Published on: March 30, 2020
We all know there is no such thing as a free lunch. But a new Small Business Administration (SBA) emergency loan program comes close, and it could be a financial lifesaver for many businesses, including condominium association management companies.
Part of the massive pandemic relief legislation enacted recently by Congress, the SBA Paycheck Protection Program, as the title suggests, is designed to help small businesses maintain their operations and sustain their payrolls until the pandemic eases and normalcy – or something approximating it ─ is restored.
The $350 billion program allows any small business with up to 500 employees to borrow an amount equaling 2.5 times their average monthly 2019 payroll, to a maximum of $10 million, under terms more flexible and more favorable than those offered for standard SBA loans. That’s a very good deal.
Even better: Those borrowed funds will be converted from a loan to a grant – that is, the principal amount of the loan will be forgiven – as long as the funds are used for qualified purposes, and provided that the employer does not lay off any staff members and continues paying at least 75 percent of their salaries during a two-month period, ending June 30th.
Qualified Loan Purposes
The qualified purposes for which loan funds can be used are: Payroll, rent, insurance, utilities, mortgage interest (but not principal) payments and interest payments on debt incurred before the period covered by the loan program.
You are reading this correctly: If you use the borrowed funds for qualified purposes, don’t lay off any employees and don’t reduce payroll expenditures by more than 25 percent during the two-month coverage period, the principal amount of the loan will be forgiven; you will have to repay only the accrued interest, which will be set at a maximum rate of 4 percent. Additionally, the forgiven portion of the loan will not be treated as cancellation of debt income and so will not be taxable.
Payroll costs eligible for loan forgiveness are defined broadly, to include:
- Salary, wage, commission, or similar compensation;
- Payment of cash tips or their equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for group health care benefits, including insurance premiums;
- Payment of retirement benefits; and
- Payment of state or local taxes assessed on employee compensation.
Exceptions and Exclusions
There are some exceptions and exclusions. For example, the loan covers annual salaries to a maximum of $100,000 per employee. Compensation above that cap will not be included in the loan forgiveness total. Payroll taxes, railroad retirement taxes and income taxes are also excluded, as are sick leave wages and qualified family leave wages for which credits are allowed under separate provisions of the Families First Coronavirus Response Act – another emergency measure passed recently by Congress.
The loan forgiveness total can’t exceed the principal amount of the loan, but it may be reduced proportionally if employers reduce their staffs or reduce the salary or wages of employees by more than 25 percent during the two-month coverage period. However, employers who cut staffs or salaries during that period can restore the loan forgiveness if they reverse those cuts by June 30th.
Loan amounts in excess of the forgiven amount will be considered non-recourse loans on which personal guarantees and collateral requirements are being waived. The loans will have to be repaid within 10 years from the date of application for loan forgiveness, with loan payments possibly deferred for from six to 12 months.
Details of the program, including the list of participating lenders that will be offering the loans, are expected to be released “soon.” But SBA officials have indicated that the application process will be streamlined and expedited, with minimal documentation required. Borrowers applying for loan forgiveness will be required only to:
- Certify that the loan is essential to support their operations during the pandemic;
- Acknowledge that they will use the funds only for qualified purposes; and
- Certify that the they have not received other loans and do not have loan applications pending for the same purposes and the same amounts.
Borrowers will also have to document the use of funds subject to loan forgiveness during the loan period.
No Catches – No Cautions
We’ve reviewed this program from every possible angle and have found no disadvantages – no hidden trip-wires to avoid, no ‘yes-but’ cautions to offer companies considering the loans. This is a rare example of something that appears “too good to be true” really is as good as it appears to be. The federal government is offering businesses virtually free money to keep their operations afloat and their staffs intact while the country recovers from the pandemic cloud and shakes off the economic paralysis it has created.
Condominium management companies facing declining or delayed income as their association clients struggle with interruptions in their revenue stream, can use the loans to avoid, or at least defer, staff reductions that might otherwise be required. With their operations fully staffed, managers will be able to provide full service to association clients that will need those services more than ever. This is clearly a win-win for management companies and condominium associations.
Some management companies have called us asking if they should take this government loan. We think the question they should be asking is – why would you not take it?
Written by Richard Brooks