On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is an approximately $2 trillion stimulus and economic relief package. One principal feature is the Paycheck Protection Program (“PPP”), to be administered by the Small Business Administration (“SBA”).

The PPP expands eligibility for SBA loans under Section 7(a) of the Small Business Act. The most significant feature of these PPP loans (“PPP Loans”) is that if the borrower complies with certain requirements (described below), some or all of the PPP Loan will be forgiven. The PPP Loans will be made by participating commercial lenders on or before June 30, 2020. Applications will be accepted commencing on April 3, 2020.

Who is Eligible?

Any business (including any nonprofit, self-employed individual, independent contractor, and sole proprietorship), as well as veterans and tribal organizations, is eligible for a PPP Loan if it was in operation on February 15, 2020 and employs 500 or fewer employees. Note: there are circumstances where a company with more than 500 employees may be eligible, subject to SBA guidelines.

How are Employees Counted? 

A borrower applying for a PPP Loan (“Borrower”), should use the following method to determine its employee count:

A. The Borrower must count its own employees, including full-time, part-time or other basis; however, independent contractors are excluded.

B. The Borrower must also count employees of its “Affiliates” (as defined by the SBA rules). This calculation must be made by applying the SBA’s existing rules on affiliation. The SBA affiliation rules are broad and generally apply when one controls or has the power to control the other. For example, if a private equity or other shareholder substantially controls Company A and also controls or substantially controls Company B, then when Company A calculates the number of its employees, it must also count the employees of Company B. This could limit the ability of companies controlled by private equity or venture capital firms to be eligible for a PPP Loan.

C. The CARES Act specifically waives the affiliation rules for a PPP Loan to the following:

1. Any business with 500 or fewer employees that operates under North American Industry Classification System (“NAICS”) code 72 (Accommodation and Food service sector);

2. Any business operating under NAICS code 72 that has 500 or fewer employees per physical location;

3. Any business operated as a franchise for which the SBA has assigned a franchise identifier code; and

4. Any business that receives financial assistance from a company licensed to operate as a small business investment company under the Small Business Investment Act of 1958.

How Much Can Be Borrowed Under a PPP Loan?

A. An eligible Borrower may borrow up to the lesser of:

1. Two and one-half times (2.5x) average monthly “Payroll Costs” (as described below) during the one-year period prior to the origination of the PPP Loan, though the initial draft of the SBA Application* expects that most applicants will use 2019 (new businesses and seasonal businesses have other applicable time periods) [*NOTE: the SBA indicated this morning, April 2, 2020, that it might be modifying its application]; or

Ten Million and 00/100 Dollars ($10,000,000.00).

B. Subject to certain exclusions (see below), “Payroll Costs” include:

1. Salary, wages, commission, or similar compensation;

2. Payment of cash tips or equivalent;

3. Payment for vacation, parental, family, medical, or sick leave;

4. Allowance for dismissal or separation;

5. Payment for group health care benefits, including insurance premiums;

6. Payment of any retirement benefit; and

7. Payment of State or Local tax accessed on the compensation of employees.

C. The CARES Act excludes the following from “Payroll Costs”:

1. Compensation to an individual employee in excess of $100,000.00, prorated for the covered period;

2. Compensation of employees whose principal place of residence is outside the U.S., and qualified sick or family leave for which credits are allowed under the new Families First Coronavirus Response Act (which went into effect April 1, 2020).

What are the Loan Terms?

PPP Loans will have the following terms:

A. No personal guarantees or collateral required;

B. No loan fees;

C. Payments of principal and interest are deferred for at least six months and up to a year; and

D. Any remaining balance on the loan after forgiveness (see below) will be subject to a maximum interest rate of 4 percent per year and maturity of 10 years.

How and When Must the Loan Proceeds be Used?

A. PPP Loan proceeds must be used during the Covered Period (as defined below) for the following:

1. payroll;

2. healthcare benefits;

3. mortgage interest;

4. rent;

5. utilities; and

6. interest on any other debt obligations that was incurred before February 15, 2020.

B. The CARES Act defines the “Covered Period” as the period from February 15, 2020, to June 30, 2020.

How Much of the PPP Loan May be Forgiven? 

A. A Borrower may apply to its PPP lender for forgiveness of some or all of the PPP Loan. Subject to certain limitations and reductions, the maximum which may be forgiven will be equal to the amounts the Borrower can document it paid in the eight (8) weeks following the PPP Loan origination for the following:

1. payroll;

2. healthcare benefits;

3. mortgage interest;

4. rent; and

5. utilities.

Note that proceeds used to pay interest on any other debt obligations will not be forgiven. In addition, the U.S. government has indicated that no more than 25 percent of the forgiven amount may be for nonpayroll costs.

B. The forgiven amount will be reduced by both of the following (subject to item (C) below):

1. The percentage drop in borrower’s average number of full-time equivalent employees per month during the Covered Period, as compared to the borrower’s average number of full-time equivalent employees per month during either of the following periods (whichever will result in a lower forgiveness reduction):

a. From February 15, 2019, through June 30, 2019; or

b. From January 1, 2020, through February 29, 2020.

For example, if Company A had 100 full-time equivalent employees during the period from February 15, 2019, through June 30, 2019, but only has 75 full-time equivalent employees during the Covered Period, then the expected forgiveness amount will be reduced by 25 percent; and

2. The extent to which the total salary or wages of any employee during the Covered Period was reduced in excess of 25 percent of the salary or wages paid to such employee in the most recent full quarter prior to the Covered Period in which such employee was paid. [This only applies to employees who did not receive compensation in 2019 at an annualized rate greater than $100,000.]

For example, assume Employee A had received $10,000 in salary during the full quarter October 1, 2019 to December 31, 2019, and their salary was reduced to $6,000 during the Covered Period (a 40 percent reduction). Since the maximum salary reduction allowed without impacting forgiveness is 25 percent, then any reduction in salary to such employee below $7,500 will reduce the forgiven amount on a dollar for dollar basis. In this example, the amount of forgiveness will be reduced by $1,500 (i.e. $7,500 minus $6,000).

C. If the Company had layoffs of full-time employees or salary reductions during the period from February 15, 2020 through April 26, 2020, and the Company re-hires such full-time employees or undoes such salary reductions prior to June 30, 2020, then such layoffs and reductions will not be recognized as reductions when calculating the forgiveness amount.