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    Planning Next Year’s Budget with COVID-19

    Many unit owners would consider the annual financial statement, which is audited by an external accountant, to reign supreme but to many the annual operating budget seems to be the most important financial document. This is because the operating budget determines the amount of monthly charges to unit owners for the next year and the need for any assessments to supplement revenue. In the COVID-19 era there are several significant risks to your annual budget:

    1. Will unit owners be able to pay on time and in full each month?
    2. Will the commercial or parking space no longer be able to pay rent or worse yet become vacant?
    3. Where will the funds for the inevitable added costs of dealing with COVID issues come from?

    At Czarnowski & Beer we have been advising our clients that this year is time to start looking at the operating budget a little earlier. We suggest that you start by getting together with your financial analyst to commence the usual Fall budget process much earlier this year, this summer if possible. This will allow you to investigate what obstacles your property is encountering due to COVID-19 and you can then move to determine which of those past costs will impact the property in the new year. After these evaluations are complete you can transition into a thorough review of where the property is so far this year – this evaluation of the present situation also allows you to establish a benchmark for year-end results. By planning for the rest of the year you cement your future. You will learn now, as opposed to in December, whether you need an increase and also have adequate time to plan for it. While no one wants to pay more, as a board member with fiduciary responsibilities you really need to understand the property’s COVID age finances now.

    Research is key here. Do you really know for sure what your property’s costs of the initial shut down were? We suggest that you make it your business to find out. If there is the expected second wave planning for at the least those amounts a second time in 2020 is prudent. Let’s face it, we don’t know if a second wave is coming, or if the costs will be more or less than this Spring, but there is no better time than now to evaluate what  increased costs are caused by the crisis. Do you really want to sit still and be reactive to the news that there is not enough money coming in? Short of drawing on loan facilities, the only place the funds will come from is cash reserves so do your due diligence.

    One aspect of added costs may be the property’s payroll. We suggest you compare the costs that occurred during the shutdown with a period before the crisis. Certain added costs for coverage can be hidden in payments to security or concierge services as well reimbursement for the managing agent. Small amounts may be hidden as payments to individuals along with repairs or administration. Looking into overtime is a great way to find where money might not have needed to go. When looking at these costs it is best to have dealt them dealt with by year end to avoid financial statement deficits as best you can.

    If your property has commercial space, you will need to appropriately evaluate what is now vacant as well as the ability of your remaining tenants to pay. Allowing reopened businesses to not pay rent, even if only a diminished amount, is something that should not occur. We suggest continuing to monitor any rent arrears on these units and dealing with them as soon as there is a shortfall. Remember, every dollar lost will either need to be borrowed or paid by the unit owners. Knowledge is power in accomplishing an accurate operating budget going forward.

    Certain, hopefully limited in number, unit owners who cannot pay because of employment issues also need to be considered. While we all feel for those suffering in these times, the board took on the fiduciary responsibility to make sure the bills get paid. While a lender is much more likely to step in for a cooperative unit should arrears occur, the risks are pronounced for condominiums. You need to be prepared to only collect token amounts from lenders and then only some monthly common charges. Careful negotiation through this situation is vital and the best way to accomplish that is using future budgets and constant monitoring by the board.

    Take the time to talk to your property manager and/or building’s Superintendent about what is going on. Realistically understanding your financial situation and moving to resolve the issues impacting your property from COVID-19 is essential to your financial success. Let’s make sure that we move swiftly to determine our position and structure a plan to assure we understand where we are going.  Only by getting started on this exercise now can you hope to use the budget to plan for the latter half of 2020 and have comfort knowing that you understand 2021 as it approaches.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of COVID-19 that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.

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    Why You Should Take a Closer Look at Your Financials During COVID-19

    Prospective purchasers and lenders to cooperatives and condominiums utilize both the annual budget and financial statements as the basis for their perception of your property’s financial health.

    In the era of COVID-19 the seasonal publication of those documents creates a situation where the ability to rely on them is quite different now. You see, these documents will now need to chronicle how things have changed, which is why you should take a closer look at your financials during COVID-19.

    With the stay at home order and the reboot of the usual time frame to publish an annual financial statement many properties have just now, or will soon, published their 2019 financial statements. This means that the shortest interval for annually updated documents will be nine months if we return to the usual timing of publication. We suggest that boards prepare certain information about their property’s COVID-19 effects to be at the ready for those who will inquire. However, the annual operating budget is a document that can be more easily updated to demonstrate the effects of COVID-19 to those needing financial information.

    Effects on Your Operating Budget

    On the financial statement side of the COVID effect on finances is the amount of property reserves. In the past, reserve funds were generally viewed from a distance with a range of ideas on the topics from accepting what is there to structured plans for future capital costs that are planned to be needed. While there have always been questions as to what the reserve fund balance is, now during the period between financial statements these will be more common and will have urgency added. The concerns include how much was required to be utilized to get through the crisis to pay bills; were the added costs of COVID-19 dealt with in the budget; how the shutdown impacted commercial tenants’ ability to pay rent; and what was the mix of the population of unit owners who suffered severe enough personal financial issues that they can’t pay their monthly charges.

    Any updated operating budget information will demonstrate plans to solve the latter two questions, but only potentially painful financial actions by the board can offset the funds used for the crisis and the added COVID costs. Your board needs to consider the aspects of the reserve fund that are not only important in the near term, but also for the future.  Only by having complete knowledge of what has occurred can you expect to keep your reserve funds appropriately replenished and be ready to present a viable financial recuperation plan from this event. The need to take a closer look at the finances of your property during the COVID-19 pandemic and work with your auditor on how the finances will look when the next financial statements are published is paramount.

    Extra Working Capital Versus Restricted Cash

    Cash on a cooperative or condominium financial statement has always been king, but now this is more important than ever. While cash always had a positive association of being available for emergencies there now needs to be an enhanced level of amounts, not just for that but also for the usual reserve fund for future capital projects that everyone looks for.  The better option is to have two funds, one for major repairs and replacements and a “working capital” excess fund for emergencies. The amounts sought will tend need to be roughly twice the amounts in the past, we are now suggesting $4,000 per unit and a bare minimum amount of $200,000. If your accounts have been depleted planning now to attempt to recover lost ground can be vital to creating the best possible post COVID financial statement.

    Using Restricted Cash to Fund Operations

    We mentioned having cash for emergencies earlier and another aspect of this is determining how much was been needed during the Spring and potentially how much will be needed in the second wave of shutdowns. This leads us to ask how much the deficit (maybe deficits if there are multiple waves) was, how much cash was utilized, and might it have been cash restricted for capital projects. You will need to know if the cash was designated in order to avoid income tax consequences to unit owners, and if so that use needs to be accounted for as a ’loan’ from reserves and a plan needs to be adopted to return those funds to the restricted fund. Appropriate planning for the inevitable questions and tracing the funds that might have previously been designated for capital projects is of utmost importance.

    How to Make Your Financial Statement Presentation Picture Perfect!

    Working together with property management and the auditor can help you create the best possible financial documents. We urge you to get started with the 2021 operating budget process NOW. Many of the operating budget models utilized by property managers include a current year projection as well as the future operating budget. Having that information available can be quite helpful to quell concerns in the off-season of financial documents your property produces.

    By starting this summer as opposed to the usual timing in late Fall you can have the financial information ready for those who need it. You also can communicate any future substantial increases to unit owners well in advance or if working capital is needed, implement a COVID increase or assessment in a proactive as opposed to reactive manner.

    Obviously no one wants to pay more, and many simply are not able to, but in this situation, knowledge is power, and people need to know. Only by fully understanding how funds were needed can you ever hope to best window dress the reserves that your next financial statement will present. Covering both financial aspects before their usual timing allows you to enhance the financial situation of your property.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of COVID-10 that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.

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    We’re Here to Help

    The sudden appearance of and subsequent upheaval caused by the novel coronavirus, COVID-19 is certainly unprecedented. While we have all as a result entered into quite unfamiliar territory, at Czarnowski & Beer we have been working around the clock to create resources that help our clients navigate these uncharted waters.

    With all non-essential businesses shutting down and the added sense that we have no idea how long this will continue, we are doing what we can to help reduce the sense of fear and overwhelm that is plaguing many persons in the cooperative and condominium industry by creating the following guides and resources:

    CARES Act Summary

    To help our clients better understand the new programs that are available to them, we have created a comprehensive guide outlining the provisions laid out in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The document provides an overview on the three most popular options in the Act that can provide a significant boost to your struggling cash flow. Click here to download.

    How to Prepare for Disruptions to Your Property’s Cash Flow

    The scenarios playing out in our present-day reality are so daunting they can create an extremely challenging situation for even the most well-prepared coop and condo boards, but fear not, we have identified a few action steps that can help you identify ways to manage your property’s cash flow and handle bulging budget deficits. Read the full article here.

    Everything You Need to Know About the Paycheck Protection Program

    There has been a lot of publicity concerning the Paycheck Protection Program (PPP) and in this post we dive deep into what it is, how you can apply and raise important questions that will help you determine if applying would be the best decision for you at this time. Read it here.

    The Cash Flow Checklist: Actions Your Board Can Take to Protect Against Shortages

    While it is ultimately best to consult a trusted Certified Public Accountant to help you navigate your way forward, The Cash Flow Checklist quickly outlines ways you can prepare for disruptions to your property’s cash flow and significantly help you manage your property’s financial during these uncertain times. Click here to access the entire list.

    Why Coops and Condos Should Apply for an Economic Injury Disaster Loan

    Since the enactment of the CARES Act the spotlight has been shown on PPP loans and provisions made by that program, but what many people don’t know is that the Economic Injury Disaster Loan (EIDL) may at present provide even better opportunities for coops and condos. Read the reasons why here.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of the CARES Act and the current economic crisis that affect our clients. The information in the resources listed above should provide some assistance and give you confidence that you’ll be able to weather this storm.

    However, as this is all developing quickly we are here to offer support in any way we can. Download our proposal document here for more guidance. You can also email us at info@czarbeer.com or call (212) 397-2970 for more information.

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    Why Coops and Condos Should Apply for an Economic Injury Disaster Loan

    By now, you probably have read about the aspect of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress at the end of last month which gives until June 30, 2020 to file an application under the Paycheck Protection Program (PPP). Although the PPP is intended to help with the impact of the COVID-19 pandemic on employers of fewer than 500 persons, much of the commentary regarding the loan program indicates that only with legislative relief will it be afforded to cooperatives and condominiums.

    While we often look to legal counsel to direct our clients, the intent of the Act and the vagueness of the regulations within it seem to leave room to consider filing so long as the bank you have lending relationship or bank account will accept the application or use a third party service that works directly with another Small Business Administration (SBA) lender.

    Regardless of your Board’s decision if your property is experiencing injury, most likely from commercial tenants either indicating that they can’t pay their rent, staffing vacancies which need to be filled by quite expensive security services, or numerous unit owners not being able to pay their monthly charges; then you may want to consider another aspect of the Act, a SBA Economic Injury Disaster Loan (EIDL).  We do have cooperative and condominium clients with SBA disaster loans, so it seems that the requirements appear to be different for EIDLs.

    Until the Act, situations like the one we are currently experiencing did not qualify for disaster loans. However, everything about the current events should be considered disastrous and thus now, disaster loans are available for coops and condos.  The EIDL is quite different from the PPP, in that the amount of the loan is subject to the amount of your losses and there is presently no provision for forgiveness. However, at 3.75%, for properties in need of cash, they provide an option without the longer approval process of standard commercial loans.  You will be assigned a revolving lender by the SBA so there is no need to verify if a bank you have a relationship with are accepting applications.  Presently, that is one of the important barriers that properties are dealing with presently as they decide whether to process PPP applications.

    High demand for the EIDL has led to important changes limiting the size of the payouts for small-business owners. The Massachusetts District Office of U.S. Small Business Administration announced that, nationwide, the SBA has decided to implement a $1,000 cap per employee on the up to $10,000 maximum advance. So, a business with three employees, for example, would be eligible to receive only $3,000 up front, as opposed to the originally stated $10,000.

    Other aspects that are beneficial are that the loan term is 30 years and it can be repaid early at any time or in any partial amount.  The downside is the application process needs to be with a lender that doesn’t know you and even though the intention of Congress was ease in documenting need and qualification.  There has not been enough feedback on this program to conclude whether those aspects are in place.

    The initial application is online, and even though the loan is non-recourse, the application does require personal information of at least an individual.  Taking the first step of filing the application is quite easy, although there has been a lag in excess of the intention turnaround of several days.  When appropriate, Cooperatives and Condominiums, and their managing agents should consider moving forward with preparing these applications, and not necessarily wait too long and possible see the program run out of allocated resources.

    Overwhelming interest in the program has slowed the process which makes it difficult to estimate when applicants will be able to expect their advance. Additionally, as of April 16th the SBA indicated it is currently unable to accept new applications for both the EIDL and PPP programs based on available appropriations funding. Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.

    The Czarnowski & Beer team is dedicated to providing timely, accurate information on all aspects of the CARES Act and the current economic crisis that affect our clients. For more information on how you can prepare for cash flow disruptions see our latest blog post here. If you’re interested in reading our full summary of the provisions outlined for coops and condos in the Act, download our guide here.

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    Preparing for Disruptions to Your Property’s Cash Flow

    The cooperative and condominium industry is entering unfamiliar territory as a result of the effects caused by the novel coronavirus, COVID-19. With all non-essential businesses shutting down and the added sense that we have no idea how long this will continue, tensions are high and people are getting worried.

    Adding to the uncertainty, many unit owners were already living from paycheck to paycheck and are now finding themselves temporarily furloughed or laid off. It is expected that unemployment benefits will only cover basic living costs, so monthly carrying charges are way down the list. The simple fact is that whether the resident experiences a temporary or permanent work disruption, the impact on their ability to pay monthly charges will fall on the board of the property to work through. In times like these we should treat our financially challenged neighbors the way we would want to be treated.

    Let’s face it, in addition to managing unit owners who are behind on their maintenance charges, we also need to plan for commercial tenants not being able to pay their rent anytime soon. Lately we are mostly receiving queries from properties with commercial tenants, as a business needs to be operating in order to pay its rent for retail space, in addition to properties in moderate income neighborhoods where unit owners are already seeking relief. The Czarnowski & Beer team wants to support our clients in any way we can which is why we created this list detailing options for board members to manage cash flow and handle bulging budget deficits.

    The scenarios playing out in our present-day reality are so daunting they create an extremely challenging situation for cooperative and condominium boards who are required to operate on a balanced budget. Any significant interruption of any source of income will force a budget into a deficit, but fear not, we have identified a few action steps available to you:

    Reach out to residents and commercial tenants to gain a better understanding of their specific needs. Reaching out to these valued members of your community about their situation fosters a sense of good will, allows you to have better knowledge of the magnitude of the board’s situation, and affords you the opportunity to plan. Accumulate information on the anticipated income disruption and, where possible, gain data on its likely duration. Continued communication allows for budgets to be adjusted sooner rather than later.

    Draw on the available balances of lines of credit line. Make sure to update cash flow projections for the added cost of interest and required amortization, where necessary. Do your best to document a plan to pay back the line over time. We recommend this step as during past financial crises, lenders have often capped lines of credit at existing draw levels or terminated unused lines. Better to draw funds now and not need them than to need the funds later and line not be available.

    Refinance (or for condominiums obtain a loan). With current historically low interest rates, paying an early prepayment penalty might make sense. Consider a new credit line or a second mortgage.  Depending upon the magnitude of any prepayment penalty, consider a simultaneous credit line borrowing. If a building has a mortgage with a relatively high interest rate, even just borrowing the same principal amount can result in significant savings in debt service. Some condominiums might consider placing a mortgage on the resident superintendent’s apartment. Keep in mind these actions have an up to a 90-day period of lost time up to closing.

    Loan money from your property’s reserves to put towards operations. Maintain appropriate documentation of these occurrences in your board meetings minutes and include a clear plan to replenish the reserves when possible.

    Postpone capital improvement projects wherever possible.

    Resist covering a deficit by either increasing monthly charges or imposing an additional assessment. These options will likely increase the financial stress already placed on residents, thus making a bad situation worse

    Defer payments wherever possible by entering /forbearance agreements. Debtors are aware that it is best to establish and have both parties agree to revised payment arrangements as, when someone signs an agreement, they are far more likely to honor the terms of a deal. Only where there is extreme financial hardship should you contact existing lenders and try to arrange for some forbearance in payment obligations. However, do not unilaterally stop making mortgage or escrow payments as some lenders might quickly place the mortgage into foreclosure mode. The bank that loaned you the money may quickly package and sell the loan to institutional investors that might not be as accommodating as one would hope.

    Converse with your vendors and contractors. You and your managing agent have influence over these relationships and arrangements will need to be accomplished.

    Resist your commercial tenant’s request to apply some or all of their security deposit against current rent.  If the tenant does not survive you have lost money that could cover the building while trying to find a replacement tenant. Additionally, where you have a guaranty of any type applying security gratuitously reduces the liability of the guarantor.

    Avoid the courts at all cost. Neighbors who for years may have dutifully paid their monthly charges deserve better. Let us all see ourselves as in this together and act with compassion.

    While it is recommended that you consult an accountant to help you navigate your way forward, the points outlined here can show you how to prepare for disruptions to your property’s cash flow and significantly help you manage your property’s financial during these uncertain times.

    The Czarnowski & Beer team is dedicated to providing timely, accurate information on all aspects of the CARES Act and the current economic crisis that affect our clients. If you’re interested in reading our full summary of the provisions outlined for coops and condos in the Act, download our guide here.

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