By Alan H. Sonnenklar, Esq. Email Alan
On
Friday, March 27, 2020, the bipartisan Coronavirus Aid, Relief and
Economic Security (“CARES”) Act, intended to provide immediate and
much-needed relief to individuals and businesses affected by the ongoing
outbreak of COVID-19, was signed into law by President Trump. At a
price tag of roughly $2 trillion, the CARES Act contains numerous
provisions meant to help small businesses weather the economic slowdown
in the face of the pandemic.
One major feature of the CARES Act is
the allocation of up to $350 billion to the federal Small Business
Administration (“SBA”) to provide Paycheck Protection Program (“PPP”)
loans of up to $10 million per small business, to cover certain expenses
incurred between February 15, 2020 and June 30, 2020. Small businesses
are defined as those with under 500 employees, and the Act further
widens the definition of a small business by waiving SBA rules which
exclude some affiliates of the business in certain industries in the
total employee headcount. For instance, franchises in the food and
accommodations industries which employ less than 500 employees at any
individual location would be eligible for loans for each such location.
The definition of a small business also includes physician and other
professional practices.
Businesses applying for PPP loans will be
required to certify that the uncertainty of current economic conditions
makes the loan necessary to support ongoing operations, that the
borrowed funds will be used to retain workers, maintain payroll, and
make mortgage, lease and utility payments, and that the business is not
receiving duplicative funds for the same purposes.
Each business
eligible to receive a PPP loan under the CARES Act may receive one
covered loan which may be used for certain enumerated purposes. These
purposes include payroll costs, family or medical leave, rent,
utilities, mortgage interest, interest on outstanding business debt,
salaries and/or commissions payable to employees (up to a cap of
$100,000 per employee), and health care benefits. The amount of the loan
will be capped at the lesser of: (1) 2.5 times the average total
monthly payments by the applicant for payroll costs (other business
costs are not included in this total); or (2) $10 million. Additionally,
interest rates on all loans will be capped at 4%. Loans to small
businesses under the CARES Act will not require personal guarantees from business owners, or any collateral, as a condition of approval.
Importantly,
the CARES Act includes provisions for forgiveness of PPP loans if
certain conditions are met. The amount of the prospective loan
forgiveness – which, unlike typical loan forgiveness, will be excluded
from the taxable income of the business receiving the loan – will be
based on the amount of rent, mortgage interest, utility costs and
payroll paid by the business during the 8 week period following the
origination of the loan.
Effectively then, the contemplated loan forgiveness could convert some or all of the loan into a de facto grant
so long as the required conditions are met. Among the conditions for
the forgiveness of the loan are: (1) the employer must not reduce the
average number of full-time employees during the covered period; and (2)
the employer must not reduce the salaries or wages of its employees by
more than 25 percent. If an employer fails to satisfy these conditions,
then the amount of the loan forgiveness will be reduced according to a
formula set forth in the CARES Act. Significantly, the CARES Act
provides that a business will still be eligible for loan forgiveness if
the business rehires an employee that has already been terminated, or
restores an already implemented pay reduction.
In order to receive a loan, a business will be required to submit an application to an approved lender containing certain documentation. This may include, but is not limited to, documents verifying the number and pay rates of full-time employees, state and federal tax filings, and documents reflecting rent, mortgage, utility expenses, and other financial obligations. Additional documentation will be required in connection with a future request for loan forgiveness. The SBA is required to issue implementing regulations within the next two weeks with additional details about the loans, eligibility, application process, required documents and loan forgiveness requirements. Once the program is underway, current SBA lenders are authorized to make determinations on eligibility for loans under the CARES Act. A list of those lenders can be found on the SBA’s website linked here.
If
you have any questions about the CARES Act and related SBA loans in
light of the COVID-19 pandemic, please feel free to reach out to the
Firm. We will be keeping abreast of new information as it becomes
available.
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a
Long Island law firm providing a wide array of legal services to the
members of the health care industry, including corporate and
transactional matters, civil and administrative litigation, healthcare
regulatory issues, bankruptcy and creditors’ rights, and commercial real
estate transactions.
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