Update Regarding CARES Act PPP Loan Program – Safe Harbor for Loans under $2 Million

Update Regarding CARES Act PPP Loan Program – Safe Harbor for Loans under $2 Million

On May 13, 2020 the U.S. Small Business Administration (“SBA”) published new guidance clarifying prior guidance which had left many loan recipients confused and fearful of potential penalties associated with their PPP loans. To recap, over the last few weeks there has been much news and discussion debating whether companies who have received PPP Loans were actually eligible at the time they applied for the loan, and whether they should return the money. This came on the heels of the SBA’s publication of Question 31 on its Payment Protection Program Frequently Asked Questions document (the “FAQ”) on April 23, 2020, which states that recipients should have considered their economic need for the loan, including their current business activity and adequate sources of liquidity, at the time they applied for the loan. FAQ 31 goes on to permit recipients to pay back their PPP loans without any penalty for making bad-faith certifications on their application, before May 7th (a deadline that was subsequently extended to May 14th). Ultimately, FAQ 31, as well as the subsequent interim final rules issued by the SBA, simply added to the confusion surrounding the PPP Loan program, and led many borrowers to pay back their PPP loan out of concern that they might be investigated by the SBA for inadvertently making bad-faith certifications on their loan application.

The newly published Question 46 of the FAQ clarifies that any Borrowers of PPP loans under $2 million will be subject to a “safe harbor,” meaning that they are automatically deemed to have made the certifications regarding their need for the PPP loan in good faith, and will not be subject to investigation or penalty. This guidance provides relief to the vast majority of Borrowers, as only a relatively small number of Borrowers have received loans in excess of $2 million, per the SBA’s published data. For those Borrowers who did receive loans in amounts greater than $2 million, Question 47 of the FAQ extends the deadline to pay back the PPP loan through May 18, 2020, so they have a few more days to consider whether they should pay back their PPP loan. In doing so, the following are a few factors these Borrowers should consider:

1) any sources of liquidity, including lines of credit of cash reserves, that the Borrower and/or its affiliates may have had access to at the time they applied for the PPP Loan,
2) whether tapping into those other sources of liquidity to cover the business’s payroll costs, rather than taking the loan, would have been significantly detrimental to the business;
3) whether those sources of liquidity are needed to cover expenses other than payroll costs or cannot be used for payroll costs for other reasons;
4) how the economic uncertainties made applying for the PPP loan a necessary action to secure the survival of your business; and
5) how the pandemic and the government mandated shut down orders have actually affected the underlying stability of your business.

Borrowers should document these details, as well as any other reasons they believe the PPP Loan was necessary to support its ongoing operations, in a brief memorandum in preparation for a review by the SBA and Department of Treasury, who have pledged to review every loan in excess of $2 million following the Borrower’s request for forgiveness. This review will likely look at the Borrower’s initial need for the loan, as well as the Borrower’s use of the loan proceeds, to ensure compliance with the terms of the CARES Act and the subsequent released guidance and regulations. In fact, it may be prudent for Borrowers with loans under $2 million to prepare a brief memorandum for their records, in case their lender asks them to reconfirm their certification that the current economic uncertainty made the loan request necessary to support the ongoing operations of their business.

FAQ 46 also states that if the SBA and Department of Treasury determine that a Borrower did not make the certifications regarding their need for the PPP Loan in good faith, and did not return the funds in a timely manner, it will “seek repayment of the outstanding PPP loan balance” and will deem the Borrower ineligible for forgiveness, but will not pursue any other penalties in connection with the bad-faith certification as long as the Borrower pays back the PPP Loan. Ultimately, Borrowers of PPP Loans in excess of $2 million can still have a legitimate basis for their application, but will need to make sure they are prepared to defend that basis when the SBA and Department of Treasury review their loan.

The periodically updated FAQ can be found on the SBA website at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

Were Association Lien Foreclosures Intended to be Covered by Florida’s Moratorium on Mortgage Foreclosures?

Were Association Lien Foreclosures Intended to be Covered by Florida’s Moratorium on Mortgage Foreclosures?

On April 2, 2020, Florida Governor Ron DeSantis, in response to the COVID-19 pandemic, issued Executive Order 20-94, entitled “Mortgage Foreclosure and Eviction Relief” (“EO 20-94”).  EO 20-94 provided for a statewide moratorium on mortgage foreclosure causes of action as well as a statewide moratorium against residential evictions based upon the non-payment of rent (While there was no express limitation of that moratorium to residential mortgage foreclosure causes of action, it appears, from the language of that order, that it was only intended to apply to residential mortgage foreclosure actions).

EO 20-94 was set to elapse again on June 30, 2020, but only hours away from the expiration of the existing Executive Order (“EO 137”), Governor DeSantis signed Executive Order 20-159 that extended those moratoriums for another month.

One of the many questions begged by the issuance of EO 20-94 was this one: “Were homeowner’s association and condominium association lien foreclosure actions intended to be covered under the moratorium on mortgage foreclosures established by EO 20-94?”

“While there is no reference, in EO 20-94, to homeowner’s association liens or condominium association liens, the uncertainty as to whether the association lien foreclosure actions were intended to be covered by EO 20-94 stems from the interdependency, between the association lien foreclosure actions and mortgage foreclosure actions, established by the Florida Statutes.  Section 718.116(6)(a), Florida Statutes and Section 720.3085(5), Florida Statutes, both provide:   “The association may bring an action in its name to foreclose a lien for unpaid assessments secured by a lien in the same manner that a mortgage of real property is foreclosed and may also bring an action to recover a money judgment for the unpaid assessments without waiving any claim of lien.”       

Thus, if an association lien foreclosure action is to proceed in “the same manner in which a mortgage of real property is foreclosed”, and a mortgage on real property cannot currently be foreclosed due to EO 20-94, it would then seem to follow that association lien foreclosure actions must be subject to the same statewide moratorium that currently prevents mortgages on real property from being foreclosed.

This result may not have been intended by Governor DeSantis.  That appears to be demonstrated by the fact that EO 20-94 did not expressly restrict all foreclosure actions on real property.  Instead, only mortgage foreclosure actions were restricted. That conclusion also appears to be bolstered by the following language found in Section 3 of the order:  “Nothing in this Executive Order shall be construed as relieving an individual from their obligation to make mortgage payments or rent payments.”  If EO 20-94 were intended to also apply to association lien foreclosure actions, it would have been likely that Section 3 would have been rewritten to have read: “Nothing in this Executive Order shall be construed as relieving an individual from their obligation to make mortgage payments, homeowner’s association or condominium association payments, or rent payments.”     

However, a reading of EO 20-94 as restricting all foreclosure actions on real property, or at least on residential real property, appears to be supported by the apparent underlying goal of that order — preventing Florida residents from being forced out of their residences, during the pandemic, due to a failure to pay obligations associated with the occupancy of those residences, for those obligations (such as a mortgage obligation or a rent obligation) that afford a creditor the right to compel the resident to vacate the residence (through the completion of a foreclosure sale by the mortgage holder or the completion of an eviction action by the landlord).  Since a homeowner’s association and a condominium association are both in the class of creditors that also have the right to compel the resident to vacate the residence (through the completion of a foreclosure sale), perhaps Governor DeSantis did intend for EO 20-94 to also apply to a homeowner’s association and a condominium association.

Regardless of Governor DeSantis’ original intentions at the time of the issuance of EO 20-94, this reader hopes that, in the event the restrictions imposed by EO 20-94 are extended beyond the current deadline through the issuance of a subsequent executive order, the subsequent order will provide clarity as to this issue.  In addition, perhaps the extended order, assuming one is issued, will provide an exception for vacant properties as there would appear to be no reason to prevent foreclosures on properties that are currently vacant.

For the latest news on COVID-19’s effects on community associations, contact our association law team for more information.

July 1, 2020 Update:
Executive Order 20-121 (“EO 121”) was issued on May 14, 2020 by Governor DeSantis. It extended EO 20-94 through the end of the day on June 1, 2020.  Unfortunately, EO 20-121 did not clarify whether EO 20-94 was intended to also cover homeowner’s association and condominium association lien foreclosure actions.  It also did not provide an exception for vacant properties.  Instead, EO 20-121 merely read: “I hereby extend Executive Order 20-94 until 12:01 a.m. on June 2, 2020.”   

Executive Order 20-137 (“EO 137”) was issued on June 1, 2020 by Governor DeSantis.  It extended EO 20-94 through the end of the day on June 30, 2020.  Unfortunately, EO 20-137 did not clarify whether EO 20-94 was intended to also cover homeowner’s association and condominium association lien foreclosure actions.  It also did not provide an exception for vacant properties.  Instead, EO 20-137 merely read: “I hereby extend Executive Order 20-94 until 12:01 a.m. on July 1, 2020.” 

On June 30th, only hours away from the expiration of the existing Executive Order (“EO 137”) which provides a statewide moratorium against both residential mortgage foreclosure actions and residential eviction of tenants, Governor DeSantis signed Executive Order 20-159 that extended those moratoriums for another month. Once again, this new order didn’t clarify whether EO 20-94 was intended to cover homeowner’s and condominium association lien foreclosure actions, although it has been read by most Florida trial courts to also apply to residential lien foreclosure actions.