March 27, 2020

Client Alert: Update on Recent Legal Developments in the Wake of Ongoing COVID-19 Crisis

March 31, 2020

In this update:

Congress Passes CARES Act. Affords Economic Relief for Small Businesses Impacted by COVID-19 by Appropriating $350 Billion to the Small Business Administration for Low Interest Loans with the Prospect of Loan Forgiveness

In response to the massive disruption COVID-19 has caused to businesses of all sizes, and particularly small businesses, this past Friday, President Trump signed into law the Keeping American Workers Paid and Employed Act as part of the larger Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Under the Act, the Small Business Administration is authorized to make up to $349 billion in loans to eligible small businesses under the Business Loans Program Account for the Paycheck Protection Program.

A. Paycheck Protection Program

Designed to promote the continued employment of employees, the Paycheck Protection Program allows eligible for-profit and non-profit businesses with no more than 500 employees (or a greater number based on the size standard applicable to the industry), as well as eligible sole proprietors, independent contractors and self-employed individuals, to obtain a loan to cover payroll costs, including healthcare premiums and paid time off, rent, utilities, interest on mortgage payments and interest on other pre-existing loans for an eight-week period between February 15, 2020 and June 30, 2020.

Eligible employers and self-employed individuals are eligible for loans that are generally equal to the lesser of $10,000,000 or 2.5 times the borrower’s average monthly payroll costs over the one year period preceding the loan, plus certain other costs. Compensation of an individual employee in excess of $100,000 during the one year period before the loan is made is not included within the calculation.
Loan proceeds may only be used to cover payroll costs, costs related to the continuation of group healthcare benefits during periods of paid sick, medical or family leave, and insurance premiums, payments on interest of any mortgage obligations incurred prior to February 15, 2020, rent on any lease in force prior to February 15, 2020, utilities, interest on debt incurred prior to the covered period.
Loans will have the following terms:
- 10 year maturity period (to the extent not forgiven)
- Interest at a rate not greater than 4%
- No personal guarantees
- Nonrecourse
- Lenders are required to treat every borrower as having been impacted by COVID-19 and to defer the loan repayment for no less than 6 months and no longer than one year if the borrower requests deferral.
Borrower and Lender Fees are Waived.

B. Loan Forgiveness

Unlike Economic Injury Disaster Loans (EIDLs), the Federal Government has incentivized small businesses to maintain their workforce by offering to forgive the loan in an amount equal to the sum of the payroll costs and other eligible uses to which the business applies the loan during the eight-week period.

Expenses Eligible for Forgiveness:
- Payroll costs and employee compensation;
- Mortgage interest;
- Rent; and
- Utilities
Restrictions:
- Forgiveness amount will be reduced by a fraction, the numerator of which is the average of full time equivalent employees employed during the 8 week period following receipt of the loan and, the denominator of which is either the average number of full time employees employed by the borrower between February 15 and June 30, 2020 or the average number of full time employees employed by the borrower between January 1 and February 29, 2020. The borrower elects which fraction to use.
- Forgiveness amount will be reduced by the total reduction in salary or wages of any employee earning less than $100,000 on an annualized basis that exceeds 25% of the total salary or wages of the employee during the preceding full quarter in which the employee was employed prior to the date of the loan.
The borrower does not lose forgiveness of the loan based on employees whose employment is terminated or whose salaries and wages are decreased by more than 25% between February 15, 2020 and ending on the date that is 30 days after the date of enactment of this Act, if by June 30, 2020 the employer has eliminated the reduction in the workforce and the reduction in salaries and wages.

C. Additional Information

The Act delegates authority to participating banks to make and approve these loans to eligible borrowers, which will be 100% SBA guaranteed.
The applicant must submit a good faith certification detailing: (1) that the uncertainty of current economic conditions makes necessary the loan request to support the business’s ongoing operations; (2) acknowledging the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments; (3) the business does not have another application pending for a loan under the Act for the same purpose; and (4) during the period beginning February 15, 2020 and ending on December 31, 2020 the business has not received amounts under the Act for the same purpose and that are duplicative of the amounts applied for.
The Federal Government has announced that it expects to be able to start receiving applications for this loan program by this Friday, April 3, 2020.

While small businesses can still apply for Economic Injury Disaster Loans (EIDLs) directly with the SBA, the prospect of loan forgiveness and the ability to apply for a loan directly with an eligible FDIC insured lender, makes the Paycheck Protection Program an appealing choice for small businesses. The team at Anselmi & Carvelli, LLP will be closely monitoring evolving developments related to this program so that we can continue to serve the needs of our valued clients. If you have any questions about how this particular loan program can assist your business, or if you would like to discuss what other funding options are available, including EIDLs, please contact one of our attorneys today.

Client Alert