This is another in a continuing series of bulletins that Aerlex Law Group is issuing to clients and friends of the firm to provide information regarding the effects of the Covid-19 pandemic on the business aviation community.
HOW YOUR COMPANY CAN BENEFIT FROM NEW CARES ACT
We are all being inundated with emails and information concerning the new laws being enacted by both the United States government and individual states in response to the current Covid-19 pandemic. We at Aerlex Law Group want to help organize the onslaught of information you are receiving by breaking the new laws down into separate articles that we hope will help you navigate the programs that may best assist you, your business and your employees. To date, we have written articles on (1) the new requirement regarding posting the available benefits under the Families First Coronavirus Response Act (“FFCRA”), and (2) the steps the Federal Aviation Administration has taken in response to the Covid-19 crisis. This article specifically addresses the new Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) recently adopted by Congress and signed into law by the President.
The CARES Act includes a variety of measures to address the crisis now facing the country’s health care system, but also provides emergency aid that impacts employers, the latter of which will be the focus of this article.
PAYCHECK PROTECTION PROGRAM
The Section 7(a) loan program has long been the Small Business Administration’s (“SBA”) primary program for providing financial assistance to small businesses. The terms and conditions of a Section 7(a) loan, including material terms such as the loan amount and guaranty percentage, vary by the type of loan. These loans are issued by commercial lenders, who administer the loans with varying degrees of involvement by the SBA.
The CARES Act created the Paycheck Protection Program (“PPP”), which expands Section 7(a) loans by providing federally guaranteed loans to certain eligible businesses and entities. Eligible businesses and entities with fewer than 500 employees, select types of businesses with fewer than 1,500 employees, Section 501(c)(3) non-profits with fewer than 500 workers, and some Section 501(c)(19) veteran organizations can apply for loans under this program for the period between February 15, 2020 and June 30, 2020. Starting April 10, independent contractors and self-employed individuals can apply. The CARES Act has authorized the distribution of $349 billion through the PPP 7(a) loan program.
By maintaining employees on their payroll through the duration of the crisis, the small businesses referred to above can qualify for PPP loan forgiveness. The act has also been made retroactive February 15th to encourage small businesses to rehire employees that have recently been laid off.
For businesses and entities operating between February 15, 2019 and June 30, 2019, the PPP offers loans of up to $10 million with a maximum 4% interest rate. (For businesses and entities not operating between February 15, 2019 and June 30, 2019, the maximum loan amount is equal to 250% of their average monthly payroll costs between January 1, 2020 and February 29, 2020.) The total amount of the loan will be the lesser of the $10 million maximum and 2.5 times the borrower’s average monthly payroll for the past 12 months (excluding compensation over $100,000). During the period of February 15, 2020 through June 30, 2020 (the “Covered Period”), the SBA will guarantee 100% of issued PPP loans. Loan proceeds may be used by small businesses to cover payroll costs (excluding individual employee compensation over $100,000), group health care benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred prior to the Covered Period.
• Collateral and Fee Waivers: Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
• Options Deferment: Deferment of principal, interest, and fees for a period of between six months and one year is available.
• Increased Lender Pool and Flexibility: The SBA is delegating to lenders the authority to make determinations on borrower eligibility and creditworthiness without going through traditional SBA channels. Furthermore, the SBA Administrator and the Secretary of the U.S. Department of the Treasury have the authority to add additional lenders to the PPP.
• Loan Limitations. Loan proceeds may not be used for employee salaries in excess of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation. Additionally, borrowers are not eligible to apply for both Economic Injury Disaster Loans and new SBA loans at the same time.
A borrower is eligible for loan forgiveness and cancellation of indebtedness during the Covered Period for all payments made in any of the previously noted categories during an eight-week period beginning on the date the loan is funded. The loan forgiveness amount is subject to reduction if an employer lessens its number of full-time employees or decreases the pay of certain employees beyond 25% of that employee’s prior year compensation. However, employers that rehire employees who have already been let go (thus eliminating any reduction in the number of full-time equivalent employees) by June 30, 2020 will not be subject to reductions in any loan forgiveness amount.
Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan with a maximum interest rate of 4% for a maximum of ten years.
HOW TO APPLY
Borrowers will submit an application to a lender that will originate the loan, and the lender must issue a decision on the application within 60 days, although this time is expected to be much shorter. (Many lenders already issue SBA loans and many of those lenders are SBA priority lenders who may move the process faster.) Lenders will process loan forgiveness applications directly and the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness.
The application can be found here on the United States Treasury site, along with details for borrowers and lenders. The Treasury urged those in need of funding to apply quickly, noting that the program has a cap and demand is likely to be high.