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CARES Act Loans: An Overview of the Paycheck Protection Program

March 31, 2020


On March 27, 2020, President Trump signed into law the highly anticipated Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  The CARES Act is a $2.2 Trillion stimulus plan issued in response to COVID-19 and designed to aid individuals and businesses while the nation navigates these unprecedented times.

Though additional guidance is yet to be delivered in the form of rules and regulations for several provisions under the new law, many business owners, non-profit organizations and individuals want to know the options that are available now or will become available in the near future.

This Montgomery McCracken client alert specifically addresses solely the Paycheck Protection Program (“PPP”) under the CARES Act.

Our Montgomery McCracken colleagues have addressed other forms of aid available under the CARES Act and other federal, state and local government programs relating to COVID-19, which include, but are not limited to tax credits, tax deadline filing extensions, rebates and grants. Our Firm will continue to update the Montgomery McCracken COVID-19 Resource Center as additional programs and guidance are released.

Paycheck Protection Program (“PPP”)

The CARES Act provides $349 billion in additional funding to the Small Business Administration (“SBA”) for loans to “small business concerns” through the PPP – an expansion of the SBA’s existing 7(a) loan program for the time period between February 15, 2020 and June 30, 2020.

Who is eligible?

The CARES Act expands the SBA 7(a) loan program’s definition of “small business concern” to include businesses, non-profit organizations, veterans’ organizations, sole proprietors, independent contractors, eligible self-employed individuals, or Tribal small business concerns, if such persons or entities employ not more than the greater of:

  • 500 employees (individuals employed on a full-time, part-time or “other basis” are included for purposes of the determination); or
  • the employee size standard, if any, assigned by the SBA to the applicable North American Industry Classification System (NAICS) Code.

Businesses that fall within NAICS Code 72 (accommodations and food services) may determine their eligibility by calculating their number of employees by physical location.

Notably, affiliates are generally included for purposes of determining the number of employees. As a general principle, entities are deemed to be affiliates “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.” The CARES Act does, however, waive the affiliation requirement for:

  • franchises reflected on the SBA franchise registry;
  • any business that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act (a small business investment company, or SBIC); and
  • any business with not more than 500 employees that is assigned a NAICS code beginning with 72 (accommodation and food services).

The affiliation requirement may cause private equity backed portfolio companies to be ineligible for the PPP. As currently written, most portfolio companies controlled by private equity sponsors, even though each such company may be an eligible business when considered on its own, would be aggregated with the other controlled portfolio companies of the sponsor, such that they would exceed the 500-employee limitation for participation.  It is anticipated that this issue will be resolved when the SBA releases PPP regulations, but confirmation of that point has yet to be given.

What are the terms of the loan?

  • Loan Amounts – The maximum PPP loan amount is the lesser of $10 million or 2.5 times the average monthly payroll costs of the business, measured over the one-year period prior to the date the PPP loan is made. Seasonal businesses and businesses not in operation from February 15, 2019 to June 30, 2019 are subject to a different measurement period for purposes of determining average monthly payroll.
    • “Payroll costs” as used in the PPP include the sum of payments of any compensation with respect to employees that is a:
      • salary, wage, commission, or similar compensation;
      • payment of cash tip or equivalent;
      • payment for vacation, parental, family, medical, or sick leave;
      • allowance for dismissal or separation;
      • payment required for the provision of group health care benefits, including insurance premiums;
      • payment of any retirement benefits;
      • payment of State or local tax assessed on the compensation of employees; and
      • 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 not exceeding more than $100,000 in 1 year, as prorated for the period beginning on February 15, 2020 and ending on June 30, 2020.
    • “Payroll costs” do not include:
      • the compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period beginning on February 15, 2020 and ending on June 30, 2020;
      • taxes imposed or withheld under FICA (Social Security and Medicare), Railroad Retirement Act, and IRC Chapter 24 (income tax at source);
      • any compensation of an employee whose principal place of residence is outside the United States; or
      • qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
  • Interest Rate – Interest rates are capped at four percent (4%).
  • Term – Maximum term is 10 years after determination of the amount, if any, to be forgiven (as set forth in further detail herein).
  • Payment Deferral – Payments of principal, interest and fees will be deferred for 6–12 months.
  • Collateral – No collateral required.
  • Personal Guarantee – No personal guarantee required.
  • Recourse – PPP loans are 100% guaranteed by the SBA (as opposed to 75% for traditional 7(a) loans). No recourse to owners of borrowers for nonpayment, unless proceeds are used for an improper purpose.
  • Penalties and Fees – Prior to June 30, 2020, fees applicable to other 7(a) loans will be waived for PPP loans. There will be no prepayment penalties throughout the life of the loan.

What can a PPP loan be used for?

Proceeds from PPP loans can be used for:

  • Payroll costs;
  • Costs related to the continuation of group health care benefits during periods; of paid sick, medical, or family leave, and insurance premiums;
  • Employee salaries, commission, or similar compensations;
  • Payments of interest on any mortgage obligation (excludes prepayment and principal);
  • Rent payments (including rent under a lease agreement);
  • Certain utilities; and
  • Interest on any other debt obligation that were incurred prior to February 15, 2020.

Will any portion of a PPP loan be forgiven?

An individual or entity that is eligible to receive a PPP loan is eligible for forgiveness of indebtedness on that loan in an amount equal to the sum of the following costs incurred and payments made during the 8-week period beginning on the origination date of the covered loan:

  • Payroll costs (as defined herein);
  • Interest payments on a covered mortgage obligation;
  • any payment of a rent obligation made under a leasing agreement in effect prior to February 15, 2020; and
  • any utility payment related to the distribution of electricity, gas, water, transportation, telephone or interest access for which service began prior to February 15, 2020.

Any amount that would otherwise be forgiven may be reduced based on:

  • The borrower’s failure to maintain an average number of full-time equivalent employees per month (calculated as, at the election of the borrower, either the average number of such employees between (i) February 15, 2019 and June 30, 2019, or (ii) January 1, 2020 and February 29, 2020); and
  • A reduction in compensation for any individual making less than $100,000 per year by more than 25% measured against the most recent full quarter.
  • Layoffs or reductions in compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will be exempt if such employees are re-hired or replaced by June 30, 2020.

Any amount would be includible in gross income of the eligible recipient by reason of forgiveness is excluded from gross income.

How do I apply for a PPP loan?

When the application is released, PPP loans will be made through lenders that are currently authorized under the SBA 7(a) loan program and additional lenders approved by either the SBA or the Department of the Treasury.  Applications for PPP loans must be submitted prior to June 30, 2020.

What else is required?

Though more guidance is coming, which may include additional requirements, the CARES Act states that PPP loan applicants must make a good faith certification that:

  1. The uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
  2. Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  3. The borrower does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  4. During the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts for the same purpose and duplicative of amounts applied for or received under a covered loan.

The SBA is required to issue regulations to implement the PPP by April 11, 2020 (within 15 days of the enactment of the CARES Act).  Until those regulations are released, the exact application and process remains unknown.  Notwithstanding that, we highly advise those interested in applying for PPP loans to connect with their banker to confirm they are an authorized SBA lender. We expect there to be significant demand for PPP loans, and given there is a limited amount of funds available for the PPP, it is advisable for an eligible borrower to apply as early as possible.

Montgomery McCracken attorneys are available to assist with applications and have been assisting clients with numerous issues related to COVID-19. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.