Prepared by the California Community Association Attorneys at SwedelsonGottlieb
By now, most people have heard about the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020 H.R. 748). The breadth and scope of this Act, and the speed at which it passed both houses of a divided Congress and became law, is truly remarkable in these partisan times and speaks to the gravity of the COVID-19 crisis.
The Act is a massive stimulus bill that contains a variety of different programs of grants, loans, credits, debt forgiveness, and tax changes. Each of these programs is administered differently and has different criteria for eligibility.
Two of the Act’s provisions have become of particular interest to community associations: the federal Small Business Administration’s (SBA) new Emergency Economic Injury Disaster Loan Advance Grant program (the EIDL Loans which are available to HOAs), and the Paycheck Protection Program (the PPP which is not currently available to HOAs).
EIDL Loan Advance Grants
The Emergency Economic Injury Disaster Loan Advance Grant program allows eligible entities to obtain advance grants of up to ten thousand dollars ($10,000) within three (3) days after applying for an SBA Economic Injury Disaster Loan. So-called EIDL loans, which already existed before the CARES Act came into effect, are lower interest loans with limits of up to $2 million that are used to pay for expenses that could have been met had a disaster not occurred, including for payroll and other operating expenses.
Under this new program, advance grants on EIDL loans do not need to be repaid. The proceeds of these advance grants may be used for any allowable purpose that the proceeds of an EIDL loan itself could be used, including providing paid sick leave to employees unable to work, maintaining payroll, meeting increased costs to obtain materials due to interrupted supply chains, and repaying obligations that cannot be met due to revenue loss.
It is these last two purposes (meeting increased costs to obtain materials due to interrupted supply chains, and repaying obligations that cannot be met due to revenue loss) that are likely of most interest to community associations, as many will be facing significant reductions in their assessment streams because of the economic downtown caused by the COVID-19 crisis.
More importantly, both EIDL loans and the new advance grants on such loans are available to any “private nonprofit organization.” The vast majority of community associations in California meet this definition, because they are incorporated as nonprofit mutual benefit corporations under California law.
Paycheck Protection Program (PPP)
On the other hand, the Paycheck Protection Program is a new type of so-called “7(a) loan”(because it is administered by the SBA under Section 7(a) of the federal Small Business Act).
The portion of the CARES Act authorizing the creation of the Paycheck Protection Program states that is available to business concerns, nonprofit organizations, veterans organizations, or Tribal business concerns employing not more than 500 people. However, this part of the Act specifically defines a “nonprofit organization” as one that is one eligible for tax treatment as a charitable organization under Section 501(c)(3) of the Internal Revenue Code.
A community association that is eligible federal tax treatment as a 501(c)(3) charitable organization would be extremely rare. This would mean that a community association was fully exempt from having to pay income taxes, and that all dues (assessments) that members paid to the association were tax deductible. In the 35 years our firm has represented community associations, we have never seen an association that has successfully applied for and received this type of tax-exempt status from the IRS.
We do not know why Congress decided to make one part of the CARES Act available to community associations (the Emergency Economic Impact Disaster Loan Advance program), while making another part of it unavailable (the Paycheck Protection Program). Perhaps it has something to do with 501(c)(3) charitable organizations typically having employees on their payrolls, whereas all nonprofit entities, including community associations, likely have payroll and non-payroll expenses that could be covered by an EIDL loan and related advance grant.
The Community Associations Institute (CAI) is currently lobbying for Congress to expand the Paycheck Protection Program to apply to community associations as well, and amendments are currently being proposed to the CARES Act, even though it was only recently enacted. Follow this link to read what CAI has to say about the PPP and a petition to Congress to let them know that HOAs need some CARES as well.
However, for now it would appear to be a waste of a board’s time to try to obtain a loan through the Paycheck Protection Program. Even if a community association somehow obtained such a loan, it would be limited to using the proceeds of that loan for payroll costs for compensating employees (provided that association actually has any employees, which many do not), mortgage payments, rent, utilities, and other debt obligations incurred before the COVID-19 crisis began, and not for bolstering its operating fund, which is intended to address the emergency situations many associations may currently be dealing with.
Furthermore, obtaining a loan through the Payroll Protection Program could possibly be considered a fraudulent act, inasmuch as a community association would be certifying that it is eligible for tax treatment as a 501(c)(3) charitable organization, and that it only intends to use the proceeds of the loan for the aforementioned costs, neither of which is probably the case for most associations. As a result, a community association’s directors and officers insurance (D&O) policy could quite likely exclude coverage for such an intentional fraudulent act.
Therefore, we do not recommend that community associations apply for loans under the Paycheck Protection Program at this time, at least until the Act has been amended to clearly include community associations as being eligible, or until the Treasury publishes additional guidelines to that effect.
On the other hand, many community associations have already applied for and received EIDL loans and advances grants on those loans, which in our opinion are well-suited for addressing any shortfall in revenue that associations may be currently experiencing. If not, now is the time to do so, as we hear that funding for this program is quickly drying up.
To learn more and to send an email to your Members of the U.S. House of Representatives & Senators asking for community associations to be included in the Paycheck Protection Program follow this link to access the Community Association Institute’s web page on this topic.
SwedelsonGottlieb represents California community associations. Contact SwedelsonGottlieb at email@example.com or 1-800-372-2207 if your HOA or condo association needs legal assistance.