OPA Board on reasons, process for PPP loans

(May 13, 2020) Ocean Pines Board members, in a closed session Tuesday evening, unanimously agreed to keep the $1.143 million loan granted through the federal Paycheck Protection Program (PPP) last month. 

Prior to the closed session each Board member, during a special meeting, weighed in on the subject.  

First, they debated whether to adjourn to the closed session. Association President Doug Parks originally moved to do so, citing "Matters pertaining to employees and personnel as permitted by the MD Homeowner’s Association Act."   

"There are some speculative numbers that we're looking at to try to help us make a decision, and there will absolutely be some discussion on what would happen if these numbers are negative" that could lead to discussions on personnel, Parks said, adding Maryland law prohibits doing so. 

Association Vice President Steve Tuttle said he was not in favor of going into closed session. 

"The primary discussion is about the PPP loan – it's not about staffing," he said. "I feel like we owe it to our membership to allow them to hear ... the whole conversation around the PPP loan." 

Director Tom Janasek agreed. 

"I don't think it's directly affecting our personnel," he said. "We're discussing whether we should or whether we shouldn't keep it." 

Director Frank Daly said he thought the public would benefit from hearing more about the fiscal impact of any decision related to the loan. 

"There's a misconception that we have this huge amount of money that we're sitting on, that we can just transfer like a magic wand," he said.  

Parks said Ocean Pines' governing documents prevent the Association from using reserve funds for operations, such as payroll. 

Resolution F-03 established reserves for capital asset replacements, road maintenance, bulkheads and waterways, and new capital.  

"It's not an operational reserve – it's not a rainy-day fund," Parks said. "We're required to carry a reserve fund to protect the assets that we have here in Ocean Pines. 

"The concept of us having millions in the bank sitting around doing nothing but gathering interest and waiting for a rainy day is inaccurate at best,” he added. 

 General Manager John Viola added that replacement reserves were already below recommended levels.  

"We need the money in that account to deal with the year-in and year-out items that have to be replaced," Director Larry Perrone said. 

"If you think we're going to tap into this replacement account, I think you need to shift your thought process," Perrone continued. "It's not going to be appropriate and ... it may not be possible." 

 Parks said another factor in seeking the loan was that the Board previously extended the assessment deadline from May 1 to Aug. 1, to help those struggling to pay. He said doing so meant Ocean Pines would not have that money for operations.  

According to Perrone, Ocean Pines has so far collected about $5.4 million in assessments, out of the expected total of $9.4 million. 

Daly also spoke about the decision to delay assessment collections. 

"All of us got calls when the economy got ripped out from under people," Daly said. "We went from one of the best economies in our lifetime ... to a Depression-level economy in 90 days. That is a dramatic shift that has never happened before." 

Daly said there were calls from homeowners "saying, literally, they had the choice between paying an assessment or putting food on the table." 

"We said ... we can provide some relief out of compassion, because it was just an untenable situation," Daly said. "But, come Aug. 1, we don't know how much money of what we should have collected will be available. 

 "The PPP loan came along and that's possibly a solution,” Daly continued, “but the operating problem is there no matter what and it's going to be with us for the foreseeable future.” 

Another factor, according to Perrone, is the lack of amenity revenue caused by COVID-19 closures. Viola previously said about 60% of revenues come from assessments, while amenities and other funding generate the remaining 40%.  

"We may not be able to run our operation to take advantage of the projected revenue that usually comes with amenities running in prime season, based on the pandemic and the restrictions associated with it,” Parks said. 

Viola said there was also the issue of a negative operational balance remaining from the more than $1.6 million in losses several years ago. He said about $650,000 of that remains. 

Perrone added one projection of additional losses this year related to COVID-19 could add another $500,000 shortfall. 

 On the issue of the legality of the loan, Parks said Ocean Pines' attorneys, the Small Business Administration that oversees the Paycheck Protection Program, and the Bank of Ocean City that locally granted the loan all confirmed there were no issues with the application.   

Parks admitted there initially was a concern over whether 501(c)(4) nonprofits, including Ocean Pines, were eligible for the federal aid.  

"In discussions with both the Bank of Ocean City and our attorneys, it was noted that other HOAs had also been granted and approved this very same kind of loan," he said. 

Parks said a legal review of the loan included a tax attorney with Lerch, Early & Brewer. He said their advice was that, when the loan was approved, "there was no stipulation that said 501(c)(4) were not allowed or did not qualify for the PPP program.” 

He said the Bank of Ocean City discussed the matter with the SBA, who added, "the terms and conditions that were in place when you were approved are the ones that take precedent." 

 "We're in a very good position,” Parks said. “We haven't committed fraud. We haven't committed any kind of egregious act.” 

Director Camilla Rogers added, "On the day that we applied and we were given the loan, it was appropriate on that day and time, and the law supported us." 

"I am obviously not the attorney for this Association. However, as a person who is an attorney, I want to assure the group that I did my due diligence on this," Rogers said. "I felt a need to really research this ... and I can assure you, from the bottom of my heart, that we did the right thing." 

Rogers said the process has been extremely fluid and compared it to "making law in the wilderness." 

"The rules have changed in the middle, [but] I want to assure people in our community ... that we did not go into this half-heartedly," she said. "There was a lot of research done." 

Rogers also said she'd heard criticism that suggested Ocean Pines return the money "so it can be distributed ... to people with small businesses who really need it." 

"There was a sentiment out there that we took the money and we didn't need it, and now there's other businesses out there that are suffering," Parks said. "I don't know of any businesses that are going to go under or were denied funding because Ocean Pines was approved for funding ... there's no evidence that that's the case. 

"I think that's a little bit unfair and, quite frankly, it doesn't really follow suit with how this whole process works," Parks added.   

Daly tried to sum up the conversation. 

"We have applied for a Paycheck Protection Plan loan. The attorneys, the bank, and the Small Business Administration have all said what we did was in full compliance the day that we applied," he said.  

"If we apply the money the way that it's supposed to be applied ... to keep people on staff for a period of eight weeks, then that loan is converted to a grant and is 'forgiven' and we don't have to pay it back," Daly continued. 

"Worst case scenario, the government comes back to us and they say, 'The day that you applied you did everything perfectly right, so we're fine with that, but this is not going to be a grant, it's going to be a loan … and you have to pay it back at 1% interest," he said. "It's a loan that we would have had to probably take out anyway to cover our operating expenses. 

"End of discussion, right?" Daly said.  

Tuttle said the entire process was like "building an airplane while it's flying."  

"This thing is so fluid," he said. "Based on all the legal processes that have been done ... I think that we should keep the money ... and stay on the horse and see where it ends up, because we don't know where it's going to end up and nobody can predict that." 

Following nearly an hour of discussion during the open part of the meeting, Board members voted 7-0 to go to closed session to continue the talks. In the end, the directors unanimously agreed to keep the loan money. 

The Board, on Wednesday, released the following statement about the closed session: 

“Last night, the Board met in closed session to discuss possible options regarding the approved loan in conjunction with the Payroll Protection Program. With the ever-changing situation in the federal government regarding an organization’s qualifications and financial status, our due diligence is to continue to stay abreast of the current developments and make a determination on the approved loan.  

“We reviewed various scenarios regarding the effect of the keeping the loan on both our short and long-term financial position. We also discussed what effect returning the funds would have on those same short and long-term financial positions. One of the goals was to ensure we considered all relevant factors in determining whether we keep the approved loan or return the funds. Other considerations included possible reductions and/or elimination of services, staff layoffs, hiring freezes and modified program offerings at various amenities. 

“After much discussion and careful thought, the Board unanimously decided to keep the approved loan and use it for payroll and utilities as it was intended. Multiple discussions with our attorneys, the Small Business Administration and representatives from the Bank of Ocean City were an important influence in arriving at the decision. The Board and the GM will continue to monitor the situation and the GM’s finance team will manage the expenses in compliance with the requirements of the loan.”