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Senate Passes CARES Act Providing Forgivable Loans to Maintain Business Continuity in Trying Times

Late in the night on March 25, 2020, the Senate passed H.R. 748 titled the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act”.  The CARES Act has a number of provisions meant to allow employers to receive forgivable loans to pay business expenses and permit them to maintain continuity of operations to the extent possible in light of other legal restrictions currently in place.  The bill now goes to the House where it is expected to pass and then will go to the White House where the President has promised to sign it.

Section 1102 of the CARES Act is entitled the Paycheck Protection Program (the “PPP”), administered by the Small Business Administration (the “SBA”) under its 7(a) loan guarantee program, pursuant to which employers are able obtain forgivable loans to pay for business expenses including payroll (including health insurance, sick leave, retirement, and other benefits), mortgage interest expenses, rent expenses, and utility expenses (collectively, “Business Continuity Expenses”).  The principal balance of these loans, if used for Business Continuity Expenses, are forgivable after June 30, 2020.

1. Who is Eligible?

Employers, including the self-employed, independent contractors and sole proprietors, with 500 or fewer employees are eligible for loans under the PPP.  Hospitality-based businesses (those whose NAICS code begins with “72”) are eligible for the loans so long as they have 500 or fewer employees in any one location.  Further, under normal SBA rules, certain relationships between business entities result in the entities being deemed “affiliates” and therefore, combined for SBA purposes.  Hospitality-based businesses are not subject to the affiliation rules for the purposes of PPP loans.

2. How Much May be Borrowed?

The amount that may be borrowed under the PPP is generally equal to the lesser of 2.5 times the average monthly payroll expenses for the year 2019, or at the election of the borrower, 2.5 times the average monthly payroll expenses for the period of time from March 1, 2019 to June 30, 2019, or $10,000,000.  There is an alternative calculation for seasonal employers.

Payroll costs include the sum of:

a. Salary, wage, commission, or similar compensation;

b. Payment of cash tip or equivalent;

c. Payment for vacation, parental, family, medical, or sick leave;

d. Allowance for dismissal or separation;

e. Payment required for the provisions of group health care benefits, including insurance premiums;

f. Payment of any retirement benefit; or

g. Payment of State or local tax assessed on the compensation of employees.

Payroll costs do not include:

a. The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the “covered period” (March 1, 2020 to June 30, 2020);

b. Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period;

c. Any compensation of an employee whose principal place of business is outside the United States;

d. Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (the “FFCRA”); or

e. Qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA.

3. What May the Loan be Used for?

 Loans made under the PPP may be used by employers to pay payroll costs (as defined above), costs related to the continuation of group health care benefits including insurance premiums, employee salaries, commissions or similar compensations, payment of interest on mortgage obligations incurred prior to March 1, 2020 (but not including prepayments or principal payments), rent expenses, utilities, and interest on any other debt obligations incurred before March 1, 2020.

4. How to Get the Loan?

Employers that wish to obtain a loan under the PPP may go to any existing SBA 7(a) approved lender, or additional lenders determined by the SBA and the Secretary of the Treasury to have the necessary qualifications to process, close, disburse and service loans made with an SBA guarantee.  Employers will be required to self-certify (1) that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the employer; (2) acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; (3) that the employer does not have an application pending for a PPP loan for the same purpose and duplicative of amounts applied for or received under a PPP loan; and (4) during the period beginning February 15, 2020 and ending on December 31, 2020, that the employer has not already received amounts under the PPP.

The PPP waives guarantee and other servicing fees, makes inapplicable the requirement that the employer be unable to obtain credit elsewhere, waives personal guarantee requirements, caps the interest rate at 4%, provides complete payment deferment relief (including payment of principal, interest and fees) for not less than 6 months and not more than 1 year, waives prepayment penalties, and does not preclude recipients of economic injury disaster loans for purposes other than payroll costs.

5. Loan Repayment?

So long as the funds from loans issued pursuant to the PPP are used for the purposes listed above, the principal balance is eligible for loan forgiveness.  To apply for loan forgiveness, employers will need to deliver the following documentation to the lender:

a. Documentation verifying the number of full-time equivalent (“FTE”) employees on payroll and pay rates for the period of January 1, 2020 to June 30, 2020 (including payroll tax filings);

b. Documentation confirming rent, utilities or mortgage interest payment amounts;

c. Certification from the employer confirming the truth of the documentation; and

d. Any other documentation the SBA may request.

If employers use the funds appropriately and provide the correct documentation, the principal balance (but not the interest) will be forgiven.  This forgiven debt will be treated as cancellation of indebtedness income except that it will not be included in the employer’s gross income.

6. Limitations on Forgiveness?

The purpose of PPP loans is to maintain business continuity, and especially, maintain payrolls.  In the event that an employer reduces its headcount during the period of covered period, the amount of principal eligible for forgiveness will be reduced.  Further, in the event that an employer has already laid off employees prior to the enactment of the CARES Act, that employer will have to rehire its employees or otherwise close the gap between its headcount on February 15, 2020 and its headcount on the date that is 30 days after the enactment of the CARES Act.  This rehiring must occur no later than June 30, 2020.

Further, any reduction in compensation to employees in excess of 25% of the employees’ compensation on February 15, 2020, shall also lead to a reduction in the amount of principal eligible for forgiveness.  However, employees making more than $100,000 may have their salaries reduced by more than 25% and not have such reduction counted against the amount the employer is entitled to forgive.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

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About this Author

Lawrence Glusman Real Estate Attorney Davis Kuelthau
Shareholder

Larry’s practice focuses on commercial lending, real estate and business transactions. It also includes creditors’ rights in litigation, foreclosure and various insolvency proceedings. For more than 20 years, Larry has represented Milwaukee Economic Development Corporation (MEDC), a trailblazing non-profit lender which invests in the Milwaukee business community. He has documented and closed hundreds of MEDC loans to a wide array of local businesses, helping them achieve their business goals.

Larry also represents established and start-up businesses with real estate and asset...

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Mike van Someren Real Estate Attorney  Davis Kuelthau Law FIrm
Associate

Mike is a member of the real estate, commercial finance, and corporate practice groups at Davis and Kuelthau. He regularly counsels clients in all aspects of commercial real estate transactions, including providing advice on entity selection and formation, drafting purchase and sale agreements, offers to purchase, performing due diligence, and negotiating and drafting agreements with municipalities and other stakeholders. He has extensive experience counseling clients on land use and zoning matters, such as drafting easements and restrictive covenants, and providing advice regarding project requirements under local zoning laws. Mike also represents landlords and tenants in the drafting and negotiation of retail, healthcare, industrial and office lease agreements.

In addition to his commercial real estate work, Mike advises clients on corporate matters. He focuses specifically on corporate governance issues, business to business contract review and negotiation and business to consumer contract drafting. Mike represents clients in merger and acquisition transactions, negotiating and drafting stock purchase and asset purchase agreements and performing due diligence research.

Representing clients on commercial finance transactions, Mike addresses their capital needs, including structuring joint ventures, raising cash from investors through the sale of securities in private placements, as well as tax credit financing when available. Mike also represents borrowers and lenders in the negotiation and drafting of loan documents.

414.225.1433