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Treasury Issues Anticipated Guidance on CARES Act’s Paycheck Protection Program

Client Updates

*Updated as of April 1, 2020

This afternoon, the Treasury Department issued its implementation guidance on the Paycheck Protection Program (the “PPP”) which was created under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as well as the application form for obtaining PPP funds. The PPP authorizes loans to businesses of 500 or fewer employees for payroll costs and other approved expenses. Subject to certain restrictions, the funds available under the PPP are forgivable. See our prior client alert on the CARES Act (which included an overview of the PPP) here. Summarized below are new issues for borrowers based on today’s guidance:

  • Affiliation rules have not been altered by the Treasury guidance so PE-controlled companies continue to be ineligible for PPP loans other than those (1) in the hotel and food services industries (NAICS code 72), (2) that are franchises in the SBA’s Franchise Directory, or (3) that receive financial assistance from small business investment companies licensed by the SBA. Note that not all PE-funded companies are PE-controlled companies (this is a case-by-case determination based on ownership, management, interlocks, business relationships and integration of operations). We will continue to watch for any subsequent changes to the affiliation rules by the SBA.

  • As stated in the CARES Act, PPP funds can be used for payroll costs (including benefits), interest on mortgage obligations, rent and utilities.

    • The CARES Act also permits funds to be used for (1) costs related to insurance premiums and (2) interest on any other debt obligations incurred before February 15, 2020. These two items are not mentioned on the Application Form (and only costs related to insurance premiums is referenced in the Treasury guidance). However, the application form includes an “Other” box for borrowers to insert any other intended use of funds. While uses which are not specifically permitted under the CARES Act should not be added by borrowers, those who intend to use PPP funds for insurance premiums or interest on debt obligations may still be able to reference those uses in the application.

    • The application continues to allow PPP funds to be used for healthcare costs but, consistent with the CARES Act, the Treasury guidance still excludes healthcare costs as a forgivable expense. Clients should be careful to document that funds are being used for payroll, mortgage interest, rent or utilities to ensure forgiveness.

  • As PPP subscription is expected to be high, the guidance anticipates that no more than 25% of the forgiven amount may be for non-payroll costs. The CARES Act stated that any PPP funds would be forgivable if used for payroll costs, interest on mortgage obligations, rent or utility payments. Clients are now incentivized to maximize all funds received toward payroll.

  • The CARES Act calculates a borrower’s loan amount as 2.5x “Average Monthly Payroll”, up to $10 million. For purposes of calculating Average Monthly Payroll, the PPP guidance states that most applicants will reference the average monthly payroll from 2019, excluding costs over $100,000 on an annualized basis for each employee.

    • This differs from the CARES Act which states that Average Monthly Payroll would be based on a trailing 12-month average from the time that funds were made. The original bill language may have been intended to incentivize companies from laying off employees by requiring that the payment amount be connected to recent payroll. However, the Treasury guidance now allows companies to more easily reference their historical payroll.

    • Additionally, the CARES Act, the Treasury guidance and the application form may be inconsistent when describing how to calculate the $100,000 per-employee payroll cap in determining Average Monthly Payroll. The CARES Act states that compensation of an individual employee in excess of an annual salary of $100,000 is capped, which could be read to mean that an employee whose salary is less than $100,000 has no cap with respect his or her non-salary benefits. On the other hand, the Treasury guidance instructs borrowers to cap salary, wages, commissions and tips at $100,000 but includes no such cap on non-cash benefits. Lastly, the application form instructs borrowers to cap all compensation at $100,000. Despite the inconsistency, lenders are likely to be prudent when calculating per-employee Average Monthly Payroll and we believe will instruct borrowers to cap all amounts at $100,000. That being said, clients may want to specifically ask their lender how it prefers to calculate this cap in order to maximize available funds.

  • The PPP application is fundamentally the same as the application used for SBA Section 7(a) loans with particular modifications. Like the SBA loan application, several sections of the PPP application will need to be completed and signed by 20% or greater owners. All parties listed below are considered “owners” as well as “principals”:

    • For a sole proprietorship, the sole proprietor

    • For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm

    • For a corporation, all owners of 20% or more of the corporation

    • For limited liability companies, all members owning 20% or more of the company

    • Any Trustor (if the Applicant is owned by a trust)

  • Starting April 3, 2020, small businesses and sole proprietorships can apply for funding. Starting April 10, 2020, independent contractors and self-employed individuals can apply for funding.

  • Treasury encourages applicants to apply quickly because there will be a funding cap. Some observers believe that any Phase IV legislation will authorize additional funds for the PPP.

  • Payment details in the guidance include the following:

    • Interest rate: 0.50% fixed rate (subject to forgivable amounts). This clarifies the CARES Act provision which states that the PPP interest rate would not exceed 4%.

    • All payments are deferred for 6 months. However, interest will continue to accrue over this period.

    • Any non-forgiven loan will be due in 2 years and there are no early prepayment penalties or fees. This clarifies the CARES Act provision which states that PPP maturity would not exceed 10 years.

    • Loans are non-recourse and do not require personal guarantees or collateral.

  • The completed application must be submitted to an SBA participating lender who will then assess eligibility for financial assistance. Many banks are in the process of (or have already launched) application websites to streamline this process. Some banks are requiring that the borrower have a preexisting relationship with the bank in order to utilize their application website. Therefore, we suggest that borrowers contact their regular corporate bank to submit an application.

  • Link to Application:

  • Full guidance:

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