CLIENT ALERT - Tips on Safeguarding the Financial Health of HOAs During the COVID-19 Crisis
» Posted April 14, 2020 News
Many board members are deeply concerned about the impact the stay-at-home order will have on the association’s ability to pay its bills. The Los Angeles Times has reported that there have been 2.3 million new unemployment claims made in California within the last month. But, in that the unemployment checks cap out at $1,050 per week for the highest-paid recipients, the payments may not be enough for all owners to meet all of their obligations. And while federal stimulus packages offer hope for small business owners, it currently appears that the funding will not come over night, there may not be enough for everyone and many will need to pay it back.
Some associations have already received requests from owners for “assessement abatement.” These owners are likely thinking that a homeowners association can forego collection for several months in the same manner that some commercial property owners and lenders are able. Most homeowners associations will not have this option. Budgets are developed based upon the projected expenses and most of the expenses have not changed because people are staying at home.
So, what should a board be doing to help safegaurd the association’s financial health? Here are some thoughts:
- Some associations, with hefty reserve funds, may consider a temporary loan from reserves to the operating account to assist the members. This decision does not need to be made now. Instead, the board can review the receivables in a month or two and evaluate the association’s position, rather than base the decision on speculation as to the owners’ abilities to pay their assessments. Note, this option requires a plan and specific notices and resolutions. You will likley need to call legal counsel for assistance.
- Encourage the owners to pay in advance. A homeowners association can take in assessment revenue in advance of a due date. Why would anyone want to pay in advance? Well, there are a couple reasons. The money is not doing a lot of good in the bank. Interest rates are low. But, more importantly, pre-payment may be beneficial to the entire community, including the owner who pre-pays. If the board finds that there is not enough money to pay the bills, and there is not enough money to borrow from reserves, the board may need to impose a special assessment against all the owners. Those who could not pay the regular assessment will not be able to pay the special assessment either. In the end, those with hardship may be put in a position from which they cannot recover. Pre-payment by those who can pay may just give the owners with hardship some extra time to get back on their feet.
- As non-profit organizations, homeowners associations are eligible to apply for Economic Injury Disaster Loans (EIDL) under the CARES Act. EIDLs are long term, low interest loans and emergency cash advances designed to assist with substantial economic injury as a result of COVID-19. A substantial economic injury has occurred when an association is unable to pay ordinary operating expenses or has reduced working capital, increased expenses, or cash shortages due to a national disaster. The money received is intended to supplement assessments and may only be spent on fixed debts, payroll, accounts payable, and other operating expenses that cannot be paid because of the disaster’s impact. EIDL proceeds cannot be used for improvements or payments to owners. EIDL can be up to $2,000,000, and the interest rate is 2.75% for non-profits. The maximum term of an EIDL is thirty (30) years. The SBA will determine the repayment period and monthly payments based upon the applicant’s financial condition. The loan can be collateralized with receivables (a pledge of assessments). An EIDL must be repaid, but it is also possible to apply for an emergency grant of up to $10,000 at the same time. The grant money can only be used for sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, or repaying obligations that cannot be met due to revenue losses. The application can be found at https://covid19relief.sba.gov/#/
Board members should take care to avoid sending a message to members that assessment payments can be delayed. While an association may be able to cope with some of the members delaying payment, it could be a disaster if the members collectively believe that other obligations should be paid before assessments. Hardship requests should be handled on a case-by-case basis. The board can consider waiving late charges and interest, but should not delay recording a lien if there is any indication that the owner will be unable or unwilling to catch up on assessment payments.