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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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    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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    Net Operating Losses: The Carryback is Back!

    The 2017 Tax Cuts and Jobs Act (TCJA) updated the net operating loss rules to eliminate carryback opportunities, while allowing carryforwards to be used to offset 80% of taxable income. On the plus side, the updated rules allowed losses to be deferred indefinitely removing the 20 year expiration rule and even better than that, is the good news that the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has modified those rules even further and now the 80% limitation has been lifted, meaning once again losses can now be carried back for up to five years.

    The widening of the use of net operating losses and allowing carryback refunds as part of implementing the CARES Act presents an opportunity for small businesses to recoup taxes paid, as well as significantly reduce their tax burdens going forward. The IRS also announced temporary procedures that allow a fax transmission of the required forms to speed up the processing times for these refund claims. The new law requires a taxpayer with a net operating loss arising in a 2018, 2019, or 2020 taxable year to carry that loss back to each of the five preceding years unless the taxpayer elects to waive or reduce the carryback.

    Starting on April 17, 2020 and until further notice the IRS will accept eligible refund claims forms to a specific fax number – 844-249-6236 for Form 1139 (corporations) and 844-249-6237 for Form 1045 (individuals, estates and trusts). The IRS is encouraging taxpayers to wait until April 17, rather than mailing in the forms since mail processing is being impacted by the pandemic.

    Previously, these forms could be filed only via hard copy delivered through the USPS or by a private delivery service. The temporary procedure to accept these forms via fax allows the federal government to make the relief in the CARES Act available to taxpayers before IRS processing centers are able to reopen. The other procedures to process claims will remain the same – the only difference is to allow an additional method to file eligible refund claims.

    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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    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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