CARES Act Includes Payroll Protection Program Loans

The United States Senate has unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the House of Representatives is expected to approve it today, March 27, 2020.  President Trump has indicated that he intends to sign the CARES Act once it reaches his desk.

Although the CARES Act contains numerous provisions, one of the most important for businesses with fewer than 500 employees is Section 1102.  Section 1102 allows companies employing fewer than 500 employees (full, part-time, or otherwise), to obtain a Payroll Protection Program Loan (a “PPP Loan”) of up to $10 Million from local Small Business Administration lenders for the covered period of February 15, 2020 through June 30, 2020 through an existing loan guarantee program of the Small Business Act (the “SBA”).

The following entities and individuals may also be eligible for PPP loans:

• 501(c)(3) nonprofits
• 501(c)(19) veteran’s organizations
• Tribal business concerns with not more than 500 employees
• Sole-proprietors, independent contractors and other self-employed individuals
• Certain businesses in the hospitality/restaurant industry that employ no more than 500 employees per physical location and are below a certain gross annual receipts threshold

These PPP Loans allow companies to borrow the lesser of:

• The average monthly amount paid by the applicant for payroll costs incurred during the one-year period before the date on which the loan is made, multiplied by 2.5, plus the value of any existing Disaster Loan under Section (b)(2) of the SBA received after January 31, 2020; or
• $10 Million.
  • For example, if a company’s average monthly payroll from March 1, 2019 to February 29, 2020 was $1,500,000, that company would qualify for a loan of $3,750,000 ($1,500,000 x 2.5).

“Payroll costs” includes any of the following:

• 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 provisions of group health care benefits, including insurance premiums
• Payment of any retirement benefit
• Payment of state or local tax assessed on the compensation of employees

Applicants for PPP Loans do not need to demonstrate that they could not achieve credit elsewhere, fees are waived in their entirety, and interest rates are capped at 4%.  Additionally, PPP Loans require neither collateral nor a personal guarantee by the borrower, and lenders are required to defer payments on PPP Loans for between six months and one year.  Finally, the CARES Act does not prohibit PPP Loans for applicants who have already received Disaster Loans under the SBA, so long as the loans are not used for duplicative purposes.

PPP loans can be used to repay or refinance existing Disaster Loans, for any authorized purpose under the SBA, as well as for the following:

• Payroll costs
• Sick leave
• Maintaining group health insurance plans
• Mortgage payments
• Rent payments
• Other existing debt obligations incurred before the covered period

The portion of PPP Loans used to cover payroll, mortgage, rent or utility costs from February 15, 2020 through June 30, 2020 are eligible for forgiveness, meaning that the borrower will not have to repay that portion of the loan.  In order to incentivize the retention of employees at existing salaries, the amount of loan forgiveness is reduced by:

• Any reduction in the average number of monthly full-time equivalent (“FTE”) employees employed by the loan recipient during the eight weeks following disbursement of the loan (the “covered period”), as compared to the average number of monthly FTE employees employed by the recipient during, at the recipient’s election, the period from February 15, 2019 through June 30, 2019, or the period between January 1, 2020 and February 29, 2020 (the “reference period”), with special rules for seasonal employers; and
  • For example, if the recipient had an average of 85 FTE employees during the covered period, and an average of 100 FTE employees during the reference period, then the recipient would only be entitled to 85% of the loan forgiveness that would otherwise be available.
• The amount of any reduction in total salary or wages of any employee with an annualized rate of pay of $100,000 or less during the covered period that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed.

In order to incentivize the rehiring of employees and reversal of any salary reductions, loan forgiveness will be determined without regard to any reductions, if, by June 30, 2020, the loan recipient rehires all laid off employees and fully restores any salary reductions occurring during the period of February 15, 2020 through 30 days after enactment of the CARES Act.

The Firm’s lending and business attorneys have a wealth of experience in handling commercial loans for a variety of different industries.  This team is poised and ready to begin the process of obtaining PPP Loans for qualifying companies.  Please contact Seth Tipton or Sarah Powell if you have any questions.