On March 27 2020, Congress enacted the CARES Act, a key component of which is the Paycheck Protection Program (“PPP”). PPP authorized up to $349 billion in forgivable loans to small businesses to allow them to pay their employees during the COVID-19 crisis, as well as certain other expenses, such as rent. Rosenberg & Estis, P.C. has prepared the below summary to assist you and your tenants with understanding the components of the program and to provide guidance for you to facilitate your application. Subject to the detailed information below, the terms of all loans will be identical for every borrower and may be forgiven on condition that:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8-week period after the loan is made; and
- Employee headcount and compensation levels are maintained at the same level as payroll existed one year prior to the issuance of the loan.
The loan amount will be calculated based on payroll costs up to $100,000 on an annualized basis for each employee. Due to likely high demand for loans under PPP, SBA guidance provides that at least 75% of the forgiven amount must be used for payroll costs.
The following is intended to answer some common questions related to the PPP Loans:
WHO CAN APPLY?
All businesses with 500 or fewer employees can apply, including nonprofits, sole proprietorships, self-employed individuals, and independent contractors, among others. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries. (click HERE for additional detail on the SBA website). In addition, the SBA’s affiliation standards have been waived for small businesses (1) in the hotel and food services industries (click HERE to confirm); or (2) that are franchises in the SBA’s Franchise Directory (click HERE to check); or (3) that receive financial assistance from small business investment companies licensed by the SBA.
Note that recent SBA guidance indicates that passive entities, which according to SBA regulations includes most landlords, are not eligible, but real estate management companies are. We believe that this guidance fails to comport with both the CARES Act’s language and Congress’s intent in enacting the statute. Our understanding is that industry representatives are lobbying to amend this guidance given the large number of individuals employed in the real estate industry and Congress’s overall intent to keep as many Americans employed as possible. However, unless and until more favorable administrative guidance is issued, the above-referenced restrictions apply.
WHEN CAN I APPLY?
- Small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders on and after April 3, 2020.
- Independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders on and after April 10, 2020.
WHERE CAN I APPLY?
You can apply through any existing SBA lender or through any participating lender. You should consult with your local lender as to whether it is participating and/or visit www.sba.gov for a list of SBA lenders.
WHAT DO I NEED TO APPLY?
You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender by June 30, 2020. As part of your application, you must certify in good faith that:
- Current economic uncertainty makes the loan necessary to support your ongoing operations.
- The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
- You have not and will not receive another loan under this program.
- You will provide documentation to the lender that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
- All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
- The tax documents you submit are identical to those you submitted to the IRS, and you understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements.
WHAT OTHER DOCUMENTS WILL I NEED TO INCLUDE IN MY APPLICATION?
While the required documents may vary by lender, the following are the documents that we recommend you compile to support your application:
- Articles of Incorporation and/or Organization, Bylaws and/or Operating Agreement for the borrowing entities;
- Payroll cost calculation, which should be calculated as an average of the past 12 months, assuming no seasonality. Payroll costs include:
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- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each individual employee and for domestic employees only);
- Employee benefits, including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for group health care benefits including insurance premiums; and payment of any retirement benefit; and
- Federal, state and local taxes assessed on compensation.
- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee;
- Payroll verification to allow the lender to verify the above;
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- Payroll summary report from 1/1/2019 to present on a monthly basis (you may also need corresponding bank statements, so we recommend that you collect them as well, in the event required). Ideally this will come from a third-party payroll processor and with employee detail sufficient to allow your lender to verify the payroll cost calculation above. Note that for any employee(s) over $100,000, salary and wages will be deemed to be $100,000 for purposes of the loan amount alternatively;
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- If you cannot produce a summary report in this detail, then payroll stubs for each employee for this period should be compiled;
- 1099s for 2019 for any independent contractors;
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- Documentation showing all health insurance premiums paid over the past 12 months by the borrower for a group health plan;
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- Documentation of all retirement plan funding over the past 12 months that was paid by the borrower (do not include payroll deductions from employees’ paychecks);
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- Documentation of any federal, state and local taxes assessed on compensation;
- IRS Forms 941 & 944, if applicable;
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- W-2 forms may be required, so we recommend that you compile them in case they are necessary;
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- W-9 to confirm Tax ID Number; and
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- Government-issued photo identification for any individual owning 20% or more of the borrower, plus the person with operating control (e.g. CEO, managing member), and if no owners of 20% or more, then just the person with operating control.
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DO I NEED TO TRY TO OBTAIN OTHER FUNDS BEFORE APPLYING FOR A PPP LOAN? No. The SBA requirement that you try to obtain some or all of the loan funds from other sources is being waived.
HOW LONG WILL THIS PROGRAM LAST? Although the program is open until June 30, 2020, the expectation is that because there is a funding cap, those who apply later may not obtain a loan. We encourage you to apply as quickly as you can because there is a funding cap, and lenders need time to process your loan.
HOW MANY LOANS CAN I TAKE OUT UNDER THIS PROGRAM? Only one.
WHAT CAN I USE THIS LOAN FOR? You should use the proceeds from these loans on your:
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- Payroll costs, including benefits;
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- Interest on mortgage obligations incurred before February 15, 2020;
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- Rent under lease agreements in force before February 15, 2020; and
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- Utilities, for which service began before February 15, 2020.
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WHAT COUNTS AS PAYROLL COSTS? Payroll costs include:
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- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
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- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
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- Federal, state and local taxes assessed on compensation; and
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- For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
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HOW LARGE CAN MY LOAN BE? Loans can be for up to 2.5 times your average monthly payroll costs for the last year, subject to a $10 million cap. If you are a seasonal or new business, different time periods will apply to your calculation. Payroll costs are capped at $100,000 annualized for each employee.
HOW MUCH OF MY LOAN CAN BE FORGIVEN? If you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utility payments over the 8 weeks after getting the loan, it will not be forgiven. If you do use it for those purposes, it is subject to forgiveness, but the SBA has stated that due to likely high demand, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll cost in order to have the loan fully forgiven. Therefore, to be safe, you should plan to spend at least 75% of the loan on payroll costs in order to maximize the amount of your PPP loan which can be forgiven.
Loan forgiveness will be reduced if you fail to maintain your staff and payroll levels.
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- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount from its level one year prior to the issuance of the loan.
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- Level of Payroll: Your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
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- Re-Hiring: If you reduce your full-time headcount, you have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. If you do so, prior reductions will not affect the amount of loan forgiveness.
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HOW CAN I REQUEST LOAN FORGIVENESS? You can submit a request to the lender that is servicing the loan. Your lender will require documents that verify the number of full-time equivalent employees and pay rates, as well as payments on eligible mortgage, lease, and utility obligations and will require you to certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible payments.
WHAT IS MY INTEREST RATE? 1% fixed rate.
WHEN WILL I HAVE TO START PAYING BACK MY LOAN? All payments are deferred for 6 months; however, interest will continue to accrue over this period.
WHAT IS THE TERM OF THE LOAN? In 2 years.
CAN I PAY MY LOAN BACK EARLIER THAN 2 YEARS? Yes. There are no prepayment penalties or fees.
DO I NEED TO PLEDGE ANY COLLATERAL FOR THESE LOANS OR PROVIDE A PERSONAL GUARANTEE? No collateral or personal guarantee is required.
Please feel free to contact the undersigned attorneys at Rosenberg & Estis, P.C. if you have any questions with respect to the foregoing, or if we can be of any assistance to you in processing your application for a PPP Loan.
Sincerely,
Deborah Riegel, Michael Lefkowitz and Eric Orenstein