Governmental Assistance to Businesses in Response to COVID-19 PandemicMarch 29, 2020
In response to the COVID-19 pandemic, the federal government has launched several initiatives to address the economic hardship suffered by businesses, particularly small businesses. These initiatives include loan programs, grants and tax credits as described below. As the government at all levels increases its efforts to support the country’s economic recovery, we expect more programs to follow. We will continue to monitor these efforts as they develop.
SBA Paycheck Protection Program
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law and represents the third major piece of federal legislation in response to the COVID-19 pandemic. The CARES Act includes $349 billion in Small Business Administration (SBA) loan guaranties, subsidies and programs. Under the CARES Act, among other items, SBA’s Section 7(a) Loan Program is expanded to include the Paycheck Protection Program.
Eligibility and Terms
Under the program, eligible businesses can apply for a Paycheck Protection Loan during the covered period of February 15, 2020 through June 30, 2020 (“covered period”) in the maximum amount that is the lesser of (i) 250 percent of an applicant’s average total monthly payments for payroll costs for the one-year period prior to obtaining the loan and (ii) $10,000,000. Payroll costs include payments to employees for salary, wages, or similar compensation, severance, health and retirement benefits, and sick or family leave. However, the amount is capped at $100,000 per employee.
Additionally, the maximum loan amount of an SBA Express Loan is increased from $350,000 to $1,000,000.
Eligible businesses include small businesses, 501(c)(3) nonprofits, veteran organizations and Tribal business concerns provided (i) they employ 500 employees or less (full-time, part-time or other basis, who are counted against the payroll) or (ii) are within the applicable size standard for employees as identified in the Small Business Act (SBA). Sole proprietors, self-employed individuals and independent contractors are also eligible. The CARES Act excludes certain affiliation rules for businesses in the accommodation, food services and drinking places industries that have no more than 500 employees; however, it does not otherwise waive existing affiliate rules, which generally aggregate the employees of companies that are under common control. The CARES Act does provide that any business that (x) employs not more than 500 employees per physical location of the business and (y) is in the accommodation, food services and/or drinking places industry is eligible to receive a Paycheck Protection Loan.
Subject to the forgiveness provisions discussed below, loan terms include a maximum maturity of 10 years from the date a borrower applies for loan forgiveness with an interest rate not exceeding 4 percent. Payments of principal interest and fees are deferred for a period of not less than 6 months and not more than one year after obtaining the loan. Additionally, the loan does not have a collateral requirement and a borrower is not required to provide any personal guarantees. The loan is nonrecourse except to the extent that the loan proceeds are used for an unallowable expense. The federal government guarantees the balance of any portion of the loan not forgiven.
Loan proceeds can be used for (i) eligible payroll costs; (ii) interest payments on mortgages (iii) rent payments; (iv) utility payments; (v) costs related to the continuation of group health care benefits; and (vi) interest on other debt obligations incurred before covered period.
Lenders who participate in SBA’s Section 7(a) will make loans under the program. A business applying under the program will need to submit an application to participating lenders providing, among other items a good faith certification that (i) uncertainty of current economic conditions make the loan request necessary, (ii) funds will be used for allowable uses and (iii) borrower is not receiving duplicative funds from another SBA program.
Businesses operating on February 15, 2020 and that have a pending or approved loan application under the program are eligible for loan forgiveness (principal, interest and fees) in an amount equal to the sum of eligible costs incurred and payments made during the covered period, which is the 8-week period beginning on the date of origination of a loan. Note forgiveness amounts cannot include employee compensation in excess of $100,000 for an individual employee prorated for the covered period.
The forgiveness amount can be up to 100% of the loan but is not to exceed the loan’s principal amount. A borrower applying for loan forgiveness is to provide the following information:
- Verification of full-time equivalent employees on payroll and pay rates
- Evidence of covered costs/payments (e.g., canceled checks, payment receipts, mortgage, rent and utility payments)
- Certification from representative that (i) documentation is true and correct; and (ii) amount of forgiveness requested was used to retain employees, and pay mortgage, rent and utility payments
A lender is to make a decision on a loan forgiveness application within 60 days of receipt of application.
The forgiveness amount is to be reduced (x) for any employee layoffs and (y) for any reduction in wages of any employee made by the business in excess of 25 percent of the total wages of the employee during the most recent full quarter during which the employee was employed before the covered period. A business can seek relief from these loan forgiveness reductions if such a business by June 30, 2020 rehires the employees laid off and/or makes up for the wage reductions imposed.
SBA Economic Injury Disaster Loans (EIDLs) and Grants
As part of the Coronavirus Preparedness and Response Supplemental Appropriations Act, which was the first major piece of legislation in response to the COVID-19 pandemic, the SBA was authorized to provide an estimated $7 billion in assistance through its Economic Injury Disaster Loans (EIDL) program.
Eligibility and Terms
EIDLs provide certain small businesses with low-interest loans of up to $2 million. The loans can be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. Qualifying businesses are those that are: (a) a small business, a small agricultural cooperative, a small aquaculture cooperative, or a private nonprofit organization according to SBA standards; (b) located in a state or territory where the SBA has issued an EIDL declaration (all of New York State currently qualifies); (c) unable to pay ordinary and necessary operating expenses; and (d) unable to secure credit elsewhere. The terms of an EIDL include an interest rate of 3.75% for for-profit entities and 2.75% for non-profits, a repayment term of no more than 30 years, and no strict collateral requirements exist although loans are to be secured by collateral to the extent possible. Borrowers under the Paycheck Protection Program may not also borrow under the EIDL program for the same purposes. Existing EIDL borrowers may borrow under the Paycheck Protection Program but cannot use proceeds for the same purpose. EIDL borrowers also may have an opportunity to refinance their EIDL loans into Paycheck Protection Program loan.
Note that under a $10 billion program authorized under the CARES Act, the following EIDL requirements for eligible businesses are waived: (i) personal guarantees on loans of $200,000 or less during covered period; (ii) applicant being in business one year prior to the disaster and (iii) applicant being unable to obtain credit elsewhere. The covered period for the program is January 31, 2020 to December 31, 2020. Eligible borrowers include small businesses, cooperatives, Tribal business concerns, private non-profits and/or ESOPs if they employ 500 employees or less (full-time, part-time or other basis, who are counted against the payroll). Sole proprietorships and independent contractors are also eligible.
Pursuant to the CARES Act, applicants for an EIDL loan can also apply for an emergency grant of up to $10,000 as an advance to cover payroll, sick leave and other debts. Such funds must be dispersed within three days of the request (and which applicant is not required to repay if denied an EIDL loan).
Existing SBA Loan Participant Debt Relief
Under the CARES Act, $17 billion is made available to SBA to pay the principal, interest and associated fees on existing SBA loan products, including existing 7(a) loans (e.g., Community Advantage, 504 and Microloan products).
Financial Assistance for Certain Companies
The CARES Act includes the Coronavirus Economic Stabilization Act of 2020 (the “CESA”). CESA sets aside approximately $500 billion dollars and enacts other measures to provide liquidity to eligible businesses that are suffering as a direct result of the COVID-19 emergency.
Airlines and National Security Businesses
The CESA authorizes the U.S. Department of the Treasury (the “Treasury”) to provide up to $25 billion in loans or loan guarantees to commercial airlines, ticket agents, and businesses that perform aircraft maintenance inspection services, $4 billion in loans or loan guarantees to cargo air carriers, and $17 billion in loans and loan guarantees to businesses critical to maintaining national security.
Eligible Businesses, including Mid-Size Businesses, States and Municipalities
The Treasury is also authorized to provide $454 billion (plus any amount of funding that is not provided to the airline or national security industries) in loans, loan guarantees and other investments to programs or facilities established by the Federal Reserve that will provide liquidity to the financial system that supports lending to eligible businesses, states, or municipalities.
The CESA provides that Treasury should endeavor to create a program or facility to provide financing to banks and other lenders that make direct loans to U.S.-based mid-size businesses and non-profit organizations with between 500 and 10,000 employees. This program or facility should provide financing to banks and other lenders that make direct loans to mid-size businesses with an interest rate no greater than two percent, and have no principal or interest amount payable within the first six months after a loan is made. Any mid-size businesses who receive these loans are required to make a good-faith certification that, among other things, (i) the uncertainty of the current economic environment makes the loan necessary to maintain its ongoing operations, (ii) that it will use the funds to retain at least 90% of its workforce at full compensation until September 30, 2020, (iii) that the borrower is created or organized in the US or under the laws of the US and has significant operations in and a majority of its employees based in the US, and (iv) it will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan.
Small Business Bankruptcy
Under the CARES Act, the Small Business Reorganization Act is amended to increase the eligibility threshold to file under subchapter V of Chapter 11 of the U.S. Bankruptcy Code to businesses with less than $7.5 million of debt (increased from $2,725,625 of debt). The increase sunsets after one year.
Families First Coronavirus Response Act Tax Credits
As part of the Families First Coronavirus Response Act (FFCRA), which was the second major piece of federal legislation in response to the COVID-19 pandemic, two refundable federal tax credits were created. These credits, which are against FICA taxes, are available employers with 500 or fewer employees and can offset the cost of providing Covid-19-related leave to their employees. Comparable credits and limitations are available to self-employed individuals as well.
- Payroll Tax Credit for Paid Sick Leave: a tax credit equal to the daily wages paid to an employee taking sick leave due to Covid-19 is available. The maximum available sick leave credit is: (a) $5,110 per employee taking sick leave to care for themselves; (b) $2,000 per employee taking sick leave to care for a family member affected by Covid-19.
- Payroll Tax Credit for Paid Family Leave: a tax credit equal to the daily wages paid to an employee taking qualified family medical leave. The family leave credit is capped at: (a) $200 per day per employee taking qualified family medical leave; and (b) $10,000 total per employee.
Forbearance of Residential Mortgage Loan Payments For Multifamily Properties With Federally Backed Loans
Pursuant to the CARES Act, a multifamily borrower with a federally-backed multifamily mortgage loan that was current as of February 1, 2020 may request a forbearance if it is experiencing a financial hardship due to the pandemic. The borrower is to submit a written request to its servicer, and the servicer is to provide a 30-day forbearance with two additional 30-day extensions. The covered period expired on the earlier of the termination date of the national emergency concerning the pandemic and December 31, 2020.
A multifamily borrower that receives a forbearance cannot during such forbearance evict or initiate the eviction of a tenant solely for the nonpayment of rent or other fees nor can such borrower charge late payment penalties to a tenant. In addition, a multifamily borrower cannot require a tenant to vacate during the forbearance period or without 30 days' notice.
Under the CARES Act, for 120 days beginning upon enactment, a landlord of a multifamily property is prohibited from initiating legal action to evict a tenant solely to due to the nonpayment of rent or charging fees, penalties or other charges to the tenant related to such nonpayment of rent where the landlord’s mortgage on that property is insured, guaranteed, supplemented, protected or assisted in any way by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program or the Violence Against Women Act of 1994.
The SBA is currently drafting guidelines and the loan application documents. We expect those to be available during the week of March 30, 2020.
For more information on this or other matters, please contact:
Andrew C. Gold at +1 212 592 1459 or [email protected]
Eric A. Stabler at +1 212 592 5982 or [email protected]
Patrick J. O’Sullivan, Jr. at +1 212 592 1503 or [email protected]
© 2020 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.