On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted. The CARES Act, a nearly $2 trillion stimulus package, was enacted to help address the economic impact of the COVID-19 pandemic. The CARES Act includes two programs which provide loans for small businesses – the Paycheck Protection Program (“PPP”) and the Emergency Economic Injury Disaster Loan (“EIDL”) program. Both of these programs are discussed in further detail below.
The CARES Act significantly expands the ability of businesses to obtain loans under Section 7(a) of the Small Business Act, through the newly added $349 billion PPP. The loans will provide businesses with cash-flow assistance and contain many attractive features, such as loan forgiveness of up to 8 weeks of payroll (conditioned on employee retention and retention of salary levels) and a six months’ deferral of payments on the loan. Eligible businesses are able to apply for a loan under this program through June 30, 2020 (or until funds available for this program are exhausted), if they were harmed by the COVID-19 pandemic.
Eligibility for the Program
To be eligible for the PPP, businesses must have been in operation on February 15, 2020. Eligible participants for the program include, (i) small business concerns, as well as any business concern, nonprofit organization and veterans’ organizations, each of which have fewer than 500 employees, (ii) individuals who operate as a sole proprietorship or as an independent contractor and eligible self-employed individuals, and (iii) businesses in the accommodation and food services sector with fewer than 500 employees per location. The loans under this program are available through June 30, 2020, or until funds available for this program are exhausted.
It is important to note, it appears that the Small Business Association (the “SBA”) might now be interpreting its rules (including rules that were adopted prior to the COVID-19 outbreak) so as to deem owners of apartment buildings, including cooperatives and condos, as ineligible to apply to the PPP. Specifically, the SBA’s interim final rule for the PPP refers to 13 CFR 120.110 and the SBA’s “standard operating procedures” (SOP) 50-10 Subpart B Chapter 2, which both state that “passive businesses” are not eligible. The specific passive businesses which are specifically excluded under the SOP, are as follows: (i) passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds; (ii) businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose, (iii) apartment buildings, and (iv) residential facilities that do not provide healthcare and/or medical services. It is our understanding that the Real Estate Board of New York City (REBNY) intends to ask SBA immediately to clarify these eligibility rules. Until any such clarification and/or exemption is issued, it is unclear whether owners of apartment buildings, cooperatives and condos will be eligible for the PPP.
Given the ”first come, first serve” nature of the PPP and likelihood that the funds will be quickly depleted, building owners, cooperatives and condos may need to make a business decision of whether or not to apply for the PPP before clarification from the SBA is obtained. Potential concerns for building owners, cooperatives and condos in applying for the PPP prior to clarification from the SBA are that false certifications of eligibility on a borrowers PPP application can result in civil and criminal penalties.
The Loan Amount and Terms
Under the PPP, the borrower is eligible for a loan in an amount not to exceed the lesser of (1) $10,000,000, or (2) (a) 2.5 multiplied by average total monthly payments for payroll costs during the 1-year period before the date on which the loan is made, (b) plus the amount of an EIDL (if applicable) made between January 31, 2020 and April 3, 2020, (c) less the amount of any Emergency Economic Injury Grant (which is discussed in detail below). In the event the borrower was not in business during the 1-year period before the date on which the loan is made, then loan will be determined by averaging the monthly payroll costs between January 1, 2020 and February 29, 2020.
Payroll costs include (i) compensation (salary, wage, commission, or similar compensation, and payment of cash tip or equivalent); (ii) payment for vacation, parental, family, medical, or sick leave; (iii) allowance for dismissal or separation; (iv) payment required for the provisions of group health care benefits, including insurance premiums; (v) payment of any retirement benefit; and (vi) payment of State or local tax assessed on the compensation of employees. Importantly, the following items cannot be included as payroll costs: (i) employee or owner compensation in excess of an annual salary of $100,000, (ii) taxes imposed or withheld under Chapters 21, 22, and 24 of the IRS code, (iii) compensation of employees whose principal place of residence is outside of the United States, and (iv) qualified sick and family leave for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
The annual interest rate for loans under this program is 1.0% and the loans will be subject to a payment deferral for six months. The maturity date for PPP loans is 2 years. Loans under this program do not require collateral or personal guarantees and the typical requirement that a business show that it is unable to obtain credit elsewhere does not apply to the PPP.
A borrower may use loan proceeds exclusively for (i) payroll costs (as described above); (ii) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (iii) rent (including rent under a lease agreement); (iv) utilities; and (v) interest on any other debt obligations that were incurred before the covered period.
Loan Forgiveness
Covered loans under this program are eligible for loan forgiveness up to the full principal amount of the loan and any accrued interest. Borrowers will be eligible for loan forgiveness equal to the aggregate amount of payroll payments (as described above), interest payments on mortgage obligations, rent payments and utility payments, made during the eight-week period following loan origination. The amount of the loan that is eligible for forgiveness is reduced proportionally in the event the borrower makes reductions in either (i) full-time employment levels, or (ii) compensation levels of more than 25% (excluding reductions in compensation for employees making over $100,000) from the 1-year period before the date on which the loan is made. Any such reductions can be mitigated if, prior to June 30, 2020, the borrower re-hires the equivalent number of employees or raises compensation to the prior levels. Additionally, it is important to note the SBA has indicated in its interim final rule for the PPP that not more than twenty-five percent (25%) of the loan forgiveness amount may be attributable to non -payroll costs.
For purposes of loan forgiveness, the borrower will have to document the proceeds used for payroll costs and other authorized expenses, in order to determine and substantiate the amount of the loan forgiveness. Additionally, if the PPP loan proceeds are used for unauthorized purposes the SBA will direct the business to repay those amounts. Knowingly using funds for authorized purposes will subject the borrower to additional liability, such as charges for fraud. Therefore, it is prudent for the borrower to keep the PPP loan proceeds in a separate segregated bank account so that the distribution of funds to payroll costs and authorized expenses can be properly accounted for, tracked and documented.
Application for the Program
Applications to the PPP must be submitted through approved SBA 7(a) lenders. SBA has a free referral service tool called Lender Match to help find a lender near you. The Department of Treasury will also be in charge of authorizing new lenders, including non-bank lenders, to help meet the needs of small business owners.
The CARES Act also significantly expands the ability of businesses to obtain EIDLs. Specifically, the CARES Act includes a $10 billion package to expand the EIDL program to additional eligible businesses negatively affected by the COVID-19 pandemic. The program also provides an emergency grant of up to $10,000 to small businesses and private non-profits harmed by the COVID-19 pandemic, within three (3) days of applying for the EIDL. The emergency grant does not need to be repaid under any circumstances, but the amount of any advance received under the grant program will be subtracted from the amount forgiven in the PPP (as discussed in detail above). The EIDL program may be used to keep employees on payroll, pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. The EIDL program may be an excellent option for businesses that require liquidity or a long term loan to help the business with the economic impacts associated with the COVID-19 outbreak. The loans under this program are available through December 31, 2020.
Eligibility for the Program
To be eligible for the EIDL program, the borrower must have been in operation since January 31, 2020, when the public health crisis was announced. Eligible participants for the program include (i) businesses with not more than 500 employees, (ii) small business concerns that meet the applicable size standard for the industry as provided by the SBA, if this number is greater than 500, (iii) any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor, (iv) a cooperative with not more than 500 employees, (v) an employee stock ownership plan with not more than 500 employees, (vi) a tribal small business concern, with not more than 500 employees, (vii) private nonprofit organizations, and (viii) small agricultural cooperatives.
The Loan and Grant Amount and Terms
Under the EIDL program, the borrower is eligible for a loan of up to $2 million (based on the amount of the economic injury as determined by the SBA) to pay expenses that could have been met had the COVID-19 pandemic not occurred. Upon submission of an application, the business is eligible for an Emergency Economic Injury Grant of up to $10,000, which is required to be distributed to the applicant within three (3) days. The Emergency Economic Injury Grant does not need to be repaid under any circumstances, and may be used to keep employees on payroll, pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. However, if the business also ultimately receives a PPP loan or refinances an EIDL into a PPP loan, any advance amount received under the Emergency Economic Injury Grant Program would be subtracted from the amount forgiven in the PPP loan. Additionally, businesses cannot use their EIDL for the same purpose as their PPP loan.
The annual interest rate for loans under this program is 3.75% for businesses and 2.75% for nonprofit organizations. The maturity date for EIDL loans is 30 years. The loans are subject to a principal and interest deferment at the Administrator’s discretion. The CARES Act also waives the requirement for any personal guarantees on advances and loans of not more than $200,000, during the covered period of January 31, 2020 and ending December 31, 2020. However, the CARES Act does not expressly mention collateral requirements and therefore, existing collateral requirements for EIDLs, which provide that collateral is generally required for loans of more than $25,000, appear to still apply. Additionally, under the CARES Act, the typical requirement that a business show that it is unable to obtain credit elsewhere does not apply an EIDL.
A borrower may use EIDL proceeds to cover certain costs. Traditionally, EIDLs are only expressly permitted for working capital necessary to carry the business until resumption of normal operations and expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the injury not occurred. The CARES Act, however, has expanded the allowable costs that the proceeds of EIDLs can be applied to. The additional allowable costs include: (i) providing paid sick leave to employees unable to work due to the direct effect of the COVID-19 pandemic, (ii) maintaining payroll to retain employees, (iii) meeting increased costs to obtain materials unavailable from the borrower’s original source because of interrupted supply chains, (iv) making rent or mortgage payments, and (v) repaying obligations that cannot be met due to revenue losses.
Application for the Program
Applications to the EIDL program must be submitted through the SBA. To apply for an EIDL online, businesses can use the following link: https://disasterloan.sba.gov/ela/.
If you have questions related to this article, the application documents required, or require any assistance with respect to the above described programs, please contact the authors listed below:
Brian Bendy
bbendy@bbgllp.com
212-867-4466 (Ext. 378)
Craig L. Price
cprice@bbgllp.com
212-867-4466 (Ext. 319)
Kara I. Rakowski
krakowski@bbgllp.com
212-867-4466 (Ext. 330)
Disclaimer
This summary does not include or address every provision of the CARES Act, the PPP, and the EIDL and the Emergency Economic Injury Grant programs, which should be read in their entirety. Furthermore, pursuant to the CARES Act, the SBA has promulgated regulations for the implementation of the PPP which are effective immediately, but subject to revisions, therefore, there is still uncertainty relating to some of the details of the implementation of the program. The information contained in this publication should not be construed as legal advice. The invitation to contact is not a solicitation for legal work under the laws of any jurisdiction in which BBG lawyers are not authorized to practice.