Congress passed and the President signed H.R. 748 on March 27, 2020 in light of the recent Coronavirus / COVID outbreak. It contains the single largest government spending program ever enacted or implemented. Many clients are debating whether to make use of a portion of the act – specifically Div A, Title I, KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT. That Section allows the Small Business Administration to guarantee and in some cases pay off certain loans that would otherwise not be available to small businesses. The entire CARES Act can be viewed here https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.xml This post is an overview of that loan program and the ability to have some or all of the loan forgiven.

Before providing the overview, any client considering using this loan program should consider how likely the loan will be approved to be forgiven – and how much might not be forgiven. Even if a loan is not forgiven, there are valid reasons to consider using this loan program because the loan terms are generally very favorable as compared to regular SBA loans. Some businesses however, for example, businesses that have few or no employees, such as real estate holding companies – will not really benefit from this. However, their tenants might benefit from this because a covered cost includes rent. If their tenants are able to re-employ their workers in a fairly short time frame, the loan amount for those expenses might largely be forgiven.

Overview

  1. Eligibility:  In general, any business, including non-profits, sole proprietorships, contractors etc are eligible – but they generally must have less than 500 employees and have been in business as of 2/15/2020.[1] 
  2. Amount:  The maximum loan is 2.5 X the total payroll costs of the eligible business for the 1 year period prior to the date the loan is made, not to exceed $10,000,000. Businesses that have been in business for less time can still obtain a loan.
  3. Period:  The loan must be made between February 15, 2020 and June 30, 2020.
  4. Interest rate:  Interest cannot exceed 4%.
  5. Precondition:  The eligible business must make certification that it has been impacted by COVID, however, the certification is very broad.
  6. Use of funds:  Funds from the loan may only be used for eligible expenses which are: payroll costs; group health care benefits; employee related insurance premiums employee salaries, commissions, or similar compensations, payments of interest on any mortgage obligation, rent, utilities; and interest on any other debt obligations that were incurred before the covered period started.  Note that these types of expenses can extend past the “covered period” for loan forgiveness.
  7. Fees: All application fees are waived. All requirements for personal guarantees are also waived.
  8. Repayment deferral:  Lenders MUST defer all payments (interest and principal) for at least 6 months, but not more than 1 year.
  9. Forgiveness: The eligible business may request that the loan be forgiven for covered costs incurred during the “covered period” which is the 8 week period commencing on the date of the loan origination.
    • Covered costs are rent on leases entered into before February 15, 2020, payroll costs[2] (during the covered period), payments of interest on any covered mortgage obligation, and payments on covered utility payments.
    • The maximum forgiveness cannot exceed the covered loan amount.[3]
    • The amount to be forgiven is reduced on a formula of the average number of “full-time equivalent employees”[4] per month employed by the eligible recipient during the covered period, as compared to the same number in either the period of January 1, 2020 and ending on February 29, 2020 or the period February 15, 2019 and ending on June 30, 2019 (at the election of the borrower), but . . .
    • If the eligible business had reduced hours of full time equivalent employees in the period 2/15/2020 and ending on 4/27/2020, such reductions shall not be used in the above calculation as long as such reductions are reinstated not later than June 30, 2020.

More detailed provisions supporting the above summary

H.R. 748, Div A, Title I, KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT

Sec. 1102(a)(1)(A)(iii) – the term ‘covered period’ means the period beginning on February 15, 2020 and ending on June 30, 2020;

(viii) – “payroll costs” – generally, all costs, including retirement, PTO, tips, health insurance, but: capped at 100K over a year, does not include costs for employees whose principal residence is located outside of US, does not include employee tax withholdings, does not include payments under section 7001 of the Families First Coronavirus Response Act (Public Law 116–127).

Sec. 1102(a)(1)(D) – must have less than 500 employees (complex formulas and requirements as to how to count them, and for multi-location businesses)

Sec. 1102(a)(1)(E) – maximum loan is generally 2.5 X the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made, capped at $10,000,000. Formula is different if business was started after 2/15/19.

Sec. 1102(a)(1)(F) ALLOWABLE USES OF COVERED LOANS.—

“(i) IN GENERAL.—During the covered period, an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds of the covered loan for—

“(I) payroll costs;

“(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;

“(IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);

“(V) rent (including rent under a lease agreement);

“(VI) utilities; and

“(VII) interest on any other debt obligations that were incurred before the covered period.

Sec. 1102(a)(1)(F)(ii)(II) A lender must consider the age of the business, especially if it either was not in operation as of 2/15/2020, or had no employees or contractors.

Sec. 1102(a)(1)(G) BORROWER REQUIREMENTS.— in general the borrower has to certify that

“(I) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;

“(II) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;

“(III) that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and

“(IV) during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

All application fees are waived, and there is no personal guaranty requirement.

Loans cannot exceed 4% interest

All payments on loans must be deferred at least 6 months, and not more than 1 year.

Loan Forgiveness, Sec. 1106.

“covered period” means the 8-week period beginning on the date of the origination of a covered loan;

“covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020;

“expected forgiveness amount” means the amount of principal that a lender reasonably expects a borrower to expend during the covered period on the sum of any—

(A) payroll costs;

(B) payments of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation);

(C) payments on any covered rent obligation; and

(D) covered utility payments;…

Limits on forgiveness:  “The amount of loan forgiveness under this section shall not exceed the principal amount of the financing made available under the applicable covered loan.”  §  1106(d)

Amount is reduced by a formula:

(the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period)


DIVIDED BY

EITHER:

(the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019)

OR

(the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020)

In addition, “The amount of loan forgiveness under this section shall be reduced by the amount of any reduction in total salary or wages [of any employee making less than 100K] … during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.”

Finally, “the amount of loan forgiveness under this section 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 1 or more employees of the eligible recipient, as applicable, during the period beginning on February 15, 2020 and ending on [April 27, 2020]” if

EITHER OR BOTH OF THE FOLLOWING ARE TRUE:

“(I) during the period beginning on February 15, 2020 and ending on [April 27, 2020], there is a reduction, as compared to February 15, 2020, in the number of full-time equivalent employees of an eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the number of full-time equivalent employees;

(I) during the period beginning on February 15, 2020 and ending on [April 27, 2020], there is a reduction, as compared to February 15, 2020, in the salary or wages of 1 or more employees of the eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees


[1] A business formed or started after this date might be eligible, it is a factor in the loan underwriting.  Multi-location businesses with more than 500 employees might also be eligible.

[2] Note that there are no exclusions for payroll paid to owners, so long as the owner is not making more than 100K.

[3] It is not clear if they intended this to mean “plus interest”

[4] Note therefore that part time employees are covered but are calculated on a “full time equivalent” basis.