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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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    Quick Guide: Main Street Lending Program

    For the past few weeks we’ve been bombarded with information on the most popular aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but the Federal Reserve took additional steps to bolster the economy with the Main Street Lending Program (MSLP). Designed to further assist small and medium-sized businesses this program provides liquidity during the coronavirus crisis. The MSLP enables new financing of eligible term loans from eligible lenders to eligible businesses by making an extra $2.3 trillion in loans available. As with the Small Business Administration’s Paycheck Protection Program (PPP), businesses should reach out to their banks or lenders to apply for one of these loans. However, we need to mention that for now the minimum loan size is $1 million and the interest rate is expected to be higher than that of PPP loans.

    Businesses will need to attest that they require financing due to COVID-19 and have made efforts in the areas of retaining employees as well as maintaining payroll during the term of the loan. An important stipulation of the use of the loan is that the borrower may not use proceeds to repay or refinance pre-existing loans. Small businesses that participate in the PPP may also take advantage of the Main Street Program.

    The MSLP will enhance support for eligible borrowers that were in good financial standing before the crisis by offering four-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Interest rates on this unsecured debt will be based on the Secured Overnight Financing Rate (SOFR) plus 2.5% to 4%, depending on the credit risk. SOFR is a newer benchmark that is due to replace the London Inter-Bank Offered Rate (LIBOR) next year.

    Amortization of principal and interest is deferred for one year (the amortization schedule for an eligible loan is not otherwise specified in the term sheets released by the Federal Reserve). Eligible lenders (banks) may originate new MSLP loans or use them to increase the size of existing loans to businesses.

    Prepayment is permitted without penalty and there is a 1% loan origination fee based on the principal amount of the loan. However, unlike the PPP, these loans contain no provisions for forgiveness.

    The borrower must agree to not use the proceeds of the loan to repay other loan balances and concur that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.

    There are compensation restrictions in that until one year after the loan is repaid, no officer or employee of the business whose calendar year 2019 total compensation exceeded $425,000 receives from the business total compensation that exceeds during any consecutive 12-month period the total compensation received by that person in 2019. Additionally, severance pay or other termination benefits cannot exceed two times the maximum compensation received by that person in 2019.  Lastly, no officer or employee of the business whose total compensation exceeded $3 million in calendar year 2019 may receive during any consecutive 12-month period total compensation in excess of $3 million plus or 50% of the compensation over $3 million of total compensation received from the business in calendar year 2019.

    The good news is that banks are already seeking changes as the Federal Reserve finalizes the MSLP in order to expand eligibility. The feedback has been for new enhancements that make the program workable for lenders as this would get the funds into the real economy quickly. The program’s $1 million minimum loan size appears to be too large and will exclude many small businesses that need to borrow a smaller amount while a minimum of $100,000 seems more appropriate. Calls have been made to reduce the floor to $50,000. As some lenders have yet to adopt to SOFR, those lenders want to use LIBOR or other benchmarks.

    Further, other industry groups have made requests to include more flexibility on the duration of the loans allowed and the maximum size of the loan, as well as giving lenders more discretion as how to supervise capital distribution restrictions that are imposed on borrowers as a condition of the loan.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of the the current economic crisis 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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    What the CARES Act Means for RMD’s

    When it comes to required minimum retirement account distributions (RMDs), the government giveth, and now giveth again.

    Earlier in the year, due to congressional approval of the Secure Act created for older Americans, the RMDs from retirement accounts are underwent a bit of a makeover. The updated life expectancy tables, which were proposed by the IRS for 2021, adjusted how you calculate those RMDs and there are two main benefits to consider.

    After 2019 the mandated annual withdrawals from your retirement accounts will begin once you reach  72, as opposed to the former 70 and a half years of age. While that age delay is a small thing, it is still helpful to those wishing to maintain account balances and defer taxes.

    The second benefit of the updated longer life expectancy calculations is that they work to make the minimum amount you have to take a little smaller. While it is true that most account holders take more than required, the IRS estimates that just 20.5% of those age 70 and older are expected to take only the minimum in 2021.  Now the government has come along to bring further financial relief to those minimum minded retirees by waiving all required minimum distributions due in 2020.

    Normally, there is a consequence if you do not take any distributions, or if the distributions are not large enough, but the Coronavirus Aid, Relief and Economic Security (CARES) Act changes this for 2020. By not taking a RMD, you can reduce your 2020 tax bill.

    Anyone with an RMD due in 2020 from a company plan, such as a 401(k), 403(b), IRA, or other defined contribution plan, is eligible.  Unfortunately, if you already took an RMD for 2020, you may be out of luck because there are generally no give backs.

    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. 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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    Quick Guide: CARES Act Payroll Tax Deferral

    News of the Coronavirus Aid, Relief, and Economic Security (CARES) Act has made headlines every day since its enactment in late March. As of April 16, the Small Business Administration (SBA) announced that the initial amounts appropriated for the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) (including up to $10,000 emergency grants) for the COVID-19 virus situation have run out, but fear not for businesses concerned about cash flow can find solace in two other CARES Act provisions.

    One provision of the Act allows the employer portion of payroll tax deposits to be utilized if no PPP loan is forgiven. This provision seeks to alleviate the burden on employers struggling to make payroll by allowing the employer’s share of the 6.2% social security tax that would otherwise be due from the date of enactment through December 31, 2020, to be deferred and then paid in two 50% installments by December 31, 2021 and December 31, 2022. For those who are self-employed, you can immediately defer paying 50% of your self-employment tax that would be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022 (25%).

    This means an employer who incurs its 6.2% share of Social Security tax in 2020 may defer payment of that tax until 2021 and 2022.

    The second provision allows an employer to receive an immediate credit against those yet-to-be paid payroll taxes via the sum of the emergency medical leave credit, sick leave credit, and new employee retention credit. This will increase the cash available to businesses in the coming months. It appears these credits may also be refundable, meaning you can get cash back from the IRS for certain payroll taxes already paid.

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

    The novel coronavirus, COVID-19, has definitely shaken things up in the cooperative and condominium industry. With all non-essential businesses shutting down and the added sense that we have no idea how long this will continue, funds are running low and people are getting worried.

    While it is ultimately best to consult a trusted Certified Public Accountant to help you navigate your way forward, The Cash Flow Checklist 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.

    • Start with a monthly escrow for real estate taxes so you can pull that amount out each month.
    • Cease any reserve fund contributions.
    • Postpone capital improvement projects wherever possible.
    • Consider the option to draw down on existing line of credit facilities, but keep in mind that lenders may withdraw all or a portion of the available line in difficult times. Consider the effect on monthly costs of taking drawings.
    • Reach out to commercial tenants to best understand rent payments that they will be able to make.
    • Review unit owner listings and contact those who you feel might have difficulty keeping up with usual monthly payments. Call on your fellow Board members, the superintendent and neighbors to help identify others.
    • It is not clear if cooperatives and condominiums can qualify for SBA Economic Injury Disaster Loans (EIDLS) as well as Paycheck Protection Program (PPP) Loans, however, existing lenders generally need to approve additional financing. Just in case, gathering the required information and being ready to apply once final guidance is received would be prudent.
    • Condominiums without existing debt can consider obtaining new debt secured by working capital. Refinancing existing debt may make sense although consider upfront costs and early payment penalties and the anticipated lag of at least 90 days from initiation to closing.
    • Reach out the NYC Water Board to see if they have any programs available to defer payment without interest.
    • Inform vendors that payments will only be able to be made as funds are available.
    • Suspend reimbursement for abatements and Senior Citizens Rent Increase Exemption (SCRIEs).
    • Resist covering a deficit by increasing monthly charges or imposing an additional assessment, options that are likely increase the financial stress already placed on residents.
    • Avoid the courts at all cost. Neighbors who for years may have dutifully paid their monthly charges deserve better.

    Should cash become tight:

    Consider borrowing money from reserves to operations with appropriate documentation in the minutes of board meetings and include a clear plan to replenish those reserves.

    Contact the mortgage holder and request forbearance for at least 90 days.  

    Prioritize bill payment as follows:

    – Payroll

    – Fuel oil

    – Supplies/Repairs

    – Insurance

    – Office expenses

    Seek deferral acknowledgements for:

    – Mortgage (focus on interest only)

    – Gas/Electric

    – Real Estate Taxes

    – Water and Sewer

    Pay as best as possible:

    – Professional fees

    – Management Fee

    – Corporate Taxes

    Consider temporally using security deposits held against monthly charges for buyers who did not meet the board’s requirements at purchase.

    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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