News & Insights
The CARES Act – Available SBA Loan Programs and Provisions Impacting Landlords
3.28.20: The Coronavirus Aid, Relief, and Economic Security Act (or “CARES Act”) was signed into law on Friday March 27, 2020, and provides emergency relief to individuals and businesses. This update covers issues related to new forgivable loans available to businesses and certain other aspects of the law impacting owners of commercial real estate. It does not address benefits available to individuals, unique tax and employee benefits issues and the like which are covered in other updates.
Forgivable SBA Loan Program
The CARES Act creates a new Section 7(a) loan category for the United States Small Business Administration (the “SBA”) to administer. These new loans are potentially forgivable up to 100% of the principal amount borrowed (called the “Paycheck Protection Program” or “PPP Loans”). Additionally, these PPP Loans are not tied directly to establishing losses suffered during the current pandemic — there is a presumption of negative impact from COVID-19. The PPP Loans do not require collateral or guarantees, and are available to businesses that previously would not have qualified for an SBA guaranteed loan. Below is a summary of the key elements of this new program.
Eligibility: Businesses that are considered “small business concerns” and would have been eligible for a Section 7(a) loan are covered (so some businesses with more than 500 employees who otherwise are small business concerns under SBA rules should also be eligible). In addition, the eligibility rules have been expanded to include businesses (including self-employed individuals), nonprofits, and veterans’ organizations and tribunal concerns with less than 500 employees (unless the applicable industry has a higher size standard under the SBA rules). Eligibility information for this new category of businesses is further summarized in material provided by the US Chamber of Commerce which is available on the PRK Livengood website.
Available Loan Period: The PPP Loans are only available until June 30, 2020 and must be used for eligible expenses during the 8 week period after a business receives the PPP Loan, so the window to receive and use a PPP Loan is limited.
Lenders and Loan Fees: The PPP Loans will be handled by existing SBA lenders including banks and credit unions, and other financial institutions to be approved by the SBA. The customary loan fees that the SBA charges for a Section 7(a) loan (which can be substantial) are waived. It appears that the issuing SBA lender however may still charge its customary fees for these PPP Loans. This may vary by SBA lender. If you believe your business is eligible, we would recommend you apply for a PPP Loan as soon as possible with your current financial institution or local SBA lender, as we anticipate demand for the PPP Loans to be high.
Maximum Loan Amount: The PPP Loan amount is capped at the lesser of $10 million or 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary/wages/tips, sick/family leave/PTO, severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation. Thus an employer with $100,000 in monthly payroll costs would be entitled to a PPL Loan up to $250,000. However, for any employee who is paid more than $100,000 in salary, only the amount up to $100,000 (prorated for the covered period) can be used in determining the loan amount.
Also, in addition to the above limits, the PPP Loan may include or roll over and include previous Economic Injury Disaster Loans (“EIDL”) provided by the SBA to a business after January 31, 2020, so this gives some additional help for businesses who have already taken advantage of this program. A business though cannot get reimbursed for the same expenses twice (no double dipping between the PPP Loan and an EIDL loan).
Loan Terms/Use of Proceeds: An eligible business can use the PPP loan proceeds for payroll costs, insurance premiums for health care costs, interest on mortgages and business loans, rent, and utilities (but not for new loans or leases entered into after February 15, 2020) (“Allowable Expenses”). A PPP Loan if not forgiven can have a term up to 10 years and an interest rate of no more than 4%. There are no prepayment penalties. Unlike most SBA loans, there are no guaranty or collateral requirements. Thus even if not forgiven the PPP Loan terms are very favorable to borrowers.
Forgiveness: This is a key incentive for the PPP Loans as they can be forgiven in their entirety if loan proceeds are used appropriately. The amount of the PPL Loan that is forgivable is equal to the sum of the Allowable Expenses incurred and paid by the business during the 8-week period beginning when the business receives the loan proceeds. Any portion of the PPP Loan that is forgiven is excluded from taxable income.
There are some limitations on the forgiveness if the business laid off employees or reduced wages/salaries of its workforce in the period between February 15, 2020 and June 30, 2020. The amount of forgiveness is reduced proportionally in two ways: (1) based on the decrease in the average number of current full time equivalent employees (“FTEs”) as compared to historical average FTEs in the prior year (with some exceptions for seasonal businesses), and (2) any decrease in pay of any employee (not an average) beyond 25% of their historical compensation.
Since many impacted businesses have already laid off or furloughed workers, or reduced salaries, in order to encourage workforce stabilization, if those changes were made between February 15, 2020 and April 26, 2020, they will not be considered if the business rehires the number of personnel or reinstates salary levels by June 30, 2020. A business must make a formal application for forgiveness to its lender and provide appropriate documentation of payment of Allowed Expenses after expiration of the 8-week period. The amount of the PPP Loan forgiven is not included in the business’ income so there is no negative income tax impact to the business from obtaining a PPP Loan that is forgiven.
Additional SBA Loan Programs
New EIDL Loans: The CARES Act also creates a new EIDL grant program for businesses awaiting processing of a loan. Loan applicants can get up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses. This grant does not have to be repaid. A business that receives an EIDL can apply for, or refinance its EIDL into, a forgivable PPP Loan.
Increased SBA Express Loan Limits. The CARES Act also increased the maximum loan for SBA Express Loans from $350,000 to $1,000,000 until December 31, 2020. An SBA Express Loan often can be processed by an approved SBA lender within a few days and provides a business with ready access to capital in the form of a revolving line of credit for as long as 7 years. It, however, has customary SBA underwriting and collateral requirements which generally include personal guarantees and liens on business assets and the residence of the owner guarantor.
Deferral Relief on Existing SBA Loans. Lenders on existing SBA loans can provide payment deferrals and extend maturity dates up to 12 months to avoid defaults by businesses on these loans. The SBA will reimburse these lenders for the deferred principal and interest for the agreed deferral period.
Programs Impacting Landlords
Multifamily Property Protections: Until December 31, 2020 or termination of the national emergency, an owner of a multifamily property (5+ units) with a federally backed multifamily mortgage loan (again most multifamily loans are covered) may request a forbearance from their loan servicer because it has suffered a financial hardship due to COVID-19. The loan servicer is required to document the hardship and permit a forbearance for up to 90 days on all principal and interest payments. The borrower must have been current as of February 1, 2020 to be eligible. No late fees or default interest can be charged during this forbearance period. A borrower who receives a forbearance under this section cannot charge late fees or interest on unpaid rent or evict a tenant solely for nonpayment of rent during the forbearance period.
Eviction Moratorium. Owners of multifamily properties with a federally-backed mortgage loan are prevented from filing an eviction proceeding against a residential tenant for 120 days after adoption of the CARES Act, or charge late fees, interest or other penalties for nonpayment of rent during this period. Once this period expires the landlord must give the tenant at least 30 days to vacate.
Credit Protection: The CARES Act amended the Fair Credit Reporting Act to require any creditor who makes an agreement to permit a borrower or tenant to defer payment of an obligation or otherwise modify an obligation (an “accommodation”) to report that the credit obligation is current so long as the borrower/tenant adheres to the agreement or brings the obligation current prior to expiration of the mandated credit protection period. The credit protection period began on January 31, 2020 and terminates on the date that is the longer of (1) 120 days after adoption of the CARES Act, or (2) 120 days after the President terminates the declaration of a national emergency due to the COVID-19 pandemic.
Single Family Property Foreclosure Protections. Lenders on single family properties (1-4 units) with a “federally backed mortgage loan” (which includes most housing loans) are precluded from commencing a foreclosure on a defaulted borrower until after May 17, 2020. In addition, upon request of the borrower, the lender “shall” provide a forbearance for up to 12 months, with no accrual of default interest or late fees.
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