Paycheck Protection Program: On Thursday, April 2, 2020, the U.S. Small Business Administration (the “SBA”) issued an interim final rule setting out implementation guidelines and requirement with respect to the Paycheck Protection Program, a new Section 7(a) loan program created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Under the CARES Act, the SBA received funding and authority to modify its existing loan programs and establish a new loan program to assist small businesses impacted by the COVID-19 pandemic.
The CARES Act permits the SBA to guarantee $349 billion of loans under a new, temporary program called the Paycheck Protection Program (“PPP”). Loans under the PPP are subject to loan forgiveness if certain conditions are met. A business is generally eligible for a PPP loan if it is based in the U.S. and has 500 or fewer employees, although higher employee ceilings apply to certain industries based on the SBA’s size standards. Certain nonprofits, veterans organizations, tribal businesses and sole proprietorships are also eligible. Each eligible recipient is entitled to one loan only in an amount equal to 250% of its average monthly payroll, subject to a $10 million cap. We recently discussed the parameters of the PPP in a webinar which can be viewed here. Banks are expected to open applications for PPP loans today, April 3, 2020, however, as of the time of this client alert we understand that certain banks are waiting for further clarifications on certain lending requirements in order to open applications.
What is new:
- The PPP will be administered on a first-come, first served basis.
- The SBA has issued a revised form application today, which is available here. This form is different from the application form issued earlier versions of the form, and potential borrowers that completed an earlier version of the form should complete the new form.
- The maturity date for the loans will be 2 years after origination (the CARES Act required that the maturity date be no longer than 10 years after origination).
- The interest rate payable on the loans will be 1% per year (the CARES Act required that interest be no greater than 4% per year).
- The SBA has provided the following step-by-step guide for purposes of calculating average monthly payroll and determining loan amounts:
- Step 1: aggregate payroll costs from the last 12 months for employees whose principal place of residence is the U.S.
- Step 2: subtract any compensation paid to an employee in excess of $100,000.
- Step 3: divide by 12.
- Step 4: multiply by 2.5.
- Step 5: if applicable, add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020.
- Independent contractors do not count as employees for purposes of PPP loan calculations.
- Non-payroll costs are limited to 25% of loan forgiveness. Therefore, if all uses of proceeds constitute forgivable costs, at least 75% of the proceeds must be used to pay payroll in order to make the entire loan eligible for loan forgiveness. The SBA will issue additional guidance on loan forgiveness.
- All Section 7(a) lenders are automatically approved to make PPP loans on a delegated basis.
- Lender origination requirements are set forth in the interim final rule, and lenders are held harmless to the extent they comply with such requirements. Lenders are not required to verify borrower information so long as the requisite information is submitted.
- Lenders can sell a PPP loan in the secondary market once the loan is fully disbursed. SBA guidance on advance purchases is forthcoming.
- E-signatures and e-consents are permitted in lieu of physical signatures on application documents.
What is open:
- Businesses that do not meet the employee headcount requirement for eligibility, but that otherwise can qualify for Section 7(a) loans based on receipts alone, appear to be ineligible. After issuance of the CARES Act, there was an open question as to whether businesses that generally qualify for SBA assistance based on receipts would qualify under the PPP. However, the interim final rules refer to qualification by headcount only, and the form application issued by the SBA does not contemplate eligibility based on receipts only.
- Significant flexibility under the CARES Act is provided to businesses in the accommodation and food service industries. In order to be eligible for a loan, the SBA only requires these businesses to have 500 or less employees in each physical location. In addition, affiliation restrictions are waived for these businesses. However, particularly in the hotel industry, the majority of employees that service these small businesses are provided by third-party management companies. The payroll of these employees is passed on to the hotel on a back-to-back basis. Clarity as to whether these payroll costs can be included in a hotel’s application under the PPP is necessary.
- Interim Final Rule
- SBA Size and Affiliation FAQs
- Revised SBA Application Form of the PPP as of April 3, 2020
- Bilzin Sumberg Webinar
Instructive Treasury Guidelines. Separately, the Treasury Department earlier this week issued two releases outlining guidelines and procedures for loans and payroll support to air carriers and certain other businesses under Title IV of the CARES Act. Although these guidelines and procedures apply only to a narrow category of businesses to which Title IV applies, the releases provide helpful information regarding what the Treasury will be looking for from other businesses when it releases guidelines and procedures applicable to "direct loans" for mid-sized businesses (500-10,000 employees) under Title IV.
Title IV of the CARES Act provides for up to $500 billion in loans, loan guarantees and investments through Federal Reserve programs and facilities to air carriers, related businesses, businesses critical to maintaining national security, other eligible businesses (defined below), and states and municipalities.
Other eligible businesses include any U.S. business "that has not otherwise received adequate economic relief in the form of loans or loan guarantees under this Act." The Act specifically directs the Treasury to implement a program to provide financing in the form of "direct loans" to eligible businesses, including nonprofit organizations, with between 500-10,000 employees.
Treasury is required to issue implementing regulations no later than Monday, April 6. However, on Monday, March 30, Treasury issued the releases described above for air carriers, contractors, and businesses critical to national security. Regulations for the direct loan program remain to be issued, but the issued releases contain some guidelines and procedures that may be helpful to businesses seeking direct loans when that program is rolled out.
For example, applicants for loans to air carriers, related service providers, ticket agents, and national security businesses will need to provide the following documentation:
- Debt. A description of the borrower’s existing secured and unsecured debt, bank and other credit lines with outstanding and maximum balances, and major classes of existing security holders and creditors.
- Debt Service. A description of the borrower’s scheduled debt service for the next three years.
- Employment Levels. The borrower’s employment levels, by head count and total compensation amount, as of March 24, 2020, and any proposed changes to the borrower’s employment levels, relative to March 24, 2020, during 2020.
- Financial Statements. The consolidated financial statements of the borrower and any corporate parents for the previous three years, including, if available, financial statements that have been audited by an independent certified public accountant, including any associated notes, and any interim financial statements and associated notes for the current fiscal year.
- Covered Losses. A description of the covered losses that the borrower has incurred or will incur as a result of coronavirus, by line items detailing the cause of the loss (such as reduced demand), unavailability of credit, unbudgeted medical expenses, or other causes.
- Lack of Credit Elsewhere. Evidence based on factors such as market conditions, the borrower’s circumstances, or relationships with existing and potential creditors that the borrower cannot reasonably obtain credit elsewhere.
- Security. A description of the type and general value of all security, including but not limited to assets, property, and revenue streams, available to be pledged by the borrower and its subsidiaries to secure the loan, on both a senior and a subordinated basis.
- Use of Proceeds. The purposes for which the borrower will use the loan proceeds.
- Financial Needs. Quantitative information on the borrower’s financial needs for the remainder of 2020, including expected revenues, operating costs, and credit, and how the loan will address those needs together with other sources of funding and financing.
- Operating Plan. A discussion of the borrower’s operating plan for the remainder of 2020 if the loan is approved, including how the proposed loan fits within the borrower’s business plan and an analysis showing that the loan is prudently incurred.
- Cost Restructuring. A description of any plans the borrower has to restructure its obligations, contracts, staffing, or organization to improve the borrower’s financial condition.
Although not all of these requirements may apply to direct loans or other loans, loan guarantees, and investments under Title IV, potential applicants may want to start gathering similar information in anticipation of guidelines for these other types of benefits.
In addition, note that under the guidelines and application procedures for payroll support to air carriers and contractors, Treasury advises that completed applications must be submitted by 5:00 p.m. EDT on April 3, 2020, the earliest applications can be filed under this program. Treasury advises that applications received after that date and time "will be considered, but may not receive approval as quickly." Consequently, applicants for other loans under Title IV should have their applications ready for filing on the first time and date available to minimize processing delays.
- Minimum Requirements for Loans
- Guidelines and Procedures for Payroll Support to Air Carriers and Contractors
This information is intended to inform our clients and other friends about legal developments, including recent decisions of various municipalities, legislative, and administrative bodies. Because of the rapidly changing landscape related to COVID-19, we intend to send out regular updates. The information we provide is not intended as legal advice and viewers/readers should not rely on information contained in these materials to make business or legal decisions. Before making any legal decisions, consult your lawyer. Please do not hesitate to contact us should you need assistance responding to the many issues which have arisen, and will continue to arise, out of this situation.