Tribal Entities and the Main Street Lending Program

Schwabe, Williamson & Wyatt PC

On August 4, 2020, the Federal Reserve presented on the use of the Main Street Lending Program by Tribal Entities (as defined below). While the presentation was in large part a summary of the already well-known components of the Main Street Lending Program, the Federal Reserve did describe and clarify some important new components of the Main Street Lending Program that are of importance to Tribal Entities:

  • “Tribal economic enterprises” are eligible for Main Street loans, even if they are not a separate legal entity (i.e., an unincorporated component of the Tribal government is eligible to apply for a Main Street loan). “Tribal business concerns” are also eligible. For purposes of this article, “Tribal Entities” include “Tribal economic enterprises” and “Tribal business concerns.
  • Unlike other borrowers under the Main Street Lending Program, Tribal Entities that obtain a Main Street loan are permitted to make distributions to their Tribal government.

Tribes that are seeking financing and that engage in economic activity in their capacity as a Tribe, as opposed to through a separate legal entity, can now therefore consider the Main Street Lending Program as a potential financing opportunity.

For an overview of the Main Street Lending Program and the Main Street loans, see our article “Main Street Lending Program Overview for Nonprofits and For-Profit Businesses.”

The following is a summary of the Main Street loans available, as presented by the Federal Reserve:

Eligible Loans: For-Profit Businesses
(Source: August 4, 2020 Federal Reserve Presentation)

The key items applicable to Tribal Entities are:

  • Tribal Economic Enterprises”: In recognition of the fact that many Tribes engage in economic activity in their capacity as a Tribe, and not through a separate legal entity, the Federal Reserve authorized “tribal economic enterprises” to apply for and receive Main Street loans. This would include, for example, a component of a Tribal government that engages in gaming but is not a separate legal entity. The requirements of the Main Street Lending Program would apply to such loans, except that:
    • Amount: The amount of the loan would be based on the “tribal economic enterprise’s” distinguishable financials;
    • Recourse Limited: Recourse must be available to the assets of the “tribal economic enterprise”; recourse to the assets of the Tribal government that are separate from those of the enterprise may be limited “in alignment with the Eligible Lender’s typical standards for such lending”;
    • Sovereign Immunity Waiver: The lender must determine, based on its own due diligence and advice from experienced in-house or outside counsel, either that the Tribal economic enterprise does not have sovereign immunity or that the Tribe has effectively waived it such that U.S. federal courts, in addition to any state court as may be agreed, are among courts of competent jurisdiction for matters resulting from the Main Street Loan transaction;
    • Separateness: The “tribal economic enterprise” must have some “separateness” from the Tribal government, which appears to be evaluated on a case-by-case basis; and
    • Certain Distributions Allowed: The “tribal economic enterprise” can make transfers to the Tribal government subject to the terms of the loan documents and despite the Main Street Lending Program’s general prohibition against distributions by borrowers. The Federal Reserve’s rationale for permitting such distributions is that the allocation of funds from the “tribal economic enterprise” to the Tribal government was not a distribution because the “tribal economic enterprise” is not a separate legal entity.
  • Tribal Business Concerns: A Tribal business concern must be either: (a) wholly owned by one or more Indian Tribal governments, or by a corporation this is wholly owned by one or more Indian Tribal governments, or (b) owned in party by one or more Indian Tribal governments, or by a corporation that is wholly owned by one or more Indian Tribal governments, if all other owners are either U.S. citizens or businesses eligible for the Main Street Lending Program. A Tribal business concern must be a separate and distinct legal entity organized or chartered by the Tribe or federal or state authorities.
  • Tribal Dividends/Distributions: The Main Street Lending Program generally prohibits borrowers from issuing dividends or distributions to their owners or shareholders (except for distributions that cover tax liabilities). The Federal Reserve, however, has implemented an exception for Tribally-owned entities. Entities that are wholly or majority-owned by one or more Tribal governments are permitted to pay dividends or make equivalent capital distributions to their Tribal government owners. The Tribally-owned entity can only make such distributions to the Tribal government owners. Distributions cannot be made to any non-Tribal owners, unless the Tribal business is a pass-through entity and the distributions are for tax obligations. For the avoidance of doubt, transfers from Tribal economic enterprises that do not have a distinct legal personality to the related Tribal government are not considered dividends and are permitted, subject to the terms of the loan agreement. The term “Tribal government” refers to a federally or state recognized Indian Tribe and does not include Alaska Native corporations. The Main Street Lending Program, however, does not appear to prohibit contributions by Alaska Native Corporations to their Settlement Trusts, as those are not dividends or capital distributions.
  • Eligibility: For a Tribal Entity to be eligible for a Main Street Loan, it must have been established prior to March 13, 2020, not be an “ineligible business[,]” be a U.S. business within the meaning of section 4003(c)(3)(C) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and either (i) have 15,000 employees or fewer, or (ii) have 2019 revenues of $5 billion or less, when aggregated with their affiliates. On this latter criteria, the Tribal Entity must qualify under only one of these criteria, not both. In determining the Tribal Entity’s revenue and number of employees, the Small Business Administration’s rules on counting employees and revenue apply, as do the Small Business Administration’s rules on affiliation. This means that a Tribal Entity will not be affiliated with other entities owned and controlled by that Tribe solely due to common ownership or common management.
  • Calculating Loan Amounts: The Federal Reserve described an important consideration that Tribes should take into account when determining if the Main Street Lending Program will provide them with their financing needs. The maximum amount of any loan under the Main Street Lending Program is limited to an amount that, when added to “existing outstanding and undrawn available” debt, does not exceed four or six times the Tribal Entity’s 2019 EBITDA, depending on the type of loan that is being sought. In calculating the amount of debt held by the borrower, the total amount of any committed line of credit is used, even if the line of credit has not been drawn down. This means that if a Tribal Entity has a $1MM line of credit that has not been used, the Tribal Entity will still be deemed to have $1MM in debt when calculating its maximum loan amount. Accordingly, when evaluating the Main Street Lending Program and the financing available under it, Tribes should be cognizant of the impact that any unused lines of credit may have on the amount of their potential loan under the Main Street Lending Program.
  • Availability of Other Credit: The Main Street Lending Program requires borrowers to demonstrate that they are “unable to secure adequate credit accommodations from other banking institutions[.]” The Federal Reserve clarified that this certification does not mean that a Tribal Entity must certify that no credit from other sources is available to the borrower. It only means that the amount, price, or terms of the other available credit are inadequate for the borrower’s needs during the current unusual and exigent circumstances. Therefore, even if a Tribal Entity had a line of credit available to it, that would not preclude a loan under the Main Street Lending Program if the terms of that line of credit, either in regard to interest rate, maturity date, and/or amount, were inadequate for the borrower’s needs.
  • Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL_ Loans/Grants: The Federal Reserve noted that a Tribal Entity’s receipt of PPP loans, EIDL grants, or Tribal funds under the CARES Act does not render the Tribal Entity ineligible to receive a loan under the Main Streel Lending Program.
  • Use of Funds/Refinancing: During the question and answer period of the presentation, the Federal Reserve explained that Tribal Entities have broad discretion to use funds borrowed under the Main Street Lending Program, with the limits focused mainly on prohibiting the use of loans (other than Priority Loans) to refinance existing debt. Priority Loans, however, could be used to refinance existing debt, provided that the existing debt is owed to a lender that is unaffiliated with the lender making the Priority Loan.
  • Guarantees: Potential borrowers under the Main Street Lending Program should be aware that while the Federal Reserve does not require lenders to obtain guarantees from the owners of entities (Tribal or otherwise) that are applying for Main Street loans, the lenders can elect to require guarantees as a condition of the Main Street loan.
  • Sovereign Immunity Waiver: The lender must determine, based on its own due diligence and advice from experienced in-house or outside counsel, that the Tribal business concern either does not have or has effectively waived sovereign immunity such that U.S. federal courts are among courts of competent jurisdiction for matters resulting from the Main Street Loan transaction. Such waiver must extend to the borrower certifications and covenants, assignment-in-blank, and co-lender agreement, as each is applicable.
  • Ineligible Businesses: In general, businesses that were ineligible for PPP loans are ineligible for Main Street loans. See our article “Businesses Ineligible for the Paycheck Protection Program.” Please note that businesses that receive revenue from legal gambling are eligible.

There has been subdued interest in the Main Street Lending Program. It appears, however, that the Federal Reserve is taking steps to revise the program to make it more attractive to borrowers, including Tribal Entities. Accordingly, for Tribal Entities that are looking for additional or new financing options, the Main Street Lending Program may be a viable option.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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