eligibility requirements were. They agreed to accede to them and they understood that there were civil and criminal penalties for violating it.

When Congress reauthorized the law a week and a half ago, they made it a little bit worse by saying that there has to be a necessity. It’s going to be very hard for co-ops and condominiums in New York City to argue that they really have necessity to get the money because it's not like they're selling products to consumers who are out on the streets. Every co-op shareholder and condominium unit-owner has an obligation to make their monthly payments. You have a situation where a board that has gotten money is in violation of the application that they signed – (if) they can't prove necessity.

What would have to change so that a co-op or condo would feel comfortable applying for this kind of funding?

Saft: There's another round of funding that's being discussed, and I assume we're going to get it. What we would need is very specific language in the legislation saying that funding for residential apartment operations is permitted. We tried to get that this last time around. I know that a group of New York members of Congress have written a letter saying co-ops should be allowed to get this money, but there's no support on the Senate side for doing this. Without Senate support, the law is not going to change, and we're not going to be able to see that funding.