By Dean Cazenave, Blane Clark and Elisabeth Prescott

Keenly aware of the enormous impact COVID-19 is having on small businesses throughout the country, in response, the Congress approved and on March 27, 2020, the President signed the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”).  The CARES Act is intended, in part, to provide small businesses some much needed relief in dealing with significant revenue shortages and the incentive to maintain existing workforces so as not to further compound the economic impact on American workers.  The CARES Act appropriates $349 billion to small businesses, some of which will be available through amendments to the business loan provisions contained in section 7(a) of the Small Business Act, 15 U.S.C. 636 (the “SB Act”).

Under the proposed “Paycheck protection program” (the “PPP”), the Small Business Administration (the “SBA”) is authorized to provide, directly or through certain authorized lenders, a 100% federally-guaranteed loan, up to a defined maximum amount, to pay certain operational costs for the period from February 15, 2020 to June 30, 2020 (the “4.5 Month Covered Period”).  Depending upon use of the funds and subject to certain other conditions, the proceeds of a PPP loan may be forgivable in whole or in part.  The SBA administrator (the “Administrator”) may guarantee PPP loans under the same terms, conditions, and process as a loan made under Section 7(a) of the existing SB Act.

With the legislation exceeding 850-pages, many small businesses are turning to professionals, including their lawyers and lenders, for answers as to what the PPP, in particular, means for them.  The below list includes most of the questions we have received to date.  If you have any particular questions, we are here to answer them.  Please direct your questions to one of our CARES Act Team Members listed below.

  1. Is My Business eligible for a PPP loan?
    • Who are my employees?
    • When Does SBA Determine the Size of My Business?
    • How Do I Compute the Size of My Business?
    • What Affiliation Rules Apply to Calculating the Size of My Business?
    • Waiver of Affiliation Rules: Is there any special help for the hospitality and food industries or franchises?
  2. What is the Maximum Loan Amount available under this program?
  3. How May My Business Use the Proceeds of a PPP Loan?
  4. What is the Maximum Loan Forgiveness Amount?
    • How is the Maximum Loan Forgiveness Amount reduced if the number of Employees has been reduced post-disaster?
    • How is the Maximum Loan Forgiveness Amount reduced if the salaries and wages of Employees have been reduced post-disaster?
    • What if the Employer has terminated employees or reduced compensation post-disaster but rehired employees and increased compensation prior to June 30, 2020?
  5. How Do I apply?
  6. What are the terms of the loan (initial deferment, repayment term, interest rate, collateral, personal guaranty, bank fees)?
  7. What if I already applied for or have an Economic Injury Disaster Loan (EIDL)?
  8. Are there Other Notable Provisions of the CARES Act that I Should Know?

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  1. Is My Business A Small Business eligible for a PPP loan? Many businesses will be eligible without any need for a detailed understanding of the process. If your business has less than 500 employees no matter how you count them, then your business will in all likelihood be eligible. It is those businesses with more than 500 employees directly or with multiple affiliates each with their own payroll base that if aggregated would exceed 500 employees that need to review the following questions in this section very carefully.
    • Small Business Concerns.
      • “Small business concerns” eligible for loans under the existing provisions of the SB Act will be eligible for a PPP loan under the CARES Act. Under current law, a business concern may include individual, proprietorship, partnership, limited liability company, corporation, joint venture (so long as there is no more than 49% participation by a foreign business entities), association, trust, or cooperative.  To be a business concern eligible for SBA assistance as a small business, the concern must (i) be organized for profit, (ii) have a place of business located in the U.S., and (iii) operate primarily within the U.S. or make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
      • The SB Act provides that a concern is deemed small (i) if it is independently owned and operated, and (ii) so long as it is not dominant in its field of operation. The Administrator is authorized to provide additional criteria as to what will constitute a “small” business and, in so doing, may “utilize number of employees, dollar volume of business, net worth, net income, a combination thereof, or other appropriate factors.”  In line with its authority, the Administrator has provided additional criteria in the form of size standards made on an industry-by-industry basis under the North American Industry Classification System (NAICS).  These size standards are published by the SBA and are available here. (the “SBA Size Standards”).
    • Expanded Scope of Eligibility.
      • In addition to small business concerns eligible under the existing provisions of the SB Act, under the proposed amendments to the SB Act provided for in the CARES Act, the following additional business concerns may be eligible to receive a PPP loan:
        • any business concern;
        • 501 (c)(3) nonprofit organizations (excluding those that receive Medicaid reimbursements);
        • 501(c)(19) veterans’ organizations; or
        • Tribal business concern described in Section 31(b)(2)(C) of the SB Act
      • To be eligible, the above-listed business concerns may not employ more than the greater of (i) 500 employees; or (ii) if applicable, the size standard in number of employees established by the Administration for the industry in which the entity operates as set out in the SBA Size Standards. Sole proprietorships, independent contractors, and certain eligible self-employed individuals (as such term is defined in section 7002(b) of the Families First Coronavirus Response Act (Public Law 116-127) may also apply for a PPP loan.
      • For the PPP program in particular, the proposed legislation waives the usual requirement that a business be organized for profit in order to be eligible for SBA assistance as a small business. The legislation is, however, silent as to any waiver of the remaining requirements contained in 13 CFR § 121.105(a) that require a business concern to have a place of business located in the U.S. and operate primarily within the U.S. or make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.  It is reasonable to conclude that the Act’s silence suggests these requirements remain intact.
      • What does this ultimately mean for my business? If your business has 500 or fewer employees, has a physical business located in the U.S. and is a U.S. taxpayer, your business is eligible for a PPP loan.  Many businesses which are not eligible for small business loans under existing law will be eligible for a PPP loan.  Non-profits, usually not eligible for small business loans, may also qualify.  As to the foregoing, affiliation rules (discussed below) may still apply.  Businesses with greater than 500 employees and businesses for which the SBA Size Standards are stated in terms of annual receipts (without regard for the number of employee), may be eligible for a PPP loan if they qualify as a “small business concern” under existing law.  In order to determine if your business so qualifies, you should consult the SBA Size Standards.
    • Who are my employees?
      • The CARES Act makes clear that, for purpose of calculating the number of employees, the term “employee” shall include individuals on the payroll, whether full-time, part-time or on some other basis. According to existing law, “other basis” includes those individuals obtained from a temporary employee agency, professional employee organization or leasing concern.” Volunteers are not considered employees, though applicants should be mindful that individuals receiving in-kind compensation for work performed are not considered volunteers but, rather, employees for purposes of size.
      • The applicant business should be mindful of existing affiliation rules (explained generally below) under the SB Act in calculating its number of employees.
    • When Does SBA (or Lender) Determine the Size of My Business?
      • Existing regulations regarding the SB Act, particularly 13 CFR §121.302, provide for the date on which size is determined. The CARES Act, in its present form, appears void of any language amending these existing rules.  Currently, the SB Act provides that the SBA will determine the size status of an applicant for SBA financial assistance as follows:
        • generally, as of the date the application for financial assistance is accepted for processing by SBA;
        • in the case of applications under the Preferred Lenders Program (PLP), the SBA Express Loan Program (SBA Express), and the Export Express Loan Program (Export Express), as of the date of approval of the loan by the Lender; and
        • in the case of applications, the Disaster Loan Program, as of the date the disaster commenced, as set forth in the Disaster Declaration.
      • The CARES Act does not expressly address within which above category the Senate intends a PPP loan application to fall. It may be that the Senate intends to follow the general rule such that size will be determined as of the date the SBA accepts (directly or through a lender) the PPP application for processing.  Alternatively, the language of the CARES Act may be read to imply that the Senate intends for PPP applications to be submitted, at least initially, through lenders, which might suggest the Senate intends that the rule applicable to the PLP, the SBA Express, and the Export Express should apply by analogy.  Assuming that to be the case, the date of size determination would be the date on which the lender approves the PPP loan.
      • As the CARES Act is silent and the current provisions contained in the SB Act do not expressly include the PPP in any of the more specific date of size determination rules, we must conclude that the general rule applies. We are hopeful that additional guidance provided by the Administration, assuming the CARES Act passes, addresses the matter more squarely.
      • What does this ultimately mean for my business? It may be that the date of size determination is not relevant for a lot of businesses, particularly those that fall well under 500 employees or well within the maximum employee count or annual receipts amount (if applicable) allowed to be eligible as a small business concern under the existing SB Act and related regulations.  Those businesses which find themselves near a cutoff mark may be more sensitive to the date utilized by the SBA for calculation of employees or annual receipts (if applicable).
    • How Do I Compute the Size of My Business?
      • The SBA Size Standards are expressed either in the number of employees or annual receipts. The number of employees or annual receipts set forth in the SBA Size Standards represents the maximum allowed for a business concern and its affiliates to be considered small.
        • Calculation of employees. The SBA calculates employees as follows:
          • Calculate the average number of employees based upon numbers of employees for each of the pay periods for the 12-calendar months preceding the loan application;
          • If a concern is less than a year old, calculate the average number of employees based upon the number of employees for each of the pay periods during which it has been in business;
          • If a concern acquires an affiliate (or has been acquired as an affiliate) during the applicable period of measurement or before the date on which it self-certified as small, the employees to be counted will include the employees of the acquired (or acquiring) concern; and
          • Employees of a former affiliate are not included provided the affiliation ended before the date used for determining size.
        • Calculation of Annual Receipts (if applicable): Businesses having greater than 500 employees but for which the SBA Size Standards are stated in terms of annual receipts (without regard for the number of employees), may be eligible for a PPP loan if they qualify as a “small business concern” under existing law. The SBA calculates annual receipts based on the following principles:
          • “Receipts” generally includes all revenue in whatever form received and from whatever source. More particularly, receipts include total income (or gross income) plus cost of goods sold.  A more detailed definition of “receipts” may be found in 13 CFR §121.104.
          • As to business loans and the EIDLs under the SB Act:
            • for concerns that have been in business for 3+ fiscal years, annual receipts means the total receipts of the concern over its most recently completed three fiscal years divided by three;
            • for concerns that have been in business for less than 3 fiscal years, annual receipts means the total receipts for the period the concern has been in business divided by the number of weeks in business, multiplied by 52.
          • If a concern acquires an affiliate (or has been acquired as an affiliate) during the applicable period of measurement or before the date on which it self-certified as small, the annual receipts will include the receipts of the acquired (or acquiring) concern; and
          • Annual receipts of a former affiliate will not be included, provided the affiliation ended before the date used for determining size.
    • What Affiliation Rules Apply to Calculating the Size of My Business?
        • In calculating size (whether measured in employees or annual receipts as set forth for the particular industry in the SBA Size Standards), businesses interested in applying for any SBA loan, including a PPP loan, must take into account employees or receipts, as applicable, of not only the applicant business but also of its domestic and foreign affiliates. Applicant businesses should identify for their lenders and attorneys their respective NAICS code as a starting point.
        • Currently, for new business loans and disaster loans under the SB Act, the Code of Federal Regulations provides, 28 CFR §121.301, that an applicant business must satisfy both of the following criteria:
          • The size of the applicant alone (without affiliates) must not exceed the size standard designated for the industry in which the applicant is primarily engaged; and
          • The size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher.
        • The SBA will consider the totality of the circumstances and is authorized, by pertinent regulations, to “find affiliation even though no single factor is sufficient to constitute affiliation.” Current regulations explain, generally, affiliation as follows:

concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.  It does not matter whether control is exercised, so long as the power to control exists.

        • More specifically, the regulations cite to the following specific affiliation principles pertinent to all business loans under Section 7(a) of the SB Act, including the PPP if the CARES Act is passed:
          • Affiliation based on ownership: a concern is an affiliate of an individual, concern, or entity that owns or has the power to control more than 50% of the concern’s voting equity;
            • if no individual, concern, or entity is found to control, the SBA will deem the Board of Directors or President or CEO (or other officers, managing members, or partners who control the management of the concern) to be in control of the concern;
            • a minority shareholder may be deemed to be in control if that individual or entity has the ability (under the concern’s organizing documents or other agreement) to prevent a quorum or otherwise block action by the board of directors or shareholders.
          • Affiliation arising under stock options, convertible securities, and agreements to merge (including agreements in principle)– the SBA gives present effect to options, convertible securities, and agreements as though the rights granted have been exercised; no such present effect will be given if such rights are subject to conditions precedent which are incapable of fulfillment, speculative, conjectural, or unenforceable under state or Federal law or the exercise of such rights is extremely remote;
          • Affiliation based on management– affiliation arises:
            • where the CEO or President of the applicant concern (or other officers, managing members, or partners who control the management of the concern) also controls the management of one or more other concerns;
            • where a single individual, concern, or entity that controls the Board of Directors or management of one concern also controls the Board of Directors or management of one or more other concerns;
            • where a single individual, concern or entity controls the management of the applicant concern through a management agreement;
          • Affiliation based on identity of interest– where there is an identity of interest between close relatives (defined to include a spouse, parent, child or sibling, or the spouse of any such person) “with identical or substantially identical business or economic interests”, the SBA may aggregate those interests for purposes of computing size of either concern.
          • Affiliation based on franchise and license agreements – the limitations on franchisees as a result of franchise or license agreements with the franchisor are not usually considered as control for purposes of determining the franchisee’s affiliates provided the franchisee or licensee “has the right to profit from its efforts and bears the risk of loss commensurate with ownership.” In such cases, the SBA only considers the franchise or license agreements of the applicant concern.  This particular affiliation rule is relaxed even more in the proposed language of the CARES Act as described below.
      • Determining the concern’s size – the SBA counts the receipts, employees or the alternate size standard (if applicable) of the concern plus all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit.
      • Exceptions to affiliation
        • business concerns owned in whole or substantial part by Small Business Investment Companies (described in the Small Business Act of 1958) are not affiliates;
        • for Indian Tribes, Alaska Native Corporations, Native Hawaiian Organizations, Community Development Corporations (CDCs) authorized by 42 USC §9805;
      • What does this ultimately mean for my business? This affiliation criteria has not been waived across the board for PPP loans, though the criteria has been waived for those certain businesses delineated below.  If your business (including non-profits) does not fall within one of the limited groups for which these rules have been waived, your computation of employees (or annual receipts, if applicable) must take into account your affiliates.
    • Waiver of Affiliation Rules: Is there any special help for the hospitality and food industries or franchises?
      • According to the SBA Size Standards, Sector 72 businesses (those which include “accommodation and food services”) are usually determined to be small businesses based on annual receipts alone.  As such, and due to the affiliation rules described above, many Section 72 businesses may not qualify as small business concerns under the usual SB Act rules.
      • The CARES Act broadens a Section 72 business’ opportunity to qualify as a small business for purposes of being eligible for a PPP loan. Particularly, for Sector 72 businesses that maintain more than one physical location, if it employs 500 or fewer employees per location, the business will be eligible for a PPP loan.  Furthermore, the entity affiliation rules set out in 13 CFR 121.103 are waived for the 4.5 Month Covered Period for Sector 72 businesses.  This means that, in calculating its number of employees, a Sector 72 business need not take into account its affiliates.
      • The affiliation rules are also waived as to any franchise businesses with an SBA franchisor identifier code and any business that received financial assistance from a company licensed as a Small Business Investment Company under section 301 of the Small Business Investment Act of 1958. The affiliation rules otherwise remain applicable to all other small business concerns, nonprofit organizations and veterans’ organizations.
  1. What is the maximum loan amount available?
    • (a) To determine the Maximum Loan Amount, the applicants must look back over a specific period of time as set forth in the CARES Act. The statute is not very clear. In subsection (b)(i) below we indicate how we believe language is to be interpreted. In subsection (c) below, we provide some additional explanations and other possible interpretations.
    • (b) The “Maximum Loan Amount” (capped at $10 million) is the lesser of:
      • (i) 2.5 times average total monthly payroll costs (as defined below) incurred in (A) the one-year period before the loan is made or the four (4) month period from March 1, 2019 to June 30, 2019, or (B) for seasonal employers, as determined by the Administrator, the average monthly payroll costs for the 12 weeks beginning on February 15, 2019, or the four (4) month period from March 1, 2019 to June 30, 2019; PLUS (ii) the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program (for those that want to refinance their EIDL Loans as discussed below); OR
      • Upon request, for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019 –2.5 times the average total monthly payroll payments from January 1, 2020 to February 29, 2020; PLUS the outstanding amount of a loan made under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which such loan may be refinanced as part of this new program; OR
      • $10 million.
    • (c) Some commentators have indicated that the reference to the four-month period from March 1, 2019 through June 30, 2019 only applies to seasonal employers. However, we think there is good argument that it applies to all applicants.  Non-seasonal employers that were in business from February 15, 2019 to June 30, 2019, that have already laid off a number of employees might prefer to use the four-month period (3/1/19-6/30/19) to determine the average monthly payroll costs.  The average monthly payroll costs for the one-year period prior to the date the loan is made might be skewed because payroll costs for the month(s) immediately prior to the date the loan is made would be less than normal reducing the Maximum Loan Amount.  We expect additional guidance on this point.
    • (d) For purposes of computing the Maximum Loan Amount (as well as for the permitted use of loan proceeds discussed more fully below), the term “payroll costs”:

“(I) means

(aa) the sum of payments of any compensation with respect to employees that is a – (AA) salary, wage, commission, or similar compensation, (BB) payment of cash tip or equivalent, (CC) payment for vacation, parental, family medical, or sick leave, (DD) allowance for dismissal or separation, (EE) payment required for the provisions of group health care benefits, including insurance premiums, (FF) payment of any retirement benefit, or (GG) payment of State or local tax assessed on the compensation of employees; and

(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the [4.5 Month Covered Period]; and

(II) shall not include –

(aa)      the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the [4.5 Month Covered Period];

(bb)     taxes imposed or withheld under Chapter 21, 22, 24 of the Internal Revenue Code of 1986 during the 4.5 Month Covered Period;

(cc)      any compensation of employees whose principal place of residence is outside of the United States;

(dd)     qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116-127); or

(ee)      qualified family leave wages for which credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116-127).

  1. How May My Business Use the Proceeds of a PPP Loan?
    • Proceeds of a PPP Loan may be used by an eligible recipient to cover (the “Permitted Uses”) (i) payroll costs (presumably having the same meaning as defined above), (ii) costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums; (iii) employee salaries, commissions, or similar compensations (it is interesting to note that there is no reference here to excluding portions of compensation above $100,000 per year); (iv) payments of interest on mortgage obligations (not principal); (v) rent (including rent under a lease agreement); (vi) utilities; and (vii) interest on any other debt obligations that were incurred before the 4.5 Month Covered Period.
    • At present, there is no guidance on what “rent” may include but presumably it includes rent paid for land and buildings and may include rent paid for equipment, vehicles and other movable (tangible) property.
  2. What is the Maximum Loan Forgiveness Amount?
    • (a) What is the “Maximum Loan Forgiveness Amount”?
      • (i) The Maximum Loan Amount is defined above. The Maximum Loan Forgiveness Amount is determined by computing the sum of certain expenditures during the “covered period” which for these purposes is defined as the 8-week period beginning on the date of the origination of a covered loan (the “8-Week Covered Period”).  The date of the origination of a covered loan is not defined but presumably it is the date the application for the covered loan is made or the date the covered loan is made which presumably should be very close in time for these types of loans.  For some borrowers, it may make a difference when they apply for the loan so careful thought should be given to this aspect.
      • (ii) The amount of the loan that is eligible for forgiveness is equal to the sum of the following costs incurred and payments made during the 8-Week Covered Period. This language is somewhat troubling because it would seem to require the expenditure to be both incurred and paid during the same 8-week period.  It is also troubling because the language defining the costs that are included sometimes include the word payment and sometimes do not. The eligible costs to be included are the following (“Eligible Expenditures”):
        • (A) “Payroll costs” (as payroll costs are defined above, which excludes the portion of an employee’s compensation in excess of $100,000 per year, as prorated).
        • (B) “Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).” A “covered mortgage obligation” is defined as any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020.
        • (C) “Any payment on any covered rent obligation.” A “covered rent obligation” is defined as rent obligated under a leasing agreement in force before February 15, 2020.
        • (D) “Any covered utility payment.” A “covered utility payment” means payment for service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
      • (iii) We suspect that Congress wanted to make sure that the Eligible Expenditures were actually paid before forgiving the loan amount. We also suspect that Congress wanted to measure the expenses incurred during the 8-Week Covered Period.  However, the language is far from clear. What if you paid four months of rent during the 8-Week Covered Period?
    • (b) How is the Maximum Loan Forgiveness Amount reduced if the number of Employees has been reduced post-disaster (the “Reduction in Force Reduction”)?
      • (i) The sum of the Eligible Expenditures during the 8-Week Covered Period (however measured appropriately) is referred to as the Maximum Loan Forgiveness Amount.
      • (ii) The Maximum Loan Forgiveness Amount may be reduced because it must be multiplied by a fraction that penalizes employers for reducing headcount on a FTEE basis.
        • (A) The numerator of the fraction is the average number of full-time equivalent employees (FTEEs) per month – calculated by the average number of FTEEs for each pay period falling within a month – during the 8-Week Covered Period.
        • (B) The denominator of the fraction is either (at the election of the borrower):
          • (1) Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
          • (2) Average number of FTEEs per month employed from January 1, 2020 until February 29, 2020;
          • (3) Or, for seasonal employers – the average number of FTEEs per month employed from February 15, 2019 until June 30, 2019.
      • (iii) The CARES Act does not define a full-time equivalent employee. The Affordable Care Act defines a full-time employee as one that works 30 hours per week or 120 hours per month.  That is probably the best we have to go on at this time.  The same definition will apply in the numerator and the denominator.
      • (iv) This would probably mean that any employee that works on average more than 30 hours per week would be treated as one FTEE whether that employee averages 32 hours per week or 40 hours per week. Employees that work less than 30 hours per week would be treated as a partial FTEE.
    • (c) How is the Maximum Loan Forgiveness Amount reduced if the salaries and wages of employees have been reduced post-disaster (“Reduction in Wages Reduction”)?
      • (i) The Maximum Loan Forgiveness Amount shall be reduced by the amount of any reduction in total salary or wages of any “employee” during the 8-Week Covered Period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the 8-Week Covered Period.
      • (ii) Employee, for this purpose, is limited to any employee who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of pay over $100,000.
      • (iii) An eligible recipient with tipped employees may receive forgiveness for additional wages paid to those employees.
    • (d) What if the Employer has terminated employees or reduced compensation post-disaster but rehired employees and increased compensation prior to June 30, 2020?
      • (i) The Reduction in Force Reduction and the Reduction in Wages Reduction are ignored in the following circumstances. The amount of loan forgiveness shall be determined without regard to a reduction in the number of full-time equivalent employees of an eligible recipient or a reduction in the salary of one or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on approximately April 26, 2020 (the date that is 30 days after the date of enactment of the CARES Act), if
        • (A) with respect to the reduction in force, the borrower eliminates the reduction in force not later than June 30, 2020; and
        • (B) with respect to the reduction in wages, the borrower eliminates the reduction in wages not later than June 30, 2020.
      • (ii) This seems to open up the possibility for much gamesmanship by the borrowers in that borrowers might rehire a number of employees and even raise wages on June 15, 2020, and then reverse the hires and the increase in wages at some point not too long after June 30, 2020.
      • (iii) The Maximum Loan Forgiveness Amount would presumably still be based on the actual Eligible Expenditures during the 8-Week Covered Period. That is, as a result of terminating employees, the payroll costs in the 8-Week Covered Period will be less than they would have been had the employees not been terminated. We do not believe that rehiring employees or increasing salaries after the 8-Week Covered Period results in a deemed increase in Eligible Expenditures during the 8-Week Covered Period.
      • (iv) Further, it is not clear whether the reversal referenced above in subsection (d)(i) requires a total reversal in the reduction in force and a total reversal in the reduction in wages to get the benefit of this provision. In other words, if the Reduction in Force Reduction would have been based on a fraction of 12/20 because the eligible recipient terminated 8 of the 20 full-time employees but prior to June 30, 2020, rehired 4, would the fraction become 16/20, or would the fraction remain 12/20 because the eligible recipient did not totally reverse the reduction in force. The language is not clear.
      • (v) Hopefully, the SBA will issue regulations to add clarity to this provision.
    • (e) All of the discussion in this Section 4 related to the forgiveness of PPP Loans is found in Section 1106 of the CARES Act. Section 1106 defines “covered period” as the eight week period immediately following the loan origination (what we refer to as the 8-Week Covered Period). Section 1102 of the Cares Act used to determine the Maximum Loan Amount defines the covered period as the period from 2/15/20 to 6/30/20 (what we refer to as the 4.5 Month Covered Period). Using the 8-Week Covered Period makes sense when determining the amount of Eligible Expenditures by the eligible recipient which is used to determine the Maximum Loan Forgiveness Amount. When analyzing the numerator in the fraction used to determine the Reduction in Force Reduction and when evaluating reductions in wages in the Reduction in Wages Reduction, the reference to “covered period” as being this eight week period as opposed to the 4.5 month period seems illogical. In a way, it incentivizes employers to terminate their employees and/or reduce wages now and then rehire the terminated employees and increase the wages when the loan is originated which might not be until May. Further evidence that this may not have been the intent of Congress is that the curative provisions described above in subsection (d) are rendered irrelevant for any loans originated after April 26, 2020. The curative language focuses on reductions in force and wages that occurred between February 15, 2020, and 30 days after the legislation was passed which should be approximately April 26, 2020. For loans originating after April 26, 2020, this curative language is irrelevant. It would not be irrelevant if the covered period referenced in the Reduction in Force Reduction and the Reduction in Wages Reduction was the 4.5 Month Covered Period. However, Section 1106 states that the term covered period means this eight week period so it is hard to read those references as meaning the 4.5 month period.
    • (f) The eligible recipients seeking loans will be required to furnish:
      • (i) documentation verifying the number of full-time equivalent employees on payroll and pay rate for the applicable periods including
        • (A) payroll tax filings reported to the IRS; and
        • (B) State income, payroll, and unemployment insurance filings;
      • (ii) documentation, including canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on Eligible Expenditures;
      • (iii) a certification from a representative of the eligible recipient authorized to make such certifications that:
        • (A) the documentation presented is true and correct; and
        • (B) the amount for which forgiveness is requested was used to retain employees and make Eligible Expenditures;
      • (iv) and any other documentation required by the Administrator.
  1. How Do I apply? What Information, Documentation or Collateral Must I Provide?
    • Apply with Lenders. The CARES Act authorizes the SBA to make loans, directly or through qualifying lenders, under the PPP.  Under the CARES Act, qualifying lenders are deemed to have authority of the Administrator to make and approve PPP loans for the Permitted Uses.  In determining eligibility, the CARES Act specifically instructs lenders to determine, prior to approving a PPP loan, that the borrower (i) was in operation on February 15, 2020; and (ii) had employees for whom the applicant paid salaries and payroll taxes or paid independent contractors as reported on a Form 1099-MISC.
    • Collateral and Documentation. The CARES Act is clear that no personal guarantee and no collateral shall be required for the PPP loan.  The CARES Act is less clear as to what documentation it will require along with the application for a PPP loan.
    • Documentation that Banks Might Require. At a minimum, applicants should be ready to provide to the SBA or their lenders documentation to evidence that the applicant was in operation on February 15, 2020 and that the applicant had employees for whom the applicant paid salaries and payroll taxes or paid independent contractors.  Eligible self-employed individuals, independent contractors and sole proprietorships shall also submit “such documentation as is necessary to establish such individual as eligible” which such documentation may include payroll tax filings, Forms 1099-MISC, and income and expense statements from the sole proprietorship.
    • Additional Regulations to be Promulgated. The Administrator is required to issue, within thirty (30) days following enactment of the CARES Act, regulations to provide further guidance to applicants and lenders on the process. Though lenders anticipate that the loan process will be more streamlined for the PPP than is the case for typical Section 7(a) loans, until the Administration issues further guidance, many lenders are circulating their standard SBA Form 1919 to aid applicants in gathering of documents and information for the application process.  A copy of the current SBA Form 1919 may be downloaded here.
    • Borrower Certifications. When applying for a PPP loan, borrowers will be required to make a good faith certification that:
      • the uncertainty of current economic conditions “makes necessary the loan request to support the ongoing operations of the eligible recipient”;
      • funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
      • the eligible recipient does not already have an application pending for a PPP loan that is for the same purpose and duplicative of amounts applied for or received under a PPP loan; and
      • from February 15, 2020 until December 31, 2020, the eligible recipient has not received amounts under the PPP.
    • Though an applicant for SBA financial assistance ordinarily must show that it is unable to obtain credit elsewhere before the SBA will make the business a loan, this alternate source of credit rule is waived under the CARES Act.
  2. What are the terms of the loan (Initial deferment, Repayment Term, Interest Rate, Collateral, Personal Guaranty, Bank Fees)?
    • Loan repayment shall be deferred for at least six months and up to twelve months.
    • If there is a remaining balance due under the PPP loan, it shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness. It is not clear how the actual maturity date (i.e., 10 years or something shorter) will be determined. Presumably, the SBA will offer more guidance.
    • Collateral and personal guarantee requirements are waived under this program.
    • The maximum interest rate is 4% per annum.
    • Borrowers may not be charged prepayment fees.
    • The Administrator will have no recourse against any individual shareholder, member, or partner of an eligible recipient of a PPP loan for nonpayment of the PPP loan, except to the extent that such shareholder, member, or partner uses the covered loan proceeds for something other than a Permitted Use.
    • Participating lenders are entitled to compensation (based on loan balance at time of disbursement) of:
      • Five percent for loans of $350,000 or less;
      • Three percent for loans above $350,000 and less than $2 million; and
      • One percent for loans of $2 million and above.
    • The SBA guarantee for that portion of the loan will remain intact.
  3. What if I already applied for or have an Economic Injury Disaster Loan (EIDL)?
    • A recipient of an EIDL made during the period beginning on January 31, 2020 and ending on the date a PPP loan is made available can also obtain a PPP loan, as long as the EIDL loan is used for different purposes. An EIDL is not subject to forgiveness.
    • EIDLs made in between January 31, 2020 and ending on the date on which a PPP loan is made available may be refinanced as part of the PPP loan. Any such refinancing will not increase the $10 million maximum amount allowed for the PPP loan as set forth above.
    • The CARES Act makes the following additional changes to the SBA Disaster Loan program during the covered period for loans made in response to COVID-19:
      • Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
      • Waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
      • Waives the requirement that an applicant be unable to find credit elsewhere; and
      • Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”
  1. Are there Other Notable Provisions of the CARES Act that I Should Know?
    • There are significant tax provisions in the CARES Act. Click here for more information
    • The Administrator will not collect under the PPP the fees otherwise permitted under paragraphs (18)(A) and (23)(A) of the SB Act.
    • There are significant benefits for existing SBA loans.
      • This section defines “covered loans” as loans guaranteed by the Small Business Administrator under:
        • The SBA Business Loan Program, Section 7(a) of the Small Business Act (including the Community Advantage Pilot Program, but excluding the new PPP loans); or
        • Title V of the Small Business Investment Act; or
        • Made by an intermediary to a small business concern using loans or grants received under the SBA’s Microloan Program.
      • For these loans, the Administrator must pay (not just defer) (and relieve the borrower of any obligation to pay) the principal, interest, and any associated fees owed in a regular servicing status:
        • For covered loans made before this bill is enacted not on deferment, for the six-month period beginning with the next payment due;
        • For covered loans made before this bill is enacted that are on deferment, for the six-month period beginning with the next payment due after deferment; and
        • For covered loans made within six months of enactment of this bill, for six months after the first payment is due.
      • With respect to these loans, it is the Sense of the Congress that the Administration, in addition to the SBA relief already provided under the CARES Act, “should encourage lenders to provide payment deferments, when appropriate, and to extend the maturity of covered loans, so as to avoid balloon payments or any requirement for increases in debt payments resulting from deferments provided by lenders” during the COVID-19-declared emergency.

The SBA is expected to publish further guidance in the next week or two, and thus some of the foregoing may be modified or clarified further.  If you have any questions about the PPP SBA Loan Program, including whether your business is eligible for such a loan, please do not hesitate to reach out to one of our CARES Act Team Members:  Dean Cazenave (dean.cazenave@keanmiller.com, 225.382.3483), Blane Clark (blane.clark@keanmiller.com, 225.382.3414), Royce Lanning (royce.lanning@keanmiller.com, 832.494.1711), Matthew Meiners (matthew.meiners@keanmiller.com, 225.382.3416), Mark Miller (mark.miller@keanmiller.com, 318.562.2701) and Elisabeth Prescott (elisabeth.prescott@keanmiller.com, 225.389.3789).