CARES Act Resource Center

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The information published in the CARES Act Resource Center discusses:

  • 7(a) Paycheck Protection Program Loans
  • 7(b) Economic Injury Disaster Loans and the $10,000 Emergency Grant
  • Employer Payroll Tax Delay
  • Employee Retention Payroll Tax Credit
  • The Telehealth Program
  • Main Street Lending Programs
  • And more!

If you have questions about your business, its eligibility to participate in any of the loan programs, issues concerning business operations and available financial programs, or related enforcement, please do not hesitate to contact the lawyers at Capes Sokol.

During these uncertain times, you can be certain of Capes Sokol’s commitment to serve you during the COVID-19 Crisis.

Insights Resources Team

Insights

Data In, Data Out: Concerns Around PPP Loan Data Accuracy

Posted: September 9, 2020

On Monday, September 1, members of the House of Representatives’ Select Subcommittee on the Coronavirus Crisis (the “Subcommittee”), tasked with overseeing the implementation and effectiveness of the Paycheck Protection Program (“PPP”), issued a memo reporting a lack of oversight, leading to “billions of dollars being…
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Loan forgiveness, covered period, payroll costs, forgiveness payroll, PPP Loan, Paycheck protection Program

Hot Off the Press: SBA Releases New FAQs on PPP Loan Forgiveness

Posted: August 7, 2020

On August 4, 2020, the Small Business Administration (“SBA”) released a new set of Frequently Asked Questions (“FAQs”) addressing forgiveness of Paycheck Protection Program (PPP) Loans.  These FAQs supplement the 49 FAQs previously published by the SBA and Treasury addressing the PPP generally. The 23…
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“Small Business” Loan Types

Historically, the Small Business Administration (the “SBA”) has offered 7(a) Business Loans and 7(b) Disaster Loans. After the passage of the CARES Act on Friday, March 27, 2020, these two loan programs became temporarily amended to provide easier barriers of entry.

While FAQs and an Interim Final Rule have been released, there is still much that awaits further clarification. Though on April 16, 2020, funding for the two loan programs had run up, additional funding is expected. As such, it is important to familiarize oneself with the various nuances of the two programs to determine eligibility. Thus far, this is what we know about the two loan programs:

ELIGIBILITY →AFFILIATION RULES →TERMS OF THE LOAN →LOAN AMOUNT →LOAN USES →APPLICATION PROCESS →

7(A) Paycheck Protection Program7(B) Economic Injury Disaster Loan
If each of the following applies to your business, your business (as a for-profit or as a 501(c)(3)) is eligible:
  1. no more than 500 employees (unless your business’ industry type on the size chart found here allows a greater maximum number of employees)* AND
  2. was in operation as of February 15, 2020 AND
  3. had employees it was paying salaries and payroll taxes to.
*This number could be effected by any of the business’ affiliates

**Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it meet both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million AND (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million		So long as your business has been in operation since January 31, 2020, if one of the following applies to your business, your business is eligible:
  1. no more than 500 employees* OR
  2. a “small business” as determined by the size chart found here* OR
  3. a “private nonprofit organization” (essentially a state-registered nonprofit) of any size
*This number could be effected by any of the business’ affiliates.

7(A) Paycheck Protection Program7(B) Economic Injury Disaster Loan
The complicated portion, unfortunately, may be in determining your total number of employees, as it may not just include your business’ employees.

Unless you are in the accommodation industry (e.g. hotels, motels, inns) or the food industry (e.g. fast food service, restaurants) or are a franchise, nonprofit, faith-based charitable organization, or veterans organization, in determining your business’ number of employees, you must factor in affiliates.

A business is deemed to have an “affiliate” when:
“one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.”
If you determine your business has affiliates, you must total:
  • the total number of employees your business has AND
  • your business’ affiliates have to ensure you do not exceed the maximum number of employees.
Note that in calculating the number of employees, the term “employee” includes “individuals employed on a full-time, part-time, or other basis.”		The complicated portion, unfortunately, may be in determining your total number of employees, as it may not just include your business’ employees. You must factor in affiliates.

A business is deemed to have an “affiliate” when:
“one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.”
If you determine your business has affiliates, you must total:
  • the total number of employees your business has AND
  • your business’ affiliates have to ensure you do not exceed the maximum number of employees.
Note that in calculating the number of employees, the term “employee” includes “individuals employed on a full-time, part-time, or other basis.”

7(A) Paycheck Protection Program7(B) Economic Injury Disaster Loan
  • up to $10 million
  • maturity date of 2 years (from the date on which the business applies for loan forgiveness)
  • 1% interest rate
  • 6 months (including principal, interest, and fees) of deferral
  • up to 8 weeks of payroll costs, rent, utilities, and mortgage interest payments is forgivable (but can be reduced if you lay off employees or decrease wages or salaries in excess of 25% for employees making less than $100,000 and don’t eliminate such reductions by June 30, 2020)
  • up to $2 million (per recent guidance, this amount will be a maximum of $15,000, not including the request for up to a $10,000 grant which recent guidance indicated would be based on a $1,000/employee allotment)
  • maturity date of up to 30 years
  • 3.75% interest rate for for profits
  • 2.75% interest rate for nonprofits
  • 1 year (including principal, interest, and fees) of deferral
  • able to be rolled into the 7(a) loan, just make sure there is no overlap in use of the proceeds ($10,000 forgivable unless rolled into the 7(a) then the $10,000 advance gets subtracted from the forgiveness amount)
  • if not rolled into the 7(a), not forgivable

7(A) Paycheck Protection Program7(B) Economic Injury Disaster Loan
“Payrolls costs” x 2.5 + outstanding amount of 7(b) loanBased on the business’ actual economic injury and financial needs. In essence, the loan is meant to provide working capital that is necessary to resume normal operations and for expenditures necessary to alleviate the economic injury (but not meant to exceed that which the business could have provided had the injury not occurred).

7(A) Paycheck Protection Program7(B) Economic Injury Disaster Loan
  • Yes: payroll costs, group health benefits, sick, medical, or family leave, insurance premiums, employees salaries, payment of interest on mortgage, rent, utilities, and interest on any other debt (incurred prior to February 15, 2020)
  • No: principal mortgage payments, principal on any other debt
  • Yes: fixed debts, payroll, accounts payable, and/or other obligations that cannot be paid as a result of the coronavirus disaster
  • No: refinancing debt, making payments on loans owed by another federal agency, paying tax penalty obligations, repairing physical damages, and/or paying dividends to stockholders

7(A) Paycheck Protection Program7(B) Economic Injury Disaster Loan
The application process will be through an SBA approved lender. The SBA has released the borrower application here: Paycheck Protection Program Borrower Application Form

No personal guarantee or collateral is required.		A business only needs to fill out the application through the SBA online portal here: COVID-19 Economic Injury Disaster Loan Application

Note, since this loan is administered though the SBA, while the SBA may elect to approve a business purely based on the business’ credit score (without requiring a tax return), it could also require a business to fill out further forms.

Personal guarantee may be required for loans in excess $200,000.

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Main Street Lending Programs

Mid-Sized Businesses, The CARES Act Care(s) About You!
On April 9, 2020, the Federal Reserve, published term sheets for a Main Street Lending Program for small and/or mid-size businesses. There are actually two separate loan programs under the Main Street Lending Program—the Main Street Lending Program and the Main Street Expanded Lending Program.

On April 30, 2020, after receiving and reviewing public input, the Federal Reserve made adjustments to the Main Street Lending Program and Main Street Expanded Lending Program and added a third loan option (though the Federal Reserve will only purchase 85% of this loan).

The proposed terms of the programs are similar (aside from the loan amount and the collateral required) and are outlined below:

ELIGIBILITY REQUIREMENTS →OTHER ELIGIBILITY REQUIREMENTS →TERMS OF THE LOAN →LOAN AMOUNT →CERTIFICATIONS →APPLICATION PROCESS →

New Lending ProgramPriority Lending Program Expanded Lending Program
A lender cannot extend credit to the same business under multiple Main Street Lending Programs. However, small businesses that applied for and/or received a 7(a) Paycheck Protection Program loan are also eligible, for any of the Main Street Lending Programs. So long as a business, established prior to March 13, 2020, has:
  1. no more than 15,000 employees with a majority of the employees being based in the United States (affiliate rules may apply to this program) OR
  2. annual revenues of $5 billion or less
AND the business was created/organized in the United States, was in good financial standing before the economic impact of COVID-19, and did not receive support pursuant to Subtitle A of Title of the CARES Act (Coronavirus Economic Stabilization Act of 2020), the business will be eligible to participate. Mirroring 13 CFR 120.110(b)-(j), the following businesses are ineligible:
  1. Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
  2. Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under §120.111);
  3. Life insurance companies;
  4. Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
  5. Pyramid sale distribution plans;
  6. Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
  7. Businesses engaged in any illegal activity;
  8. Private clubs and businesses which limit the number of memberships for reasons other than capacity; AND
  9. Government-owned entities (except for businesses owned or controlled by a Native American tribe).

New Lending ProgramPriority Lending Program Expanded Lending Program
Lenders may apply their own underwriting process and eligibility thresholds, subject to the minimum requirements set forth above.

New Lending ProgramPriority Lending Program Expanded Lending Program
  • 5 year maturity date
  • LIBOR + 3% interest rate
  • 2 year deferral of principal and interest)
  • After the 2 year deferral, the principal amount owed will be amortized at 15% for year 3, 15% for year 4, and a balloon payment of 70% for year 5
  • May be secured or unsecured
  • While loan is outstanding, borrower will make commercially reasonable efforts to maintain its payroll
  • No prepayment penalty
  • 5 year maturity date
  • LIBOR + 3% interest rate
  • 2 year deferral of principal and interest)
  • After the 2 year deferral, the principal amount owed will be amortized at 15% for year 3, 15% for year 4, and a balloon payment of 70% for year 5
  • May be secured or unsecured
  • While loan is outstanding, borrower will make commercially reasonable efforts to maintain its payroll
  • No prepayment penalty
  • 5 year maturity date
  • LIBOR + 3% interest rate
  • After the 2 year deferral, the principal amount owed will be amortized at 15% for year 3, 15% for year 4, and a balloon payment of 70% for year 5
  • May be secured or unsecured (though if the underlying loan is secured, this loan must be secured but is limited to the amount/assets that secured the original loan)
  • While loan is outstanding, borrower will make commercially reasonable efforts to maintain its payroll
  • No prepayment penalty

    • New Lending ProgramPriority Lending Program Expanded Lending Program
    From $250,000 up to the lesser of (i) $35 million or (ii) an amount that, when added to the business’ outstanding and committed, but undrawn debt, does not exceed four times the business’ 2019 EBITDA (earnings before interest, taxes, depreciation, and amortization)From $250,000 up to the lesser of (i) $50 million or (ii) an amount that, when added to the business’ outstanding and committed, but undrawn debt, does not exceed six times the business’ 2019 EBITDAFrom $10 million up to the lesser of (i) $300 million or (ii) 35% of the borrower’s existing outstanding and committed, but undrawn bank debt or (iii) an amount that, when added to the business’ outstanding and committed, but undrawn debt, does not exceed six times the business’ 2019 EBITDA

    New Lending ProgramPriority Lending Program Expanded Lending Program
    CARES Act Section 4003(c)(3)(D) requires borrowers to make the following certifications:
    • The “uncertainty of the economy as of the date of the loan application necessitates the need for the loan in order to support ongoing operations”;
    • Loan proceeds will be used to retain at least 90% of the borrower’s workforce (at full compensation and benefits) until September 30, 2020;
    • The borrower intends to restore not less than 90% of its workface that existed as of February 1, 2020 (and to restore all compensation and benefits to its workers no later than 4 months after the COVID-19 health emergency is declared over);
    • The borrower is domiciled and organized in the United States;
    • The borrower has significant operations and a majority of its employees in the United States and will not outsource jobs offshore for the term of the loan plus 2 years after repayment;
    • The borrower is not a debtor in a bankruptcy proceeding;
    • Any publicly traded borrower will not pay dividends to common stockholders (or repurchase any of its or its parents’ stock, unless required under a contractual obligation that exists prior to March 27, 2020);
    • The borrower will not abrogate existing collective bargaining agreements for the term of the loan plus 2 years after repayment; AND
    • The borrower will remain neutral in any union organizing effort for the term of the loan.
    In addition to the above, the Federal Reserve requires the following certifications:
    • The business will not pay the principal or interest on any other debt, with the exception of (i) mandatory principal and interest payments and (ii) new and/or existing obligations that are required in the normal course of the business and on standard terms (for Priority Loans only, the borrower may refinance existing debt at the time the Priority Loan is originated);
    • The business will not cancel or reduce any existing lines of credit with any lender (unless repaying a line of credit in the business’ normal course of business);
    • The business must have a reasonable basis to believe that, as of the date of origination of the loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during such time;
    • For the term of the loan and for a period of one year thereafter:
      • Neither the business nor any parent company (or, in specified industries, an “affiliate”) will make purchases of publicly traded securities, except to the extent required under a contractual obligation that is in effect as of March 27, 2020;
      • The business will not pay any dividends or make any distributions with respect to the common stock of the business;
      • Officers or employees with more than $425,000 in total compensation (including bonuses, equity awards, and other financial benefits) in 2019 cannot receive an increase in their annual total compensation nor severance benefits in an amount greater than twice what they were entitled to in 2019; AND
      • Officers or employees with more than $3,000,000 in total compensation (including bonuses, equity awards, and other financial benefits) in $2019 will be limited to the sum of $3,000,000 plus 50% of the amount in excess of $3,000,000 received in 2019.

    New Lending ProgramPriority Lending Program Expanded Lending Program
    Businesses may apply through September 30, 2020 with a start date to be announced soon.

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    Questions?
    If you have questions about your business, its eligibility to participate in any of the loan programs, or another issue concerning business operations and available financial programs, please do not hesitate to contact the lawyers at Capes Sokol.

    Team

    Attorneys

    Laura E. Krebs Al-Shathir
    Shareholder
    R. Thomas Avery
    Shareholder
    Douglas S. Dove
    Shareholder
    John S. Meyer, Jr.
    Senior Counsel
    Brian J. Sabin
    Shareholder
    Michelle F. Schwerin
    Shareholder

    Disclaimer

    The content on this page does not constitute legal advice, may be geographically or time sensitive, and is for informational purposes only. Any opinions expressed on this page are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney. You should not act upon the information presented herein without seeking the advice of legal counsel. The choice of a lawyer is an important decision and should not be based solely upon advertisements. Past results afford no guarantee of future results. Every case is different and must be judged on its own merits.