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How Does the CARES Act Impact Lenders and Businesses during the Coronavirus Pandemic?

By Erich Paetsch, Creditors’ Rights & Bankruptcy and Litigation Attorney

Summary

The Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act” is the third emergency bill from the United States Government in response to the Coronavirus (COVID 19) pandemic. It is likely to be signed into law no later than March 28, 2020. The legislation may be modified and will be clarified by subsequent guidance from the U.S. Department of Treasury and U.S. Small Business Administration (“SBA”). Saalfeld Griggs’ Lawyers stand ready to help businesses, non-profits and lending clients understand how the CARES Act can help and impact them. Because this situation is changing regularly, please contact a Saalfeld Griggs attorney or other advisor before determining if you are eligible for relief under the proposed CARES Act.

The CARES Act has significant relief for small businesses, including $349 billion in loan guarantees and subsidies through the SBA and additional funding for existing SBA programs. The most significant provisions of the CARES Act include:

    • Expansion of SBA’s 7(a) Loan Program to support a new “Paycheck Protection Program”. The existing SBA 7(a) program will: Increase maximum loan amounts up to $10 million
    • Allowable uses expanded to include
      • Payroll Support (including paid sick or medical leave)
      • Employee salaries
      • Mortgage, rent and utility payments
      • Insurance Premiums; and
      • Other Debt Obligations

 

  • Debt Forgiveness. Certain eligible borrowers can receive loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on:
    • Payroll costs
    • Interest payment on any mortgage incurred before February 15, 2020;
    • Rent on any lease in force before February 15, 2020; and
    • Utility services
  • Subsidies for Certain Existing SBA 7(a) Loans.

 

  • Special Terms for SBA Loans
    • No personal or collateral guarantee will be required
    • The eligible recipient does not have to certify that it is unable to obtain credit elsewhere or the so-called “credit elsewhere” test which SBA typically uses to require the use of other sources of capital including equity or debt investments from owners with liquid assets
    • An eligible borrower must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions cause by COVID-19, that the funds will be used for a permitted purpose; and that they are not receiving fund from another SBA program for the same uses
    • The maximum term of the loan is 10 years
    • The interest rate cannot exceed 4.00% but interest payments are completely deferred for 1 year
    • No prepayment penalty

 

Who is Eligible?

The CARES Act covers businesses and 501(c)(3) non-profits with 500 or fewer employees, unless the covered industries SBA size standard allows for more than 500 employees. The employee size standards will be tested on an affiliate basis, combining all businesses under common control. This will require any business with more than 500 employees to consult with their SBA lender to determine whether they are eligible with more than 500 employees. Employees are defined to include all persons employed on a full-time, part-time or other basis. Certain sole-proprietors, independent contractors, and other self-employed individuals are also eligible for Paycheck Protection Program Loans. Businesses must satisfy the SBA’s definition of a “business concern” which means financial businesses, passive business, foreign businesses, gambling businesses, and other businesses illegal under federal law are ineligible.

 

What are the Probable Paycheck Protection Loan Terms?

The CARES Act allows eligible businesses and non-profits to obtain loans up to 2.5 times their monthly payroll costs measured over the prior twelve months, or $10 million, whichever is smaller. Payroll costs are defined broadly and include salaries, certain employee benefits, state and local taxes and certain types of compensation to sole proprietors or independent contractors up to $100,0000. Payroll costs specifically exclude employee compensation in excess of $100,000 per employee annually among other caps and limits. The Paycheck Protection loans do not require personal guarantees, have interest rates capped at 4.00%, do not require collateral from the business or its owners, may not be used to prepay existing debt, and any portion not forgiven will have a term of up to ten years and amortize the same as other SBA 7(a) loans, which are generally repaid with fixed monthly principal and interest payments over the remaining term. The CARES Act allows automatic deferments of principal and interest payments for at least six months and not more than one year for all borrowers.

 

How Does Loan Forgiveness Work?

Paycheck Protection Loans under the CARES Act are eligible for partial loan forgiveness after submitting a detailed application equal to the amount spent by the borrower during an eight-week period after the origination date of the loan on payroll costs, interest payment on any eligible mortgage, payment of rent on any eligible lease, and payment on any eligible utility services.

The loan amount eligible for forgiveness will be reduced proportionally by any reduction in employees during the covered period compared to certain prior periods. In addition, the loan amount eligible for forgiveness will be reduced by any reduction in pay of certain employees in excess of 25 percent.

To encourage employers to rehire employees already laid off and to discourage employers from making further layoffs due to the COVID 19 pandemic, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period and the payroll costs of any such employees are eligible for loan forgiveness.

 

Erich Paetsch is a partner in the Litigation and Creditors’ Rights & Bankruptcy practice groups and the Financial Services and Construction industry groups. The information in this article is not intended to provide legal advice. For professional consultation, please contact Erich Paetsch at Saalfeld Griggs PC.  503.399.1070.  epaestch@sglaw.com  © 2020 Saalfeld Griggs PC