By Lindsey Berwick & John Wittenberg
– July 15, 2020
On Saturday, July 11, 2020, the Small Business Administration announced that the Expansion of Economic Injury Disaster Loan Program (EIDLP) has ended after reaching the $20 billion limit allowed by Congress. The program was designed to provide low-interest, long-term Economic Injury Disaster Loans (EIDLs) to businesses as an affordable way to help them recover from the COVID-19 disaster.
Although the EIDLP has ended, the Paycheck Protection Program (PPP) deadline was recently extended, and business owners are still able to apply through August 8.
Jackson Walker will be providing additional insights on recent changes to the PPP in the near future.
For our most recent information on small business lending, view the following articles:
- “CARES Act Update – Overview of Expanded Main Street Lending Program” (June 18, 2020)
- “SBA Releases New Paycheck Protection Program Loan Forgiveness Applications, Including an EZ Application” (June 17, 2020)
- “Paycheck Protection Program Flexibility Act of 2020 – Amendments Affording Greater Flexibility to PPP Borrowers” (June 5, 2020)
- “Paycheck Protection Program Update – SBA Issues Guidance on Loan Forgiveness and Loan Review Procedures” (May 28, 2020)
– April 8, 2020
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law. The CARES Act provides emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic. The CARES Act will make available, through the Keeping American Workers Paid and Employed Act, $349 billion in loans under the Paycheck Protection Program (under the SBA 7(a) loan program), and an additional $10 billion for relief under expanded Economic Injury Disaster Loan Program (EIDLP). Subsequent to the enactment of the CARES Act, the U.S. Small Business Administration (SBA) further interpreted the Paycheck Protection Program provisions of the CARES Act in two interim final rules issued on April 2, 2020, and April 3, 2020. The SBA subsequently issued a summary of the affiliation rules applicable to the Paycheck Protection Program on April 3, 2020, and updated the Paycheck Protection Program Frequently Asked Questions on April 7, 2020.
This summary has been updated to reflect the changes and clarification provided by the SBA rules and additional guidance referenced above.
Paycheck Protection Program
The CARES Act temporarily amends the SBA’s 7(a) Loan Program to provide for the making of Paycheck Protection Program Loans (PPPL) to eligible applicants for payroll losses and selected working capital costs in light of COVID-19. A summary of the important terms of the PPPL is as follows:
- Lender: Approved SBA 7(a) lender or other lender approved by the Department of Treasury.
- Covered Period: February 15, 2020 to June 30, 2020.
- Application Deadline: August 8, 2020. [The SBA urges applicants to apply as soon as possible to secure their place in line.]
- Approval Process/Submittals: The applicant must submit the following:
- Paycheck Protection Program Application;
- Good faith certification (included on the PPPL application);
- The name, title, ownership percentage, TIN/EIN and address of any 20% or greater equity owners of the applicant’s business;
- Payroll documentation;
- The details of any EIDL received between January 31, 2020, and April 3, 2020; and
- Other submittals required by the SBA lender, if any.
- Eligibility Criteria: To be eligible for a PPPL, an applicant must:
- Have been operational on February 15, 2020.
- Have paid salaries and payroll taxes to employees.
- Certify that the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant.
- Satisfy one of the following:
- The existing statutory and regulatory definition of a “small business concern” under Section 3 of the Small Business Act (based upon employee-based or revenue-based size standards corresponding to its primary industry as set forth in the SBA’s Table of Small Business Size Standards); or
- The Act’s expanded eligibility criteria that business concerns have no more than the greater of (a) 500 or fewer employees whose principal place of residence is in the United States, or (b) the applicable SBA employee-based size standards specific for the industry in which the business operates<.
Additional Comments on PPPL Eligibility:
- A business that qualifies as a “small business concern” under Section 3 of the Small Business Act (based upon employee-based or revenue-based size standards corresponding to its primary industry as set forth in the SBA’s Table of Small Business Size Standards), may truthfully attest to its eligibility for a PPPL on the Application, unless otherwise ineligible.
- A business may qualify for a PPPL as a small business concern if it met both tests in the SBA’s “alternative size standard” as of March 27, 2020: (i) maximum tangible net worth of the business is not more than $15MM and (ii) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the PPPL application is not more than $5MM.
- For purposes of calculating the number of employees, “employees” includes anyone employed by the applicant on a full-time, part-time, or other basis, subject to the SBA’s affiliation rules (see Size Tests – Affiliates below).
- The 500-employee rule will be applied on a per physical location basis for businesses in the accommodation (i.e., hotel) and food services sector (NAICS 72).
- Affiliation rules will be waived for (i) businesses in the accommodation (i.e., hotel) and food services sector (NAICS 72); (ii) businesses operating as a franchise that is assigned a franchise identifier code by the SBA; and (iii) businesses receiving financial assistance under Section 301 of the Small Business Investment Act of 1958. [THE SBA WILL ISSUE ADDITIONAL GUIDANCE ON AFFILIATION RULES.]
- Sole proprietors, independent contractors, and other self-employed individuals are also eligible for PPPLs.
- Ineligibility: An applicant is ineligible if:
- It is engaged in any activity that is illegal under federal, state, or local law.
- It is a household employer (individuals who employ household employees such as nannies or housekeepers).
- An owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years.
- It, or any business owned or controlled by applicant or any of applicant’s owners, has ever obtained a direct or guaranteed loan from the SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
Businesses that are not eligible for PPPLs are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the CARES Act are eligible. (SOP 50 10, see Page 85 for Subpart B, Chapter 2).
- Loan Amount: Up to $10 million.
- Calculation of Loan Amount: The loan amount will be the lesser of (a) $10,000,000 and (b) up to two months of the average monthly payroll costs from the last year [Borrowers may calculate payroll costs using data either from the previous 12 months or from calendar year 2019], plus an additional 25% of that amount. If the business is a seasonal or new business, the time periods for calculation will be different. Payroll costs will be capped at $100,000 annualized for each employee. If applicable, the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020, less the amount of the EIDL Grant, will be added to the loan amount (see Applying for Both an EIDL and a PPPL below).
- Interest Rate: Not to exceed 4.00% per annum, fixed. [The SBA & Treasury have indicated the rate will be 1.00% per annum, fixed.]
- Repayment: Payment of principal and interest will be deferred for six months and may be further deferred for up to one year. [The SBA & Treasury have indicated that deferment will be for six (6) months.]
- Term: Maximum of 10 years. [The SBA & Treasury have indicated the term will be two (2) years.]
- Collateral: PPPLs are unsecured (i.e., do not require pledge of collateral).
- Guarantee: No repayment guaranty is required.
- Recourse: The SBA lender originating a PPPL will not have recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
- Loan Fees: All upfront loan fees (e.g., origination fees) are waived.
- Prepayment: Permitted – No penalty or fee.
- Loan Uses: Permitted uses of PPPL proceeds include:
- payroll costs (capped at $100,000 on an annualized basis for each employee);
- costs related to the continuation of group healthcare benefits during periods of paid sick, family, or medical leave, and insurance premiums;
- salaries, commissions, and similar compensation; mortgage interest (not principal);
- rent payments;
- utilities; and
- servicing interest on other debt obligations incurred before February 15, 2020.
- Loan Forgiveness: Borrowers may apply for forgiveness of a PPPL in an amount equal to the sum spent during the eight-week period following the origination date of the PPPL on the following incurred costs:
- payroll costs (not to exceed $100,000 of annualized compensation per employee);
- interest payments on any mortgage loan incurred before February 15, 2020;
- rent payments on any lease in force before February 15, 2020; and
- utility payment on which service began before February 15, 2020.
[The SBA & Treasury have indicated that not more than 25% of the forgiven amount may be for non-payroll costs.]
The amount forgiven may not exceed the original principal amount of the PPPL. In addition, the amount forgiven will be reduced based upon a reduction in the number of full-time equivalent employees or a reduction in the total salary or wages of any employee. A borrower that, by June 30, 2020, (i) rehires full-time equivalent employees previously laid off between February 15, 2020, and April 26, 2020, or (ii) eliminates the reduction in the salary or wages reduced between February 15, 2020, and April 26, 2020, will not be penalized for having reduced the number of full-time equivalent employees or payroll at the beginning of the covered period.
The amount of the PPPL forgiven is not considered taxable income to the borrower, and any amount not forgiven will be repayable by the borrower over a period not to exceed the term of the PPPL.
The SBA issued guidance on loan forgiveness and loan review procedures in May 2020, and the Paycheck Protection Program Flexibility Act of 2020 was signed into law in June.
How to Apply
- Businesses and sole proprietorships began applying for PPPLs through existing SBA Lenders on Friday, April 3, 2020.
- Starting Friday, April 10, 2020, independent contractors and self-employed individuals were able to apply for a PPPL through existing SBA Lenders.
- Newly regulated lenders will be available to make PPPLs as soon as they are approved and enrolled in the program.
Expansion of Economic Injury Disaster Loan Program (EIDLP)
The CARES Act expanded the EIDLP to provide low-interest, long-term Economic Injury Disaster Loans (EIDLs) to businesses as an affordable way to help them recover from the COVID-19 disaster.
- Loan Amount: Up to $2 million, based on an applicant’s actual economic injury and financial need, but EIDLs do not replace lost sales or revenue.
- Calculation of Loan Amount: The actual amount of each EIDL is limited to the economic injury determined by SBA program standards, less business interruption insurance and other recoveries up to the administrative lending limit. SBA also considers potential contributions that are available from the business and/or its owner(s) or affiliates.
- Interest Rate: Small business – 3.75% per annum, fixed; nonprofit – 2.75% per annum, fixed.
- Repayment: As determined by SBA underwriting.
- Term: Up to a 30-year term and amortization.
- Collateral: Required for EIDLs in amounts equal to or greater than $25,000. [The SBA has advised that it will not decline a COVID-19 EIDL application due to insufficient or lack of collateral.]
- Guarantee: Payment guaranty is required for EIDLs of $200,000 or more.
- Recourse: The SBA has recourse against any borrower and any guarantor for non-payment.
- Loan Uses: The permitted uses of EIDL proceeds include:
- providing paid sick leave to employees unable to work due to the direct effect of COVID-19;
- maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- meeting increased costs to obtain materials unavailable from applicant’s original source due to supply chain disruptions;
- making rent or mortgage payments; and
- repaying obligations that cannot be met due to revenue losses.
- Loan Forgiveness: None.
- Loan Fees: All upfront loan fees (e.g., origination fees) are waived.
- Prepayment: Permitted – No penalty or fee.
- EIDL Grant: While an EIDL loan application is pending with the SBA, the applicant may request an advance of up to $10,000 (EIDL Grant), which shall be paid by the SBA to the applicant within three days of the SBA’s receipt of the application. Awarded EIDL Grants will not need to be repaid, even if the EIDL application is denied.
- Waiver of Certain EIDL Requirements: The CARES Act waives the standard EIDL requirements that:
- the applicant provide a personal guarantee for loans up to $200,000;
- the eligible business be in operation for one year before the disaster; and
- the applicant be unable to obtain credit elsewhere.
- Faith-Based Organizations: Faith-based organizations, including houses of worship, are eligible to receive SBA loans under the PPP and EIDL programs regardless of whether they provide secular social services. The relationship of a faith-based organization to another organization is not considered an affiliation with the other organization if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.
- Applying for Both an EIDL and a PPPL: If an applicant received an EIDL from January 31, 2020 through April 3, 2020, the applicant can apply for a PPPL. If the EIDL was not used for payroll costs, it does not affect an applicant’s eligibility for a PPPL. If the EIDL was used for payroll costs, the PPPL must be used to refinance the EIDL. Proceeds from any EIDL Grant will be deducted from the loan forgiveness amount on the PPPL.
- Size Tests – Affiliates: Applicants must include their affiliates when determining the number of employees to determine eligibility. The SBA determines whether an entity qualifies as a small business concern by counting its receipts, employees, or other measure including those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. SBA’s regulations on affiliation are contained in 13 C.F.R. § 121.103. [THE SBA WILL ISSUE ADDITIONAL GUIDANCE ON AFFILIATION RULES.]
- Required Consents: Applicants should determine whether they will need to obtain consent from any lenders, landlords, or investors under existing debt facilities, leases, and organizational documents in connection with obtaining an EIDL or PPPL.
- SBA – Small Business Guide Resources
- SBA – State/Regional Resource Guides
- SBA – SBA Interim Final Rule
- Treasury – Paycheck Protection Program Application Form
- Treasury – Paycheck Protection Program Information Sheet for Borrowers
- Treasury – Paycheck Protection Program Information Sheet for Lenders
- Treasury – Paycheck Protection Program FAQs
For specific assistance or more information concerning these loan programs, please contact John Wittenberg or Lindsey Berwick. For additional information you can also visit the JW Coronavirus microsite.
 Payroll costs include: compensation to employees (whose principal place of residence is the U.S.) in the form of salary, wages and commissions; payment of cash tips; payment of vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for group health benefits (including insurance premiums); payment of retirement benefits; or payment of state or local tax assessed on employee compensation; and for an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation not in excess of $100,000 in 1 year, as prorated for the covered period.
Payroll costs exclude: compensation of an individual employee in excess of an annual salary of $100,000 (as prorated for the period); federal employment taxes imposed or withheld taxes; compensation to an employee whose principal residence is outside of the U.S.; qualified sick leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act (FFCRA); and qualified family leave wages for which a credit is allowed under Section 7003 of the FFCRA.
Lindsey B. Berwick has multifaceted experience handling commercial financing and transactional matters in both private practice and at one of the nation’s 60 largest financial institutions. Lindsey’s practice focuses on complex business transactions involving real estate, finance, commercial agreements and general corporate law. Clients look to Lindsey to evaluate and advise on commercial loan structures and documentation, leveraging her extensive background in the banking and finance industry to identify the correct financing vehicle for each transaction with a focus on achieving the clients’ business goals.
John D. Wittenberg represents and counsels a wide variety of clients in all aspects of commercial real estate (office, retail, and industrial). John’s practice includes the representation of banks and other financial institutions, as well as equity sponsors and borrowers, on complex business transactions and a broad range of transactional matters. Over the course of his career, John has represented clients on acquisitions and dispositions of commercial real estate, commercial leases (office, retail and industrial), sale-leasebacks, and commercial development transactions.
Please note: This article and any resources presented on the JW Coronavirus Insights & Resources site are for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Jackson Walker. The facts and results of each case will vary, and no particular result can be guaranteed.