The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed by the president on March 27, 2020. It provides a massive $2 trillion in much-needed emergency relief to businesses of all sizes impacted by the COVID-19 pandemic. Congress already has been urged to increase the funding of some of its programs. Stemming from the economic uncertainty and injury caused by COVID-19, existing laws and new programs created under the CARES Act provide several economic opportunities to help small businesses. For larger businesses with up to 10,000 employees or businesses that are otherwise ineligible for a PPP loan, see Sections D and E below.

Please note, Ulmer’s client alert dated March 31, 2020, was issued based solely on the CARES Act statutory provisions and not the rolling interim final rule guidance (Interim Rules) and frequently asked questions (FAQ) releases (starting the evening of March 31, 2020) later issued by the Small Business Administration (SBA), U.S. Treasury Department (Treasury) and Federal Reserve Bank (Fed). That prior client alert is supplemented by these materials. The first part of this client alert discusses the CARES Act loan program known as the Paycheck Protection Program (PPP) as now clarified by the Interim Rules and FAQs.

SBA, Treasury, and Fed Guidance

Starting on March 31, 2020, the Treasury, SBA, and Fed have each issued press releases, sporadic Interim Rules, and non-binding FAQs, sometimes with multiple revisions, regarding the brand-new PPP and other new CARES Act programs. The PPP description below is based upon the Interim Rules and FAQ (Guidance) last updated on April 13, 2020. The explanations below are subject to change based upon further Guidance releases and the anxiously awaited Standard Operating Procedure (SOP) expected from SBA.

Recommendation

If you determine that a PPP loan is appropriate for your business, apply as soon as you can. If you determine that your business should obtain both a PPP loan and an Economic Injury Disaster Loan (EIDL), make sure the PPP loan and the EIDL are for different purposes (see further discussion below). However, if an EIDL was already made to your business between January 31, 2020 and April 3, 2020 and was used for payroll costs, you can still apply for a PPP loan but you must refinance the existing EIDL with the PPP loan.

A. PAYCHECK PROTECTION PROGRAM (PPP)

Treasury, SBA, and Fed have been rolling out sporadic Guidance, including on weekends, to provide more details of the PPP. Borrowers and banks desperately need this Guidance and the SOP to understand how the forgivable PPP loans work, what documents are needed, how the loan proceeds should be used for qualifying forgivable purposes, the loan forgiveness formulas, and how to apply for loan forgiveness. More Guidance and the SOP are expected to be issued in the coming weeks.

PPP Loan Terms Summary

Based on the Guidance available as of April 13, 2020, a summary of the forgivable PPP loan terms includes:

• Maximum loan amount
  • Up to $10 million
• Loan amount formula
  • 2.5x average monthly payroll for either: (i) Calendar year 2019, or (ii) the previous 12 months. For seasonal employers, and new businesses that were operating on February 15, 2020 and had payroll costs, there are different measurement periods.
  • There is a max cap of $100,000 cash compensation (on an annualized basis) to each employee, used in the average monthly payroll calculation. The $100,000 cap does not include employer contributions to retirement plans, payment of employee benefits consisting of group health care coverage, including insurance premiums, or state and local taxes assessed on the compensation of such employees.
• Interest rate
  • 1.0%
• Loan term (for any non-forgivable portion)
  • Two years
• Loan forgiveness eligibility
  • Must use at least 75% of the loan money for payroll costs.
    • Payroll costs include continuation of group health care benefits and insurance premiums, employer retirement plan contributions, and employee vacation time. It also includes parental, family, medical, and sick leave, unless a credit is allowed under the Families First Coronavirus Response Act.
  • The loan proceeds must be used in the eight weeks after the date loan proceeds are first advanced.
  • Permitted (forgivable) non-payroll costs, for which no more than 25% of loan proceeds may be used:
    • Rent payments on existing leases;
    • Interest payments on existing mortgage debt;
    • Utility payments; and
    • Refinance a SBA EIDL disaster loan made between January 31, 2020 and April 3, 2020.
  • Repayment
    • The unforgiveable portion of the loan must be repaid.
  • Loan deferral
    • There is an automatic six-month deferral before loan payments begin (on any non-forgiven amounts), but interest accrues in the meantime.

The PPP loans may also be used to pay interest payments on any other debt obligations incurred before February 15, 2020, but those payments may not be forgivable. Further Guidance from SBA or Treasury is needed.

PPP Loan Forgiveness

During the eight weeks (measured from the date PPP loan proceeds are first advanced), the PPP loan must be used for:

• Payroll costs, at least 75% of the loan proceeds; and
• Permissible non-payroll costs, not more than 25% of the loan proceeds used for:
  • Rent, under leases in effect before February 15, 2020;
  • Interest portion of mortgage payments on mortgages incurred before February 15, 2020; and
  • Utilities, for which service began before February 15, 2020.

How do you apply for a PPP loan? An eligible business applies through its primary bank, if its bank is a SBA lender and is accepting PPP loan applications. Use the most recent Application Form, SBA Form 2483 (4/20). Many banks are only accepting applications from their own customers at this time. If your bank is not a SBA lender, click here to find a bank in your area that is participating in the PPP loan program. As of April 13, 2020, several non-bank financial technology companies also have been approved to participate as PPP lenders, including Square Capital, PayPal Holdings, Inc., and Intuit Inc., and may soon begin accepting PPP applications.

Who is eligible to apply for PPP loans?

• Small businesses located in the United States, with 500 employees or fewer; OR
• Small businesses located in the United States, with fewer employees than (if applicable) the SBA NAICS Code limits for their industry, even if that number is higher than 500 employees; OR
• Businesses whose NAICS Code begins with 72 (Hospitality Accommodation, Food Service and Drinking Places), certain franchises, and businesses receiving financial assistance from a SBIC have special rules where each physical location must not exceed 500 employees; OR
• Small businesses that meet 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 application date is not more than $5 million.

In determining the employee count, SBA’s Affiliation Principles do apply, meaning employees of each entity affiliated with your business are added to your employee count in determining if your business meets this initial employee count threshold test. Click here for Treasury’s summary of the Affiliation Principles.

Are nonprofit organizations and churches eligible to apply for PPP loans? Yes. Nonprofit 501(c)(3) organizations that meet the same eligibility tests as for-profit businesses and are located in the United States can apply. That includes most faith-based entities that qualify as a 501(c)(3) entity. According to the Guidance, the faith-based entity only needs to meet the requirements of 501(c)(3), but does not have to apply to the IRS for such tax exempt status before applying for a PPP loan.

Who is not eligible to apply for PPP loans? Businesses (other than nonprofits and faith-based entities) that are not eligible for any other SBA loans, including household employers, a person or business that previously defaulted on a government direct or guaranteed loan from SBA within the past seven years, financial businesses, passive business owners (including developers and landlords), businesses in a foreign country, gambling businesses, private clubs, businesses with a 20% owner who is incarcerated, on probation, on parole, or who has been convicted of a felony within the last five years. Other ineligible businesses are listed in 13 CFR §120.110. There are limited exceptions for certain industries.

Do layoffs or payroll reductions reduce the loan forgiveness? Yes. If a business lays off employees, or reduces pay by 25% or more of employees with 2019 compensation under $100,000, there will be a reduction in the loan forgiveness. The reduction formula has not been announced.

If our business rehires employees or restores reduced payroll, what effect does that have? You have until June 30, 2020 to restore your full-time employment and salary levels (if reduced by 25% or more) for any changes made between February 15, 2020 and April 26, 2020. The restoration formula and details of how this will work have not been announced.

Does an employer’s payroll costs for PPP include independent contractors and sole proprietors? No. Independent contractors and sole proprietors are eligible to apply for their own PPP loans. Subject to further Guidance, Ulmer currently presumes this restriction includes workers who are issued 1099s for their services rendered.

Does an employer’s payroll costs include federal taxes on compensation paid? No. Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld or the employer’s share of federal taxes. But, payroll costs do include state and local taxes assessed on compensation.

Are commissions, bonuses, tips, and other compensation included in payroll costs? Payroll costs are calculated on a gross basis, including all salary, wages, commissions, tips, or other forms of compensation, capped at $100,000 (on an annualized basis) for each employee.

How does a sole proprietor or independent contractor calculate average monthly payroll costs? It is based upon that person’s wages, commissions, income, or net earnings from self-employment, capped at $100,000 (on an annualized basis) for each person. Subject to further Guidance, sole proprietors or independent contractors probably can refer to the net income (prorated for one month) reported on their Schedule C.

Can a business have more than one PPP loan? No. However, a business may have both a PPP loan and an EIDL disaster loan (described below), but only if both loans are for different purposes.

What is the deadline to apply for a PPP loan? June 30, 2020. However, borrowers are urged to apply as soon as they can because the program may be oversubscribed and the allocated program money may run out. Congress is being urged to increase the amount of funding for the PPP, but that cannot be counted on until Congress formally passes new legislation that authorizes additional funding for the program.

Other PPP related frequently asked questions. Click here for a list of other frequently asked questions that Ulmer has addressed since the Guidance first began to be released.

Can a Business Have Both a PPP Loan and EIDL Disaster Loan?
An eligible small business may apply for both a PPP loan and an EIDL disaster loan, but only if both loans are for different purposes. For example, a business could have a PPP loan used for payroll, rent, and utilities, and an EIDL disaster loan used for economic damages caused by disruption of supply chains during the COVID-19 pandemic.

B. $10,000 EMERGENCY EIDL GRANT ADVANCE

Any eligible small business that applies for an Economic Injury Disaster Loan (EIDL) (further discussed below) may also apply for an Emergency EIDL Grant Advance (Grant Advance) of up to $10,000 against the EIDL. That Grant Advance is supposed to be made by SBA to the applicant within three days of the application. The business must have been in existence on January 30, 2020 to be eligible. Eligible businesses are those with 500 or fewer employees, sole proprietorships and independent contractors, private nonprofit entities, cooperatives or ESOPs with 500 or fewer employees, or tribal small business concerns with 500 or fewer employees. The business does not have to prove it is unable to obtain credit elsewhere.

The Grant Advance may be used to maintain payroll to retain employees during business disruption, provide paid sick leave for employees with COVID-19, pay rent or mortgage payments, offset lost revenue, or meet increased costs caused by supply line disruptions caused by the pandemic, and repay obligations that cannot be met due to revenue loss.

If the business is not awarded an EIDL, the Grant Advance does not have to be repaid. If the business is awarded an EIDL, then the Grant Advance will be deducted from the total amount of any PPP loan forgiveness. Click here for the website where eligible businesses can apply through the SBA.

C. EIDL DISASTER LOANS

When the national emergency due to COVID-19 was declared, SBA’s Economic Injury Disaster Loan (EIDL) program became available. Based on subsequent actions, within days every eligible small business throughout the nation and U.S. territories could apply for an EIDL. These loans are applied for directly through SBA, are more difficult to obtain, and are not forgivable. The normal SBA rules and restrictions apply to these loans.

EIDL Terms Summary

• Maximum loan amount
  • Up to $2 million
• Economic injury due to disaster
  • The small business must show SBA economic injury suffered as a result of the declared disaster, in this case due to COVID-19.
• Actual loan amount
  • There is no set formula. The loan amount will be based upon the economic injury suffered and other factors taken into account by SBA.
• Interest rate
  • 3.75% for small businesses and 2.75% for non-profits
• Repayment
  • The loan must be repaid during the loan term.
• Payment deferral
  • Loan repayment may be deferred for up to 12 months, but interest continues to accrue in the meantime.
• Loan term
  • Up to 30 years, depending on the ability of the business to repay.
• Fees or prepayment penalties
  • There are no upfront fees or early prepayment penalties.

How do you apply for an EIDL?

Click here to view the website where eligible small businesses can apply directly through the SBA. Click here to view the recommended action steps for applying for an EIDL.

Who is eligible to apply for an EIDL?

• For-profit businesses;
• Small agricultural cooperatives;
• Small aquaculture businesses; and
• Most private, nonprofit organizations (including nursing homes, food kitchens, museums, education facilities, senior citizen centers, daycare centers, shelters, rescue organizations, and others).

What other criteria must be satisfied to be eligible for EIDLs?

The business must:

• Be physically located in the declared disaster area or have a material economic presence in the disaster area;
• Have suffered a demonstrable “substantial economic injury” due to COVID-19, not just due to a downturn in the economy or other reasons;
• Be smaller than the limits under SBA’s NAICS industry classifications (either an employee count, gross revenues, or both depending on the industry) (Click here to view the table of size standards by NAICS Code);
• Have a credit history acceptable to SBA;
• Not have other available credit; and
• Be able to repay the loan.

Also, loans for more than $25,000 require collateral, based on collateral that is available. It would be a second lien behind any existing lender’s security interest on the collateral.

Are nonprofit organizations and churches eligible to apply for EIDLs? Nonprofit 501(c)(3) organizations that meet the NAICS Code test can apply. Based on recent Treasury Guidance issued on the PPP, Treasury indicated it may revise the eligibility standards to permit faith-based entities that have a 501(c)(3) designation from the IRS to also apply, but that revision has not yet been issued.

Who is not eligible to apply for EIDLs? Businesses (other than nonprofits and faith-based entities) that are not eligible for any other SBA loans, including household employers, a person or business that previously defaulted on a government direct or guaranteed loan from SBA within the past seven years, financial businesses, passive business owners (including developers and landlords), businesses in a foreign country, gambling businesses, private clubs, businesses with a 20% owner who is incarcerated, on probation, on parole, or who has been convicted of a felony with the last five years. Other ineligible businesses are listed in 13 CFR §120.110. There are limited exceptions for certain industries.

Can a business borrow more than one EIDL? Not for the same declared disaster. But, different disasters can qualify for an additional EIDL. For example, if a business borrowed an EIDL due to economic injury suffered in the recently declared Tennessee tornado disaster, they could also borrow a separate EIDL due to economic injury suffered from the COVID-19 declared disaster.

What is the deadline to apply for an EIDL? The deadline to apply is nine months after the disaster declaration, or December 13, 2020. Because the COVID-19 pandemic is so recent and we are unsure how long the many stay-at-home and social distancing orders may last, many businesses may not yet be able to demonstrate or estimate the extent of “substantial economic injury” due to COVID-19. It is possible that this EIDL COVID-19 disaster program could be oversubscribed and run out of funding, and any additional funding would have to be approved by Congress by additional legislation.

D. MAIN STREET NEW LOAN FACILITY

The Main Street New Loan Facility (MSNLF) program is for businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. A non-binding summary of this program was announced by Treasury and the Fed on April 9, 2020, under authority granted by the CARES Act. The actual terms may vary, and any changes will be announced on the Fed’s website. Only the following minimal outline was announced.

MSNLF Loan Terms Summary

• Unsecured term loan
• This loan is not forgivable and must be repaid
• Eligible loan amount
  • Minimum loan size of $1 million
  • Maximum loan size equal to the lesser of:
    • $25 million; or
    • An amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the eligible borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).
  • Interest rate
    • Secured overnight financing rate (SOFR) + 250 to 400 basis points
  • Origination fee
    • 100 basis points and possible reimbursement of the lender’s additional 100 basis point facility
  • Loan term
    • Four years
  • Loan deferral
    • There will be some form of deferral for up to one year before loan payments begin.
  • Prepayment penalty
    • There is no prepayment penalty.

How do you apply for a MSNLF loan? This is yet to be announced.

Who is eligible to apply for MSNLF loans? Any business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States. Eligible borrowers that participate in the facility may not also participate in the separate MSELF program (discussed below) or the Primary Market Corporate Credit Facility, also just announced by Treasury and Fed.

What restrictions apply? There are various certifications and covenants that the borrower must make, including certain restrictions on compensation, stock repurchase, and capital distributions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act.

When will we know the additional criteria and requirements? Treasury is required under the CARES Act to issue further guidance no later than 30 days after the passage of the CARES Act, which is April 26, 2020.

E. MAIN STREET EXPANDED LOAN FACILITY

The Main Street Expanded Loan Facility (MSELF) program is for businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. A non-binding summary of this program was just announced by Treasury and the Fed on April 9, 2020, under authority granted by the CARES Act. The actual terms may vary, and any changes will be announced on the Fed’s website. Only the following minimal outline was announced.

MSELF Loan Terms Summary

• Term loan, apparently secured by business collateral
• This term loan is not forgivable and must be repaid.
• Eligible loan amount:
  • Minimum loan size of $1 million
  • Maximum loan size equal to the lesser of:
    • $150 million;
    • 30% of the eligible borrower’s existing outstanding and committed but undrawn bank debt; or
    • An amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the eligible borrower’s 2019 EBITDA.
  • Interest rate
    • SOFR + 250 to 400 basis points
  • Origination fee
    • 100 basis points
  • Loan term
    • Four years
  • Loan deferral
    • There will be some form of deferral for up to one year before loan payments begin.
  • Prepayment penalty
    • There is no prepayment penalty.

How do you apply for a MSELF loan? This is yet to be announced.

Who is eligible to apply for MSELF loans? Any business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States. Eligible borrowers that participate in the facility may not also participate in the separate MSNLF or the Primary Market Corporate Credit Facility, also just announced by Treasury and Fed.

What restrictions apply? There are various certifications and covenants that the borrower must make, including certain restrictions on compensation, stock repurchase, and capital distributions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act.

When will we know the additional criteria and requirements? Treasury is required under the CARES Act to issue further guidance no later than 30 days after the passage of the CARES Act, which is April 26, 2020.

Additional contributors for this material include Matthew I. Pollack, Steven P. Larson, Ethan Lee Rosenfeld, and Maxwell Berg.