Paycheck Protection Program

Originally Published : March 30, 2020

Break it Down!

 Yeah, so we are just waiting for the Paycheck Protection Program (PPP) a.k.a. SBA 7(a)a.k.a. CARES application to come online.  Secretary Mnuchin said that he expects the application to be available by Friday of this week.  Realistic? Probably Mnot. 

Whether we do your application for you or you do it yourself, get moving on getting your financial paperwork together because we all want to get that money before it runs out.  I feel like I’m on line at Dominique Ansel five days before they release a new cash-filled cronut.  Of course, none of us would ever actually wait on line for food but for money at this point……

Below you will find the latest on the SBA 7(a) Loan.  We still don’t have answers to every question because the SBA has not provided guidance.  Probably tied up meeting with execs from McDonald’s, Red Lobster and Applebee’s, you know, the restaurant industry to way too much of America.  Anyway, we are taking our best educated guesses based on past SBA applications and rules so please read the FAQ’s when we publish them because the info changes almost daily.

Top 7(a) Q’s of the D
 1. If rent is forgiven under the 7(a) loan, how far back in time can I go to pay it?
The loan’s “covered period” begins on February 15, 2020. In other words, you can use 7(a) loan proceeds to pay rent owed between February 15, 2020 and the date of the loan’s origination. However, 7(a) loan proceeds used pay rent owed prior to February 15, 2020 would not be forgivable.

2. Can I use loan proceeds to pre-pay rent?
Yes, but only for rent owed during the 8 week period following the loan origination date. 

3. Can I use loan proceeds to pay vendors or distributors?
We think yes, but we are trying to verify.  If you can, it won’t be forgiven.

4. Is there a citizenship requirement to apply for the loan?
No, at least not based on the bill as it stands now.

Currently, borrowing entities must have been organized in the U.S., and employee payroll is only forgivable for employees whose principal residence is located in the U.S. Typically, SBA loans require that at least 80% of the borrowing entity be owned by U.S. citizens, but there is no analogous requirement yet for 7(a) loans. The SBA is expected to publish additional guidance in the coming weeks, however, which may or may not impose citizenship requirements, so stay tuned.

5If you have an employee that makes $150k, is $100k of that ‘forgiven’ or is nothing forgiven for that employee since he makes over $100k annually?
Only the difference would not be forgiven. The first $100k would be forgiven.

6.  What if I opened recently; can I still apply for this loan? To be eligible, borrowers must have been operating as of February 15, 2020 with employees on payroll as of that date. To the extent a business was not operating in 2019, for purposes of calculating average monthly payroll costs, the measuring period will be between January 1, 2020 through February 29, 2020.

Note that the amount of a 7(a) loan is based on a multiplier of payroll costs for the previous year. So, to the extent a business opened within the year, the amount of the loan would be reduced proportionately. For businesses that have very recently opened, we encourage you to speak with us about what loan options might make most sense for you.

7. What if I don’t plan to re-open until this is all over? Do I still need to re-hire employees to be eligible for loan forgiveness? Yes. Lenders aren’t concerned with what your employees are actually doing, they only care that about the number of employees, and what your employees are being paid. They could theoretically be paid to sit at home and do nothing.

8. Do I need to re-hire the same employees?
No. The lenders are concerned about the number of employees, and the total amount being paid in payroll. If, for whatever reason, you can’t invite an employee back, you should be alright provided you find a comparable replacement and pay that person the same rates.

9.Do I need consent from my investors to obtain this loan?
It depends. Your operating or shareholders agreement would govern whether you need investor approval to obtain a loan. Sometimes, obtaining a loan is classified as a “Major Decision” for which investor consent is required. 
Even though these loans are forgivable, they are still considered debt. So, if your operating agreement or shareholders’ agreement requires third party consents for debt, you would need to obtain those same consents for 7(a) loans. 
The Basics
Who is eligible?

Fortunately, the eligibility test is rather lenient. Any borrower with fewer than 500 employees is eligible, provided that the business was operating as of February 15, 2020, and had employees on payroll as of such date. Borrower entities must have been created or organized in the U.S. and have significant operations, and a majority of employees, based in the U.S.

Hospitality-based businesses are eligible for the loan so long as they have 500 or fewer employees in any one location, meaning that just about any hospitality business will be eligible.

Borrowers must also certify that:
·  Uncertain economic conditions make the loan necessary to support operations (there is a presumption, however, that all current economic conditions render the loan necessary for all small businesses);
·  The proceeds will be used to retain workers and maintain payroll, and/or to make mortgage, lease, and utility payments;
·  Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here; and
·  Between February 15, 2020 and December 31, 2020, the borrower has not received loan proceeds from a loan duplicative of the purpose and amounts applied for here.

Fortunately, borrowers who have previously received an SBA Economic Injury Disaster Loan Program (EIDL) between January 31, 2020 and the date PPP loans are first available may refinance the EIDL loan into a PPP loan. The rule is that borrowers may not take out an EIDL and a PPP loan for the same purposes. For borrowers to whom this applies, we recommend that you speak with your accountant about this process, and contact the SBA directly about your options.

How much can I borrow?
PPP loans are available up to $10 million. The loan amount will be equal to the lesser of:

(i) 2.5 times the average monthly “Payroll Costs” (defined below) for the 12 months prior to the loan origination date; and

(ii) $10 million.

Applicants that were not in business between February 15, 2019 and June 30, 2019 may request to use average monthly payroll costs between January 1, 2020 through February 29, 2020.

For purposes of this calculation, “Payroll Costs” include:
·                 Salary, wages, commissions, or similar compensation (up to $100k per employee and independent contractor per year, and excluding payments to employees/contractors whose principal residence is outside of the U.S.);
·                 Payment of cash tips or an equivalent;
·                 Payment for vacation, parental, family, or sick leave;
·                 Allowances for dismissal or separation;
·                 Payments for group health care benefits, including insurance premiums;
·                 Payment of retirement benefits;
·                 Payment of state and local taxes assessed on employee compensation; and
·                 Payments to sole proprietors or independent contractors up to $100k per year, pro-rated for the covered period.

Payroll Costs do not include: payroll taxes, income taxes, compensation in excess of $100k per year per employee/contractor, compensation to employees whose principal place of residence is outside of the United States, and qualified sick leave wages covered under the Families First Coronavirus Response Act. 

What are the terms of the loan?
The precise terms of these loans will differ on a case-by-case basis.  However, all loans will be subject to the following terms: interest rates will be capped at 4%, with a repayment term of up to 10 years. Repayment installments will be deferred for no less than 6 months, and no more than 1 year. There are no prepayment penalties.

Will there be a personal guarantee?
No. These PPP loans will not require collateral or personal guarantees, which is great news for borrowers.

How can these loans be forgiven?
Borrowers can obtain loan forgiveness equal to the amount spent in the 8 week period following loan origination on any of the following:

  1. Payroll Costs (defined above);
  2. Rent on leases executed prior to February 15, 2020; 
  3. Utilities for services initiated before February 15, 2020;
  4. Interest payments on mortgages incurred before February 15, 2020.  

As you might expect, the total amount forgiven cannot exceed the principal of the original loan (i.e., you cannot be reimbursed for more than the amount of the loan you accepted).

Can the forgivable amount be reduced?
Yes. The amount forgiven will be reduced based on the number of employee layoffs or wage/salary reductions. 

Specifically, the amount forgiven will be reduced proportionately by the sum of the following:

(i) the ratio of the average number of full-time equivalent (30+ hours per week) employees (“FTEs”) during the “Covered Period” (8 weeks following receipt of the loan) compared with the average number of FTE’s from February 15, 2019 through June 30, 2019, or the average number of FTE’s from January 1, 2020 through February 29, 2020. For seasonal employees, the measuring period is February 15, 2019 through June 30, 2019. 

(ii) for any employee who did not earn more than $100k during the 2019 calendar year, the amount of any reduction in wages that is greater than 25% compared to their most recent quarter of employment. 

What if I already terminated or furloughed employees?
To encourage borrowers to rehire employees and normalize their payrolls, there will be no reduction to the amount forgiven if, by June 30, 2020, the borrower: (1) eliminates any reduction in FTEs that occurred between February 15 and April 26, 2020; and (2) restores any salaries/wages reduced between February 15 and April 26, 2020 within 25% of their original amounts. 

In other words, the amount of loan forgiveness will not be reduced if the borrower eliminates the reduction in employees and the reduction in wagesby June 30, 2020. 

In other words, if borrowers normalize their payrolls by June 30, 2020, they will be eligible for full loan forgiveness.

How do I apply for loan forgiveness?
Borrowers must submit an application to their lenders, which includes a certification and supporting documentation demonstrating that the loan proceeds were used for the Permitted Purposes, described above. To be eligible for full forgiveness, borrowers must also demonstrate that, as of June 30, 2020, their payrolls have normalized as of June 30, 2020 (see above). Lenders will not forgive loan amounts without this supporting documentation, so borrowers should maintain careful and thorough recordkeeping practices, and are encouraged to work with their accountants in doing so. Lenders are required to render decisions on loan forgiveness applications within 60 days after submission.

What happens to amounts that are not forgiven?
Any loan amount not forgiven will be treated as a regular loan, subject to the terms described above.

How do I apply?
These loans will be made available through participating private lenders (i.e., regular banks), and the loans will be 100% guaranteed by the SBA. In other words, you would deal with regular banks, regular banks collect from you, and are reimbursed by the federal government for any amount forgiven. There are thousands of banks that already participate in the SBA’s lending programs, so it’s likely that you will be able to apply for this PPP loan through your existing bank.

The SBA is expected to provide additional guidance concerning exactly how to apply for PPP loans, and how to find a participating lender. In the meantime, feel free to call your existing bank to see if they are, or plan to, participate in this PPP loan program under the CARES Act.

The deadline to apply to the program will be June 30, 2020, though no applications are available yet. It is possible that lenders could begin taking loan applications as soon as mid-April.

What can I do now?
Collect your paperwork! To seek loan forgiveness, borrowers must submit an application that must contain the following documentation:
·                 Documentation verifying the number of full-time equivalent employees on payroll, and payrates, for the applicable periods (including payroll tax filings, state income, payroll, and unemployment insurance filings); and
·                 Documentation verifying payments on lease obligations, utilities, and mortgage obligations, including cancelled checks, payment receipts, transcript of accounts, and other verifying documents.

So, speak with your accountant to gather all payroll records for the prior year, and all lease/utility/mortgage records from February 15, 2020 forward.

Good Mnight,