The Contracting Education Academy



CARES Act – Title I & Title IV LoansThe Coronavirus Aid, Relief and Economic Security Act (or "CARES Act") was signed into law on March 27, 2020 to direct stimulus money to help companies stay in business. Below is a summary of the Act designed to help you determine if your company is eligible for stimulus funds.The following information is accurate as of April 30, 2020. This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.CARES Act – Title I LoansPaycheck Protection Program ("PPP")Borrower QualificationsMust be in operation on February 15, 2020.Businesses that meet any of the following criteria are eligible:Businesses with no more than 500 employees who have a principal place of residence in the U.S., or businesses which meet the applicable size standard for the industry as provided by SBA's existing regulations, or businesses that meet both prongs of the SBA's "alternative size standard" test (maximum tangible net worth is $15 million or less, and average net income after Federal income taxes – excluding carry-over losses – for the prior two fiscal years is $5 million or less)Businesses in the accommodation and food services industries with more than one physical location but no more than 500 employees at each locationNonprofit organizationsEligible independent contractors and sole proprietors.Who is ineligible?Engaging in illegal activityHousehold employers (i.e., employers of nannies or housekeepers)Owner of 20% of business is incarcerated, on probation, parole, subject to indictment, information, arraignment or other means by which formal charges are brought, or within the last 5 years, for any felony, been convicted, pled guilty, pled nolo contendere, been placed on pretrial diversion, or been placed on parole or probationApplicant or business controlled by applicant is delinquent or defaulted on a loan from a federal agency during last 7 yearsCertain other types of businesses listed in SBA eligibility regulations (13 C.F.R. § 120.110), such as speculative businesses (i.e., hedge funds).The Act waives the SBA affiliation rules in 3 cases where a business concern:(1) has not more than 500 employees and a NAICS code beginning with 72; (2) operates as a franchise with a franchise identifier code; or (3) that receives financial assistance from an SBIC.Franchisees of franchise brands listed on the SBA Franchise Directory are eligible to apply for a PPP loan, provided the franchisee meets the size standards under the CARES Act. Franchise brands that have previously been denied listing may request listing to receive PPP loans, and the SBA will not apply the affiliation rules to franchisees of those franchise brands requesting listing.Maximum Loan AmountMaximum loan amount is the lesser of(a) 2.5 times the average monthly payroll costs incurred over the trailing 12 months, plus any outstanding Economic Injury Disaster Loans (EIDLs) made between 1/31/20 and 4/3/20, less any EIDL funds already advanced.OR(b) $10 million.Treasury guidance regarding how each different business type (e.g., sole proprietors, partnerships, corporations, non-profits) should calculate loan amounts can be found?here.Important Information:Funding is first-come, first-served.Applicants may not receive a second PPP loan during the period from 2/15/2020 to 12/31/2020.EIDLs made between 1/31/2020 and 4/3/2020 used for payroll costs may be refinanced into a PPP loan. EIDLs made during the same period not used for payroll costs do not affect PPP eligibility.Application ProcessAvailable for small businesses, sole proprietorships, independent contractors, and self-employed individuals. The SBA website has a?list of current SBA lenders. Other lenders will be available to make loans as soon as they are approved and enrolled in the program.The SBA will resume accepting PPP loan applications on Monday, April 27, 2020 at 10:30 EDT.To apply, borrowers must complete the application (SBA Form 2483, available?here) as well as submit payroll documentation.Good Faith Certification:Applicants must make a "good faith certification" to the following:that the current economic uncertainty due to COVID-19 makes the loan necessary to support the business's operations;the business will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments;the business is not receiving duplicative funds for the same uses.To determine if a loan is "necessary" due to economic uncertainty, borrowers must now take into account (1) their current business activity, and (2) their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.*Borrowers that applied for PPP loans prior to April 23, 2020 that return the funds in full by May 7, 2020 will be deemed to have made the certification in good faith.*Note: This directive applies to all borrowers, but the Treasury Department has specifically determined that publicly-traded companies with "substantial market value and access to capital markets" are "unlikely" to make the certification in good faith. Treasury is pressuring publicly-traded companies to return the loan funds in full or "be prepared to demonstrate to the SBA the basis for the certification." Similarly, Treasury has indicated that the SBA will aggressively review applications for businesses that are owned in whole or in part by private equity firms.It is unclear whether Treasury's economic necessity requirement would withstand legal scrutiny, given its potential contradictions with the CARES Act. Nonetheless, borrowers who have applied for or intend to apply for a PPP loan may wish to reconsider taking the loan in light of these new requirements, even if the application has already been approved or the loan funds disbursed. Such borrowers may want to take steps to confirm their (economic) rationale for applying for PPP funding.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.Documentation:At minimum, applicants will likely need to provide documentation to verify the number of employees currently on the payroll, and average monthly payroll costs for the prior year, such as:Payroll processor records, Payroll tax filings, Form 1099-MISC, or income and expenses (for a sole proprietorship); orOther supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.Applicants may also be asked to provide documentation verifying current payrates for employees, historical numbers and payrates of employees throughout 2020, and recent monthly mortgage interest, rent, and utilities statements.Examples of documentation required:IRS Form 940 and 941;Payroll Summary Report for 2019 and YTD 2020 (including a list of compensation of an individual employee that is in excess of $100,000 annual salary), with corresponding bank statement;Employee Pay Stubs as of February 15, 2020 (or another corresponding period) with corresponding bank statement;Breakdowns of payroll benefits (vacation, allowance for dismissal, group healthcare benefits, retirement benefits, etc.);Certifications that all employees live within the United States, or a detailed list with corresponding salaries of all employees outside the United States;Trailing twelve-month profit and loss statement (as of the date of application) for all applicants;Articles of Incorporation/Organization of each borrowing entity;Bylaws/Operating Agreement of each borrowing entity;Owners' Driver's Licenses;Most recent Mortgage Statement or Rent Statement (Lease);Most recent Utility Bills (Electric, Gas, Telephone, Internet, Water).Applicants will also need to certify that the requested loan amount can be calculated from the tax documents provided, and that those documents are valid and identical to documents submitted to the IRS.TermsSBA will guarantee 100% of the loan.Payments (including interest) deferred for six months.Interest will be at 1%, and will accrue during the deferment period.Loan matures at 2 yearsNo requirement for personal guarantee or collateral.No requirement that the borrower demonstrate that it cannot obtain credit elsewhereThe SBA will not collect any yearly or guarantee fees for the loan.All prepayment penalties are waived.Allowable UsesAllowable uses include:Payroll costs, including:Wage, salary, commission, or similar compensation to employees;Payment of cash tip or equivalent;payments for vacation, parental, family, medical or sick leave;Allowance for dismissal or separation;Payments required for group health care benefits (including insurance premiums);Payments of any retirement benefits;Payments of state and local employment taxes;Rent;Utilities; andInterest payments on mortgage or debt obligations incurred before February 15, 2020.Requirement: 75% of loan proceeds must be used for payroll costs.The money cannot be used for:Compensation of individual employees, independent contractors, or sole proprietors, in excess of an annualized salary of $100,000;Compensation of employees with a principal place of residence outside the United States;Qualified sick leave wages and family leave wages for which a credit is already covered by the Families First Coronavirus Response Act; orTaxes imposed or withheld during Chapters 21, 22, or 24 of the IRC during the covered period (Feb. 15, 2020 – June 30, 2020).Misusing loan proceeds may result in:Being forced to repay amounts used for unauthorized purposes;Being subject to additional liability such as charges for fraud;Being subject to other recourse against the shareholder, member, or partners of the business for unauthorized use.Forgiveness?Amount of loan forgiveness can be up to the full principal amount and any accrued interest.Forgiveness is available for payroll costs, rent, utilities, and interest on mortgage payments for the 8-week period after the loan's origination.Per SBA guidance, 75% of forgiveness amount must be for payroll costs.The amount forgiven will be reduced if the employer lays off employees or reduces salaries by more than 25%. However, if employees are re-hired or salaries restored by June 30, 2020, the employer will not be penalized.Additional wages paid to tipped workers are forgivable.Payroll costs are capped at $100,000 per employee.Further guidance from the SBA on loan forgiveness will be forthcoming.*Note: The cap on compensation of employees in excess of $100,000 only applies to cash compensation (e.g., salary, wages, or tips). It does not apply to non-cash benefits, such as employer contributions to defined-benefit and defined-contribution retirement plans, payment for provision of employee benefits consisting of group health care coverage, including insurance premiums, and payment of state and local taxes assessed on compensation of employees.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.SBA Express Loan (as modified by the CARES Act)Borrower QualificationsBusinesses must be:(a) an operating business,(b) organized for profit,(c) located in the United States,(d) a small business under?SBA size standards, including affiliates, and(e) able to demonstrate a need for the desired creditMaximum Loan Amount$1 million as loan or line of credit.Application ProcessAdditional details regarding the program are?here, but as a practical matter, the SBA is likely not issuing Express Loans at this point, due to the overwhelming interest in PPP and EIDL funding. SBA does not have an Express Loan application currently up on the SBA website.Once applied, SBA will respond within 36 hours, at which point the borrower and SBA will work with an approved lender.TermsSBA guarantees 50% of the loan.No collateral required for amounts up to $25,000.Allowable UsesAny allowable use for 7(a) loans including:Working capital;Expansion, renovation or construction;Purchase of land, buildings or equipment;Refinancing debt; inventory;Start-up costForgiveness?Not forgivable.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.SBA Economic Injury Disaster Loan (EIDL) Program (as modified by the CARES Act)Borrower QualificationsAvailable in all 50 states, Puerto Rico, Guam, and the Northern Mariana Islands.Must be in business as of January 31, 2020.Available to:Any small business according to SBA Size Regulations;Private nonprofits*;Agricultural cooperatives;Any business concern, cooperative, ESOP, or tribal business concern, with not more than 500 employees;Sole proprietors and independent contractors.SBA affiliation rules apply.Under the CARES Act, the usual requirement that the borrower demonstrate an inability to obtain credit elsewhere is waived.*Note: per Disaster Loan?applications, private nonprofits are eligible if it "is a non-governmental agency or entity that currently has an effective ruling letter from the IRS granting tax exemption under sections 501(c),(d), or (e) of the Internal Revenue Code of 1954, or satisfactory evidence from the State that the nonrevenue producing organization or entity is a non-profit one organized or doing business under State law, or a faith-based organization"Maximum Loan Amount$2 million;$10,000 advance.Application ProcessMore information about the program can be found?here. Link to application included?here.Borrowers may be approved solely on the basis of their credit score and are not required to submit a tax return or tax return transcript for approval. Borrowers may also be approved through the use of "alternative appropriate methods" to determine an applicant's ability to repay.A borrower must certify under penalty of perjury that it is an eligible entity to receive an advance.TermsCurrently, 3.75%interest for small businesses and 2.75% for nonprofits.Terms are determined on a case-by-case basis, based on the borrower's ability to repay.Maximum term is 30 years.No personal guarantee required for advances and loans of $200,000 or less.Borrower can request a $10,000 advance that will be paid within three days of SBA's receipt of the loan application, whether or not the EIDL is ultimately granted.Allowable UsesAllowable uses:Fixed debts,Payroll,Accounts payable, andOther bills that can't be paid because of the impact of COVID-19.EIDLs that were obtained prior to 4/3/2020 for a PPP-loan purpose (e.g., payroll costs, rent, utilities, interest on mortgage payments and other debt obligations) will affect a PPP loan.It is unclear after 4/3/2020 whether and to what extent EIDLs taken out for PPP purposes can affect a borrower's PPP loan.Forgiveness?The borrower is not required to repay an advance, even if the EIDL is denied. However, if a borrower also obtained a PPP loan, the advance will be subtracted from the amount of forgiveness under the PPP.A borrower is otherwise required to repay the entirety of an EIDL.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.Additional Information on Other Title I ProgramsSection 1103: Entrepreneurial DevelopmentTitle I appropriates $265 million for the carrying out of Section 1103, which permits the SBA to provide financial grants to small business resource partners, like?Small Business Development Centers?and?Women's Business Centers, for education, training, and advising small businesses on accessing and applying for federal resources and business resiliency strategies to address the effects of COVID-19.Section 1103 also authorizes the SBA to award grants to associations, or associations representing resource partners, to develop online platforms for small businesses to access information and resources provided by the federal government for small businesses regarding COVID-19, and to provide training and education for small businesses.Section 1104: State Trade Expansion ProgramSection 1104 allows for federal grant funds supporting the State Trade Expansion Program (STEP) in fiscal years 2018 and 2019 to remain available through the end of fiscal year 2021. STEP provides financial awards to state and territory governments to assist small businesses with export development. Awards are managed and provided at the local level by state government organizations and managed at the national level by the SBA's Office of International Trade. Eligible state entities can apply for STEP awards to be used to increase small business exporters and their sales in their state. A link to the SBA program can be found?here. Specifics about STEP awards and the application process can vary state-by-state. See, e.g.,?California,?New York,?New Jersey,?Texas.Section 1104 also provides for reimbursement for financial losses relating to a foreign trade mission or a trade show exhibition that was cancelled solely due to the COVID-19 public health emergency, so long as the reimbursement does not exceed the amount received under the federal grant.Section 1112: Subsidy for Certain Loan PaymentsThe SBA offers a few existing loan programs which may assist underserved or otherwise disadvantaged businesses, including the?Community Advantage Program?(application?here), and Microloan Program (here:?). Section 1112 of the CARES Act provides a subsidy for borrowers under these programs, appropriating $17 billion and requiring the SBA to pay the principal, interest, and any associated fees for the next 6 months of scheduled payments on existing loans or loans originated within 6 months of enactment of the Act.Congress also directed the SBA to encourage lenders under these programs to provide payment deferments, when appropriate, and to extend the maturity of the loans to avoid balloon payments resulting from deferments provided by lenders during the period of the COVID-19 national emergency.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.CARES Act - Title IV LoansTitle IV, subpart A, allocates $500 billion to create four pools of funds for the Treasury to use for loans, loan guarantees, and other investments, to provide liquidity to eligible businesses. Businesses may be eligible for funding if they are an "air carrier," or a United States business which has not otherwise received "adequate relief" under the Act (i.e., through the Title I lending programs).The first three pools (totaling $46 billion) are designated for the airline industry and businesses critical to national security. The remaining pool ($454 billion plus any funds left over from pools 1-3) is designated for programs and facilities established by the Federal Reserve Board (the "Board").To date, the Board has established or announced eight different programs, including the Main Street Lending Program (MSLP), the Primary Market Corporate Credit Facility (PMCCF), and the Secondary Market Corporate Credit Facility (SMCCF).These programs are not yet operational, but the Board and Treasury are accepting public comments for the MSLP until April 16.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.Main Street Lending Program ("MSLP")On April 9, 2020, the Federal Reserve Board announced that it will be using $75 billion from the fourth Title IV pool as seed capital for the MSLP, which will enable $600 billion in lending to small and mid-sized businesses. The program will establish two lending facilities – the New Loan Facility, for borrowers with existing loans through the program, and the Expanded Loan Facility, for new borrowers.Borrower QualificationsAvailable to businesses with:up to 10,000 employees, or$2.5 billion in 2019 annual revenuesMust be organized in the United StatesMust have a majority of employees based in the United StatesBorrowers that have already received PPP loans under Title I may be eligibleBusinesses with less than $250,000 in annual earnings (even with zero existing debt) are ineligible.**Note: This is an implied earnings requirement. The minimum MSLP loan size is $1,000,000, and the maximum loan size is the lower of $25,000,000 or an amount that makes the borrowers total debt more than 4x earnings. Therefore, a company with less than $250,000 would have a maximum permitted loan size of less than the minimum loan size under the program.Loan AmountsMinimum loan size: $1 millionMaximum loan size:New Loan Facility: the lesser of$25 million, orThe amount that would put the borrower's total outstanding and committed but undrawn debt at 4 times its 2019 earnings (measured as EBITDA)Expanded Loan Facility: the lesser of$150 million,30% of the borrower's existing outstanding and committed but undrawn bank debt, orThe amount that would put the borrower's total outstanding and committed but undrawn debt at 6 times its 2019 earnings (measured as EBITDA)Terms4-year unsecured term loansAdjustable interest rates at 2.5% to 4.0% above the Secured Overnight Financing Rate ("SOFR," an overnight rate which is intended to replace LIBOR in future financial contracts)Amortization of principal and interest will be deferred for a yearNo prepayment penalty.Application ProcessLoan applications will be managed through the borrower's bank.Allowable Uses and RestrictionsRequired Attestations:Borrower requires financing because of the COVID-19 pandemic.Borrower will "make reasonable efforts" to maintain payroll and retain employees during the term of the loan.*Borrower will follow certain compensation, stock repurchase, and capital distribution restrictions, outlined below.Borrower will refrain from using the proceeds to repay other loan balances and other debt of equal or lower priority (except mandatory principal payments).Borrower certifies there are no conflicts of interest under CARES Act Section 4019, which prohibits Title IV funding to businesses at least 20% owned by the President, Vice President, heads of Executive Departments, and Members of Congress, or spouses, children, and sons-in-law or daughters-in-law of those individuals.Additional restrictions on borrowers:Freezes on total compensation for employees with total 2019 compensation between $425,000 and $3,000,000:Applies while the MSLP loan is outstanding plus one additional year.Employees cannot receive, in any 12-month period, total compensation greater than their 2019 total compensation.Employees cannot receive severance or termination benefits greater than twice their 2019 total compensation.There is an exception for employees whose compensation is determined by a collective bargaining agreement.Caps on total compensation for employees with total 2019 compensation greater than $3,000,000:Applies while the MSLP loan is outstanding plus one additional year.Employees cannot receive, in any 12-month period, total compensation greater than $3,000,000 plus 50% of the 2019 amount in excess of $3,000,000.Prohibition on repurchases of the borrower's or the borrower's parent company stock:Applies while the MSLP loan is outstanding plus one additional year.Applies to equity securities listed on a national exchange.There is an exception for repurchases required to meet preexisting contractual obligations.Prohibition on dividends or other capital distributions:Applies while the MSLP loan is outstanding plus one additional year.Applies only to common stock of the borrower.*Note: It is unclear what will constitute such "reasonable efforts," but borrowers need not adhere to Section 4003(b)(3)(D)(i), which would have required a borrower to certify that funds will be used to maintain 90% of the borrower's workforce (as of the time of application), to restore to 90% of its workforce (in place as of February 1, 2020), and to restore all compensation and benefits within four months after termination of the national emergency. Borrowers should, at the very least, expect to document the facts and circumstances of any cuts to headcount or compensation to ensure the decisions are economically defensible.Forgiveness?Not forgivable.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.Additional Information on Other Title IV ProgramsPrimary Market Corporate Credit Facility ("PMCCF")What is it and how will it work?The Primary Market Corporate Credit Facility ("PMCCF") will buy bonds from and make loans to investment grade companies. A?Term Sheet?is available, but the program is not yet operational.The Federal Reserve Bank of New York will lend to a Special Purpose Vehicle ("SPV") which will purchase qualifying bonds as the sole investor in a bond issuance, and purchase portions of syndicated loans or bonds at issuance.Eligible AssetsAt the time of purchase by the Facility, eligible corporate bonds must be issued by an eligible issuer and have a maturity of 4 years or less.PMCCF may purchase no more than 25% of any loan syndication or bond issuance.Eligible IssuersBusiness must be created or organized in the United States under the laws of the United States with significant operations in and a majority of employees based in the United States.Must have been rated BBB-/Baa3 as of March 22, 2020. If subsequently downgraded, must be rated at least BB-/Ba3 at the time the Facility makes a purchase, although issuer ratings are subject to review by the Federal Reserve.Not an insured depository institution or depository institution holding company.Must not have received "specific support" pursuant to the CARES Act or any subsequent federal legislation.*Must have no conflicts of interest under CARES Act Section 4019 (i.e., no lending to members of the Executive and Legislative branches and certain of their family members)*This is based on a Federal Reserve Term Sheet, and Treasury has not issued any additional guidance on this.Other LimitsMaximum amount of outstanding bonds or loans purchased under the Facility for an eligible issuer may not exceed 130% of the issuer's maximum outstanding bonds and loans on any day for the year prior to March 22, bined purchases for any one issuer through the PMCCF and SMCCF may not exceed 1.5% of the combined potential size of the PMCCF and SMCCF, which currently amounts to $11.25 billion.For individual corporate bonds in which the PMCCF is sole investor, pricing is issuer-specific and will be informed by market conditions. There will be a 100 bps facility fee.For the purchase of portions of syndicated loans or bonds at issuance, pricing will be the same as for other syndicate members. There will be a 100 bps facility fee on the PMCCF's share of the syndication.This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions.Primary Market Corporate Credit Facility ("PMCCF")What is it and how will it work?The Secondary Market Corporate Credit Facility ("SMCCF") will purchase secondary market corporate debt issued by eligible issuers investment grade companies. A?Term Sheet?is available, but the program is not yet operational.The Federal Reserve Bank of New York will lend to a SPV which will purchase in the secondary market individual corporate bonds and corporate bond portfolios in the form of exchange traded funds (ETFs).Eligible AssetsFor purchases of individual corporate bonds, the instruments must:Be issued by an eligible issuer,Have a remaining maturity of 5 years or less, andBe sold to the SMCCF by an "eligible seller" (a business organized in the United States or under the laws of the United States, with significant U.S. operations and a majority of U.S.-based employees, which also has no conflicts of interest under CARES Act Section 4019).For purchases of ETFs, the ETF must:Be U.S.-listed, andIts investment objective must be to provide broad exposure to the market for U.S. investment grade corporate bonds.**Note: The "preponderance" of the SMCCF's ETF holdings will have an investment objective for U.S. investment grade bonds, with "the remainder" having an investment objective for U.S. high-yield bonds.Eligible IssuersSame rules as for PMCCF.Other LimitsMaximum amount of instruments purchased under the Facility for an eligible issuer may not exceed 10% of the issuer's maximum outstanding bonds and loans on any day for the year prior to March 22, 2020.SMCCF will not purchase shares of an ETF if, after purchase, SMCCF would hold more than 20% of the ETF's outstanding bined purchases for any one issuer through the PMCCF and SMCCF may not exceed 1.5% of the combined potential size of the PMCCF and SMCCF, which currently amounts to $11.25 billion.PricingFair market value in the secondary market.Note: This information is not intended to provide legal advice or to be a substitute for legal advice or counsel. In addition, the information provided here might be subject to additional guidance from lenders, the federal government and/or other institutions. ................
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