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Law360 (April 2, 2020, 3:41 PM EDT) --
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| Franco Furmanski |
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| Carlos Loumiet |
On March 27, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, the most significant economic relief package in American history. As the old adage goes, "extraordinary times call for extraordinary measures."
These are certainly extraordinary times, and the CARES Act is certainly an extraordinary legislative measure. One tribute to that is that the bill passed our highly politically divided U.S. Senate by a 96-0 vote, and the equally divided U.S. House of Representatives by a 419-6 vote.
Then, on March 29, Trump and his coronavirus task force announced a one-month extension to the social distancing guidelines first put in place by the federal government on March 16. The extension is through April 30, and comes as no surprise, with the U.S. reporting over 200,000 cases of COVID-19 as of Thursday.[1] Trump's extension, and the economic toll that will come with it, makes the passage of the CARES Act, and the Paycheck Protection Program, that much more important.
Small businesses affected by COVID-19 will be entitled to seek relief under the CARES Act's unprecedented Paycheck Protection Program. The most relevant aspects of this historic relief program are summarized below.
The program will be administered through the Small Business Administration, and will allow companies (including nonprofit organizations) with no more than 500 employees to receive forgivable loans of up to $10 million, to provide cash flow assistance in an effort to cause them to maintain their employees during the COVID-19 pandemic.[2] The program also provides eligibility to sole proprietors, individuals who operate as independent contractors, and those who are self-employed and regularly carry on a trade or business.[3]
The program was codified into the CARES Act as an amendment to Section 7(a) of the Small Business Act, an already-existing federal law. Lenders previously approved to provide SBA loans under that section, and any other lender who the SBA and secretary of the U.S. Department of the Treasury deem capable of providing these loans, can do so.[4]
For purposes of the 500-employee threshold, a company must count all of its employees, as well as its affiliates' employees. Generally speaking, affiliate entities are those under common control, although the applicable SBA rules on this can be complicated.[5]
Eligible borrowers in the food services industry are exempted from the affiliation rules. To qualify under the program, companies in the food service industry cannot have more than 500 employees per physical location.[6] Companies with more than 500 employees may also be eligible if they are within the industry size standards established by the SBA for the industry in which the business operates.[7]
The forgivable aspect of these loans makes them, in large part, a grant by the federal government to qualifying businesses. Will the qualification process be too complex or burdensome, as many governmental programs are? The answer is no.
Expect the exact opposite. Unlike with other SBA loans, the borrower (i.e., the qualifying business) does not need to attempt to obtain credit other than through the SBA, put up collateral or personally guarantee the loan.[8] Rather, along with submitting information regarding its payroll for 2019, the borrower must submit a good faith certification stating, among other things, that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the company and retain its workers.[9]
Under this unprecedented program, the SBA will require lenders to defer payment on the loans for at least six months but no more than one year, if the borrower is an impacted borrower.[10] A borrower is an impacted borrower if: (1) it was in operation on Feb. 15; and (2) has an SBA loan application approved or pending.[11] If those two simple conditions are met, the borrower is presumed[12] to have been adversely impacted by COVID-19, and can therefore obtain the benefits of the loan deferment provisions of the Paycheck Protection Program.
Qualifying applicants will be entitled to receive a loan equal to 250% of their average monthly payroll costs, calculated over the one-year period prior to the loan date, with a maximum loan amount of $10 million.[13] Certain payroll costs cannot be taken into account for purposes of the loan amount calculation, including compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period from Feb. 15 to June 30.[14]
Importantly, the use-of-proceeds section of the program is not overly restrictive. In addition to using proceeds to cover payroll costs, borrowers can use funds to cover expenses such as interest on any mortgage obligation, utilities and rent.[15]
Perhaps the most noteworthy feature of this program is the forgiveness component mentioned above. This is how it works: 100% of all covered costs paid by the borrower during the eight-week period[16] commencing on the date of the loan will be applied toward a reduction of the loan balance (the forgiveness amount).[17]
Accordingly, to ensure that 100% of the loan amount is forgiven, during the covered period, the borrower should, if possible, pay enough covered costs to cover the entirety of the loan.[18] And to incentivize small businesses to retain their employee base during these troubling times,[19] the CARES Act provides that the forgiveness amount will be reduced if there is a reduction in the number of employees or a reduction of greater than 25% in the wages paid to any employee during the covered period.[20] The forgiveness amount is considered "cancellation of indebtedness" for federal income tax purposes, but is expressly excluded from gross income.[21]
Of the entire $2 trillion CARES Act stimulus package, $349 billion is set aside for the Paycheck Protection Program.[22] However, due to its broad eligibility provisions and the extent of the current crisis, it may be difficult for the program to fund all eligible applicants' loans.
Accordingly, the following groups will be prioritized: small businesses in underserved and rural markets (including veterans and members of the military community), small businesses owned and controlled by socially and economically disadvantaged individuals, women-owned businesses, and businesses in operation for less than two years.[23]
According to forecasts released by Goldman Sachs Group Inc. on March 31, the unemployment rate in the U.S. could reach 15%.[24] The forecast also includes that during this fiscal quarter the gross domestic product will fall at an annualized rate of 34%, though with a strong 19% rebound in the third quarter.[25]
We are living through extremely difficult times — in terms of economic performance, the worst since the Great Depression — during which our government must make almost-impossible choices. It is being asked to balance the priceless value of human life with the economic well-being of our nation.
It is clear that at least for the next month or two, extreme measures will need to be taken to safeguard human life.[26] This will ineluctably come at a steep cost to our economic well-being. The CARES Act, including the Paycheck Protection Program described in this article, is a huge step to limit the economic damage that businesses and their employees will suffer as a result of COVID-19 and the necessary measures that have been put in place to suppress it. How effective it will be remains to be determined.
Recognizing this, Treasury Secretary Steven Mnuchin has said that lenders will begin accepting loans under the Paycheck Protection Program on April 3.[27] On March 31, the Treasury published the loan application that borrowers will need to submit to qualifying lenders to request a loan under the program.[28]
The Treasury also published guidelines that further define, and in certain instances, serve as amendments to, the provisions of the CARES Act. For example, the Treasury's guidelines state that the interest rate on these loans will be a fixed 0.5%[29] and that at least 75% of the forgiveness amount has to consist of payroll costs.
Despite the Treasury's insistence on getting the program up and running by April 3, some remain skeptical that such a sizable program can be established and operational in such a short time.[30] If one thing is certain during these times, it is that time is of the essence.
Franco Furmanski is an associate and Carlos Loumiet is a partner at Nelson Mullins Riley & Scarborough LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Johns Hopkins Coronavirus Resource Center.
[2] H.R. 748 (the CARES Act), Section 1102(a)(2); the Small Business Act, 15 U.S.C. 636(a)(2)(F); 15 U.S.C. 636(a)(36). As explained in the article, the CARES Act codifies the program (except most of the loan forgiveness provisions) an amendment to 15 U.S.C. 636(a) (i.e., Section 7(a) of the Small Business Act) by adding a new section numbered 36 titled "Paycheck Protection Program." Accordingly, citations in this article will, for the most part, be to provisions in this newly-enacted section.
[3] The Small Business Act, 15 U.S.C. 636(a)(36)(D)(ii).
[4] The Small Business Act, 15. U.S.C. 636(a)(36)(F)(ii), (iii).
[5] Code of Federal Regulations, Title 13, Section 121.103.
[6] The Small Business Act, 15 U.S.C. 636(a)(36)(D)(iii), (iv).
[7] The Small Business Act, 15. U.S.C. 636(a)(D)(i)(II).
[8] The Small Business Act, 15 U.S.C. 636(a)(36)(I), (J).
[9] The Small Business Act, 15 U.S.C. 636(a)(36)(G).
[10] The Small Business Act, 15 U.S.C. 636(a)(36)(M)(ii).
[11] The Small Business Act, 15 U.S.C. 636(a)(36)(M)(i)(I).
[12] The Small Business Act, 15 U.S.C. 636(a)(36)(M)(i)(II).
[13] The Small Business Act, 15 U.S.C. 636(a)(36)(E). For an otherwise eligible borrower who was not in business between February 15, 2019 through June 30, 2019 (i.e., a recently formed entity), the relevant average monthly payroll costs are those during the period beginning on January 1, 2020 and ending on February 29, 2020.
[14] The Small Business Act, 15. U.S.C. 636(a)(36)(A)(viii)(II).
[15] The Small Business Act, 15 U.S.C. 636(a)(36)(F).
[16] This eight-week period may correlate to the federal government's best guess of how long the nation's economy will be virtually closed by COVID-19; hopefully it will be less, and not more.
[17] The CARES Act, Section 1106(b).
[18] Not all payroll costs, interest on mortgages, rent and utility payments are considered "covered" for purposes of the Paycheck Protection Program. For the exact definition of these terms, please see the following sections of the CARES ACT: (1) 1102(a)(2) (payroll costs); 1106(a)(2) (covered mortgage obligation); 1106(a)(4) (covered rent obligation) and 1106(a)(5) (covered utility payment).
[19] A record-shattering 6,648,000 people filed for unemployment benefits for the week ending on March 28 (in addition to the 3,283,000 that filed for unemployment benefits the week before).
[20] The CARES Act, Section 1106(b), (d)(2). Section 1106(d)(2), which deals with reductions in the forgiveness amount, is a bit nuanced. It provides that 100% of the loan will be forgiven if the borrower employs, on average, the same number of full-time "equivalent employees" for the 8-week period commencing on the loan origination date as it did during the periods beginning on February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, whichever the borrower chooses. The term "equivalent employees" is used in this section to ensure that the comparison is "apples to apples" and not "apples to oranges." Section 1106(d)(5) provides an exemption to the rule in Section 1106(d)(2) if the company re-hires employees and restores their salaries by June 30, 2020.
[21] The CARES Act, Section 1106(i).
[22] The CARES Act, Section 1102(b)(1).
[23] The Small Business Act, 15 U.S.C. 636(a)(36)(P)(iv).
[24] Goldman Sachs now expects US unemployment to hit 15%, CNN Business.
[25] Id.
[26] Many epidemiologists and other infectious disease experts have forecasted staggering numbers of deaths and hospitalizations if extreme measures are not taken to suppress COVID-19. See, e.g., Worst-Case Estimates for U.S. Coronavirus Deaths, the New York Times; see also, President Trump's March 30, 2020 comments during the Coronavirus Task Force press conference where he stated that potentially 2.2 million people could have died if the current measures were not put in place, and that holding the number of fatalities to under 100,000 would mean that "we altogether have done a very good job."
[27] What's in the just-passed small-business Paycheck Protection Program, The Business Journal.
[28] https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp.
[29] Treasury Issues Guidelines, Application Form for SBA Paycheck Protection Program, ABA Banking Journal. Under the CARES Act, lenders could charge an interest rate not to exceed 4%.
[30] Think the CARES Act Money Will Come Quickly? Don't Count on It, Inc.
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