On Friday, President Trump signed legislation into law that is commonly being described as Phase 3 of Congress’s efforts to offer relief to those affected by COVID-19. Among many other provisions, the bill provides small business interruption loans for eligible small businesses, businesses with 500 or less employees, veteran-owned businesses, and some not-for-profits.
The determination of the maximum loan amount available is calculated slightly differently depending on whether the borrower was in business during the period beginning on February 15, 2019 and ending June 30, 2019. For those borrowers in business, the calculation is two and a half times the average total monthly payroll costs of the applicant during the one-year period before the date on which the loan is made plus the outstanding amount of any loan taken by the applicant under Section 7(b)(2) of the Small Business Act after January 31, 2020.
For those borrowers not in business during the above stated time period, the calculation is two and a half times the average total monthly payroll costs of the applicant during the period beginning on January 1, 2020 and ending on February 29, 2020. The maximum amount of the loan will be the lesser of the amount resulting from the applicable above-stated calculation or $10 million. Proceeds from Coronavirus Aid, Relief, and Economic Security (CARES) Act loans may be used to pay “covered expenses,” including payroll costs, rent, utilities, mortgage interest (not principal), and interest on debt existing prior to February 15, 2020.
Only some of these covered expenses are eligible for forgiveness in an amount equal to the costs incurred and payments made for any payroll costs, interest payments on existing mortgage obligations, rent on existing leases, and utilities (electricity, gas, water, transportation, telephone, internet) during the eight-week period from the loan origination date. For calculating the forgiveness amount, “payroll costs” includes employee compensation; 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; and payment of state or local taxes assessed on the compensation of employees. Notably excluded from the definition of payroll costs is employee compensation in excess of an annual salary of $100,000.
The amount of the loan eligible for loan forgiveness may be reduced if the number of employees is decreased or if salaries or wages are reduced in excess of 25 percent. However, any reduction in the number of employees or their salaries or wages between February 15, 2020 and 30 days after the enactment of the act will not be factored into the calculation of the reduction in loan forgiveness as long as the numbers and wages are brought back up by June 30, 2020. With this in mind, employers are able—and, in fact, encouraged—to re-hire laid-off employees to be eligible for the maximum amount of loan forgiveness under this program. These limitations apply to employees that did not make more than a $100,000 annualized rate during 2019.
Eligible borrowers must make a good-faith certification that they are making the loan request to support ongoing operations and must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments.
Finally, in evaluating borrower eligibility, lenders must consider whether the applicant was in operation on February 15, 2020 and had employees for whom the applicant paid salaries and payroll taxes or paid independent contractors as reported on a Form 1099-MISC. No collateral or personal guarantees will be required for covered loans. Additionally, the US Department of the Treasury secretary and the Small Business Administration (SBA) administrator will extend the authority to make loans to additional lenders above and beyond those normally eligible to make SBA-guaranteed loans.
If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the Financial Institutions & Lending Practice Area.
We have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.