Paycheck Protection Program Loans
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for $350 billion in loans to be administered by the Small Business Administration (SBA), referred to as the Paycheck Protection Program. The loans may be used to cover a borrower’s payroll, mortgage interest, rent and utilities for eight weeks from the date of the loan. If an eligible borrower uses the loan for qualifying expenses while maintaining its workforce the loan may be forgiven.
Qualification and Terms of Paycheck Protection Program
To qualify for the loan program, a borrower: (1) must have been in operation on February 15, 2020; (2) have no more than 500 employees; and (3) must certify that the uncertainty of current economic conditions makes necessary the loan request to support its ongoing operations.
The amount of a loan cannot exceed 250% of the borrower’s average total monthly “payroll costs” during the one-year period leading up to loan origination. Loans are subject to a maximum of $10 million. “Payroll costs” include salaries, wages, commissions, tips, paid time off, health insurance, retirement benefits, and state and local taxes not to exceed $100,000 per employee.
Amounts not forgiven (as explained below) will have a maximum maturity date of 10 years from the date the borrower applied for loan forgiveness. Interest on the loans shall not exceed 4% until June 30, 2020, but may be subject to change thereafter. All loan payments (principal, interest and fees) are deferred for at least six months, and up to one year.
Importantly, loans are to be nonrecourse, except to the extent the loan proceeds are used for a purpose other than borrower’s payroll, mortgage interest, rent and/or utilities expenses. No borrower or owner will need to provide any collateral or personal guarantee during the “covered period” (February 15, 2020 – June 30, 2020). It is unclear whether lenders will require collateral and/or a personal guarantee to spring into effect upon the loan continuing to remain outstanding (or not completely forgiven) after June 30, 2020.
The sum of all payroll costs, mortgage interest payments, rent and utility payments incurred and made by borrower during the eight weeks following the loan, capped at the total loan principal amount, is eligible for forgiveness. Unlike other forms of forgiveness of indebtedness, the amount of forgiveness received by a borrower will not be taxed as income.
A borrower’s maximum forgiveness amount can be reduced if it reduces its number of Full-Time Equivalents (FTEs) and/or reduces wage or salary compensation in excess of 25%. The reduction of forgiveness is reduced in proportion to the decrease in the number of FTEs during the eight week period following the loan origination and borrower’s monthly average FTEs from either (1) February 15, 2019 – June 30, 2019 or (2) January 1, 2020 – February 15, 2019.
In addition, the maximum forgiveness amount will be reduced dollar-for-dollar for any wage or salary reduction of an employee paid who is paid less than $100,000 year in excess of 25%, measured against the wage and salary for such employee during the most recent full quarter prior to loan origination.
A borrower that previously reduced its workforce or the salary/wages it pays its employees can mitigate the reductions to loan forgiveness if FTEs are re-hired and/or wages are restored by June 30, 2020.
Information for Lenders
The Paycheck Protection Program will be administered out of the existing network of approved SBA lenders. However, the SBA and Treasury Department may add qualified lenders to disburse and service loans made with the guarantee of the SBA.
Lenders can make borrower eligibility determinations without SBA approval utilizing only the program eligibility rules. Importantly, a borrower does not need to show it is unable to obtain credit elsewhere, a customary SBA loan requirement.
Loans under the program are fully guaranteed by the federal government, which is an increase to the existing guarantee percentages under the current SBA loan program.
The SBA and the Department of Treasury are in the process of developing the guidelines that will be applicable to the administration of Payroll Protection Program loans. However, the SBA must issue regulations within 15 days of enactment of the CARES Act without regard to notice and comment requirements. It is possible that lenders could begin taking loan applications in two weeks.
Recommendations for Potential Borrowers
We recommend that potential borrowers create documentation now to verify the following:
1. the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings, state income, payroll, and unemployment insurance filings; and
2. payments on mortgage obligations, lease obligations and utilities, including payment receipts, transcripts of accounts, or other documents.
This information must be submitted with an application for loan forgiveness. After an application is submitted, the lender has 60 days to make a determination as to whether the loan will be forgiven. Lenders will then work with the SBA to be reimbursed for the forgiven amount.