CLA Livestream Series: PPP And Main Street Lending Program Updates

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  • 5/12/2020
  • Virtual

Join our CLA professionals and guests as we share updates on the Main Street Lending Program.

Speakers:

In case you missed it:

Questions and Answers:

How is loan forgiveness affected for PPP funds if some employees are not back to 30 hours/week for initial paydays following receipt of funds?

Salary and full-time hourly employees (those that average 30 hours or more / week) count as 1 FTE.  For part-time hourly workers, the FTE’s should be calculated based on hours worked in a given payroll period by the part-time employees divided by 30 hours.  The May 3 FAQ from the Small Business Administration also clarifies treatment of rehires by June 30.

If we hire a new full time employee to take the place of a part time employee who is retiring, will the new employee count toward the FTEs for the eight-week period?

Yes.

If we received an EIDL advance, is it safe to assume we are still in the pipeline to receive a larger EIDL operating loan?

If you applied for the grant, you are in the queue for the Economic Injury Disaster Loan (EIDL) and we understand the process takes about six weeks as there is quite the backlog.

If an owner’s annual wages are above $100k, is he or she still entitled to the health insurance benefit?

The health benefits are separate from the $100k wage limit.

Our bank sent an email with one funding date for our PPP loan that does not match the date on our statement. Which date counts for the eight weeks?

Talk to your bank to confirm the correct date.

Is it true that if a company repays a PPP loan under the safe harbor provision, they can then use the CARES Act payroll tax credits?

Yes.

Can vacation payouts to staff be included in the wage calculation for forgiveness?

Vacation compensation is included in wages.

Are forgiveness expenses on accrual basis or cash basis?

“Paid and incurred” which needs to be defined.

Is payroll deduction gross or net with payroll deposit paid?

Payroll is gross.

Is the loan date the date to begin expense tracking, or is it the paid date?

Your eight weeks start on the date your loan is funded.

Are rent and mortgage interest costs by a controlled entity considered an eligible expense for the PPP loan?

Intercompany and related party rents need clarification If you don’t spend 75% on payroll, will it result in zero forgiveness? We believe it will be that 75% of the forgiveness amount needs to be payroll – sliding scale – but will get more clarification.

Can our annual Cost-of-Living Adjustment (COLA) increase, which may hit payroll during our eight week period, be included in our eight week payroll period?

We believe pensions and retirement benefits paid during the period would qualify.

Is FTE part of the loan forgiveness calculation and if so, how is it calculated?

We think it will be 30 hours a week, but need more guidance.

Would any board designation funds be counted as liquidity?

They still need to clarify this.

Can we ask for less than 100% forgiveness?

Partial forgiveness will be allowed.

Will interest on capital loans be included in forgiveness?

Mortgages on existing debts will be defined further.

Can you please clarify that 75% “payroll” includes both wages and benefits (health insurance, 401(k) match)?

That is a reasonable assumption on which we need clarification.

If you have only used 75% of the loan on payroll expenses and then another 10% on utilities, will the loan be forgiven (aside from the 15% that needs to be repaid)?
That would be a reasonable interpretation based on the current guidance.

Are payroll taxes included with payroll?

Yes, payroll taxes on the employee portion.

How does PPP interact with unemployment insurance in California?

If people are paid under the PPP, they likely will not be eligible for unemployment.

Am I able to file for PPP as I am a single member LLC? Do I qualify?

You can qualify as self-employed – the loan is sized based off your 2019 Schedule C income.

My PPP term ends on June 10th and I pay bi-monthly. Can I move my June 15th payroll up to June 10th so, I get two full months of payroll?

We should wait until we see what “incurred and paid” means. Then you can decide what strategies apply to optimize payroll.

Will employees who have not received any hours or wages during our closure (did not receive payroll) count against our retention?

If you restore them before June 30, they will not count against you.

Are guaranteed payments to a business owner part of the PPP payroll percent?

Payments of guaranteed payments to partners in a partnership may be reported as payroll costs for the forgiveness period, up to the $100,000 annualized limit.

Could 401(k) incurred by employer during the eight weeks be included – even if not actually paid yet?

We are still uncertain what “paid and incurred” means.

Can ex-pat employees be paid out with PPP funds?

Compensation paid to employees whose principle place of residence is in the United States are eligible.  Principle place of residence is defined by the internal revenue code.

We pay stipends for certain employees, and within that payroll they will appear to have an annual salary >$100k. Does this have to be adjusted down in the payroll?

We are awaiting more guidance on this.

Are group life and dental premiums (paid by employer) allowable based on what we know?

Dental, health, and vision benefits are allowable. Life insurance does not likely qualify.

I understand PPP funds are for payroll for salaried employees <$100k, but do they have to be used for the benefits for those employees, or can they be applied to employer-paid benefits for all employees?

The $100,000 limit applies to wages, salaries, commissions, and similar compensation.  Health insurance, retirement payments, and other benefits do not count towards the $100,000 cap.

Have you heard any talk of payroll and head count coming down to 50% instead of 75%?

No, nothing yet. The Office of Inspector General (OIG) issued a report stating the 75% was not in the original CARES statute, but nothing yet on changing this.

What is the deadline that you must notify the bank of repayment if you received the PPP loan and need to return some unpaid funds?

You will submit for forgiveness with the bank after the eight week loan period.

Can I include my Professional employer organization (PEO) cost in my payroll costs?

The guidance is silent on those expenses. It might be covered in forgiveness guidance we get later.

Are you saying we can use the PPP funds to pay out employer-paid benefits for all employees, not just the <$100k ones?

Yes. Is workers compensation insurance a covered payroll expense, a covered payroll expense that is eligible for forgiveness?

We do not believe workers compensation qualifies.

Do you have guidance regarding “transportation” costs? Does it include gas, mileage, insurance, vehicle operating costs etc.?

Transportation needs to be included in the forgiveness information.

What are covered utility payments?

“Covered utility payments” are defined as “payment for a service for the distribution of electricity, gas, and water, transportation, telephone, or internet access for which service began before February 15, 2020. Generally this would include standard hardline utilities that connect directly into the property such as water, gas, electric, internet, and telephone (excluding cell phone). Cable (as in TV) is not a utility.”

 

What we talked about:

Rohen: Hello CLA family, friends, colleagues, and community partners.  Welcome back to our livestream. Today’s episode will include updates to the PPP Frequently Asked Questions, Forgiveness Tracking Strategies, and the Main Street Lending Program (timestamps of topic discussions included in parentheses):

  • PPP Frequently Asked Questions (.50 – 6:10)
  • Forgiveness Tracking Strategies (6:11 – 14:00)
  • Main Street Lending Programs (14:01 – 28:34)

The Treasury FAQ issued on April 23 focuses on the applicant certification that the loan was necessary to support the ongoing operations of the applicant, as well as a safe harbor for borrowers, which has been extended to this Thursday, May 14. We’ve got Jack Rybicki and Todd Sprang back today, along with Rick Krueger to walk through these key points. And as always we have a team of people ready to answer your questions throughout the livestream. If time permits, we’ll take a few of your questions live. Jack, catch us up on the latest information and FAQs.

Rybicki: There have been limited formal updates since the last livestream. There are still two main topics of discussion:

  • FAQ #44 that clarified the need to include foreign affiliates in the determination of employee count for eligibility which was fairly clear from previous guidance. However, this FAQ also used different language when referring to employees to be included in the headcount, dropping the qualifier of “employees whose principal place of residence is in the United States”. It is unclear if this is a drafting error or a change in interpretation, and still leaves many borrowers with foreign affiliates wondering what to do at this point. Legal opinion on this matter seems to be split and while the new language is consistent with non-PPP guidance on employee count, it is contradictory to many references in both the FAQs and IFRs previously issued. Applicants finding themselves impacted by this should consult with legal counsel and consider the guidance in FAQ 17 that allows borrowers to rely on the laws, rules and guidance available at the time of the relevant application.
  • FAQ #31, 37 and the IFR that introduced additional guidance on “economic uncertainty” and the need to evaluate current business activity and the ability to access other sources of liquidity to support operations in a manner that is not significantly detrimental to the business. At this point we do not expect any further guidance in advance of the May 14 safe harbor deadline, as the IFR issued last week merely memorialized the May 14 extension and provided no additional insight.

Rohen: Can you talk a little more about the safe harbor situation and what you think is the best course of action for borrowers?

Rybicki: We continue to advise clients to document the economic uncertainties that raised concerns about keeping their workforce employed at the time they made the loan application. This documentation should also include considerations around the access to capital available, whether that is cash on the balance sheet, undrawn line of credits, or owners with significant liquidity. This is another area for consultation with legal counsel, but we continue to believe that it is unreasonable for the government to expect private businesses to become part of the social welfare net and use the working capital retained in the business to pay employees that would otherwise have been released based on sound business decisions. Your analysis should document why using working capital for the retention of workers or maintenance of payroll levels that are not warranted by current business activity would be detrimental to the ongoing operations of the business. 

There have also been more considerations lately related to the “current business activity” portion of the expanded guidance, leading us to believe that the SBA may look at current revenue volumes compared to prior year to see if there was an economic impact suffered by the business. In this, the SBA could use a lack of economic impact as a means to question eligibility. We are encouraging clients to consider this clause in the context of forgiveness, potentially not requesting forgiveness if economic conditions did not come to pass that would have resulted in workforce retention matters. While this approach would not alleviate potential challenges to eligibility, it would likely be seen to be an indicator the company was acting in good faith and not seeking to be unjustly enriched by the PPP.

Rohen: Jack, you mentioned forgiveness, can you tell me where things stand with the forgiveness guidance?

Rybicki: We are hearing that a guide is in the works at Treasury and could be issued sometime this week. Given that some companies are now entering the 6th week of their 8-week period, this guidance cannot be delayed much further. As an aside, we are also hearing about proposals in Congress to extend the period to use PPP loan funds by another 8 weeks. We are encouraging companies to proceed cautiously on forgiveness related matters, particularly if you haven’t yet experienced a significant economic impact or if you have experienced an impact or  if you haven’t been able to use all the funds and might not get forgiveness.

Rohen: Rick, we’ve had so many questions come in from clients related to forgiveness, can you please cover the key items that are top of mind?

Krueger: We definitely have more questions than answers at this point. That said, we’re starting to get a sense of where the guidance might land and in many cases, it does seem to be fairly reasonable in trying to include 8 weeks’ worth of expenses during the 8-week covered period for forgiveness.

For example, one of the practical challenges with PPP forgiveness deals with the concept of “incurred and paid.” As written in the CARES Act, costs need to be both “incurred and paid” within the 8-week covered period to qualify. Let’s think about payroll. Most businesses pay hourly employees in arrears. So payments now are for hours worked a few weeks ago. That causes a problem with “incurred and paid.” Another practical challenge might be a rent payment. For example, if I paid my May rent on May 1, but my covered period didn’t start to May 2, what would that mean if the payment fell outside of that 8-week period?

From some of the whispers we’re hearing from the hill, we’re optimistic that Treasury and SBA are trying to find a reasonable, common-sense approach to address these types of issues. There’s no certainty and it’s a fluid process, but it seems like there may be some flexibility on the back end to include a paycheck date shortly after the covered period. There might be some flexibility to allow two months of non-payroll as long as they’re paid close to the covered period.

Rohen: We have a question from the chat if you could clarify the 75% payroll includes both wages and benefits, could you answer that while we’re on the topic?

Krueger: The CARES Act divides costs into one of two buckets, the payroll and the non-payroll and the payroll would include traditional cash compensation, your gross wages but then some of the related items like retirement, group health benefits, as well as state and local taxes, the employer’s share of all of those.

Rohen: How are you advising people to handle some of their concerns?

Krueger: As everyone knows, it’s hard to make decisions when many of the rules are still being written. So how are people dealing with this? Well on the one hand, I do have many clients who feel pretty comfortable the rules will work themselves out and they just need to focus on the major PPP programs goals of retaining workers and maintaining payroll.

On the other hand, I have clients that are reasonably concerned about some of their large expenses. For example, a client just called last week since they make their 401(k) match on an annual basis. They wanted to know if they should amend their plan to make matching contributions each pay period. I wish I could have said that’s unnecessary, but in that case, the payment was so far after the covered period that it might be in order to be included in forgiveness.

So how would I personally approach it? I sincerely hope Treasury and SBA will build some flexibility into the guidance. But we don’t know for sure and I doubt it will be unlimited flexibility. So it makes it especially important that we carefully watch for information and we keep our options open in case we need to adjust the plan.

Rohen: Amy in the chat is asking the question, "my PPP term ends on June 7, I pay bi-monthly can I move my June 15 payroll up to June 10 so I can get the two full months of payroll, what do you think about that as being flexible with the plan?"

Krueger:  My hope is that would be unnecessary, there is flexibility with payroll, especially on the back end, so as long as it is incurred during the 8 weeks and paid reasonably close to the covered period we’ll be able to include it within the amount we are considering for forgiveness.

Rybicki: We’re going to get 8 weeks’ worth of payroll and two months’ worth of rent, utilities, and interest payments. As long as you are making those payments in a reasonable period of time after the covered period it is going to be mechanics, that’s the intention of this program.

Rohen: We have another question, this time from Sara, "if you re-pay your PPP loan by the May 14 deadline, is the interest also paid or is it treated like the loan was rescinded?"

Rybicki: You will have to pay the interest from the period of time from that the loan originated to when you re-pay the loan. The bank needs to be compensated.

Rohen: We want to spend some time on Main Street Lending in the livestreams, and the programs are becoming much more relevant now especially. Cover some key things we need to know.

Sprang: Unlike PPP loans that we’ve discussed today, loans made under the Main Street Lending Program Facilities (the “Facilities”) are not guaranteed by the government, do not contain a forgiveness feature and allow for medium-sized business participation.

The three facilities include:

  • Main Street New Loan Facility (MSNLF) – Extends new adjustable rate loans to Eligible Borrowers with a three year maturity with a deferral of payments for the first year and consistent principle amortization over the remaining three years.
  • Main Street Priority Loan Facility (MSPLF) – Extends new loans to Eligible Borrowers with the same maturity and rate as MSNLF, but it utilizes a higher adjusted EBITDA calculation, principle amortization is more heavily weighted to maturity, different subordination terms and a limited ability to refinance existing debt at origination.
  • Main Street Expanded Loan Facility (MSELF) – Extends an increase (“upsized tranche”) to an existing term loan or revolving credit facility of an Eligible Borrower.  The maturity and rate are the same as MSNLF and MSPLF.  It also retains the same adjusted EBITDA calculation and principle amortization as MSPLF while providing a much larger maximum loan amount, but does not provide the same limited ability to refinance existing debt as MSPLF.

Consult with a CLA professional, they are familiar with this program and can assist with detailed questions and support you with the calculations to determine your eligible loan amount.

Rohen: If I remember correctly, all three of the facilities have a term of 4 years and an interest rate of LIBOR plus 3%. What are eligibility requirements for obtaining a Main Street Loan?

Sprang: There are six requirements:

  1. The business was established prior to March 13, 2020 (National Declaration of Emergency);
  2. Created or organized in the United States or under the laws of the United States with significant operations in the United States and the majority of its employees in the United States;
  3. Not participating in more than one of these three Main Street Facilities, or the Primary Market Corporate Credit Facility;
  4. Not an ineligible business as defined by the PPP on or before April 24, 2020; 5.
  5. $15,000 or less employees or $5 billion or less of revenues for 2019 fiscal year end;
    • Employee count is determined via the average total of persons employed (full-time, part-time, seasonal and otherwise employed) by the Borrower and its affiliates for the 12-month period prior to origination.  Employee count should exclude volunteers and independent contractors.
    • 2019 fiscal year end revenues should include the revenues of affiliates and can be determined utilizing
      • Audited financial statements or annual receipts as reported to the IRS
      • If you don’t have 2019 numbers from either source, you can use the 2018 fiscal year information
  6. Has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act). If eligible borrower or its affiliates received a PPP loan, they can also receive a loan from one of these three facilities, provided they are eligible borrowers.

Nonprofit organizations are not eligible – heavy on eBIDTA

Rohen: If someone is interested in obtaining a loan, what lenders are making these loans?

Sprang: The Facilities all utilize the same pool of eligible lenders. Eligible lenders include, in general, banks, savings associations and credit unions. Although the official start date and launch for the Facilities were not announced on April 30, interested applicants should contact their lender to determine if the lender plans to participate in some or all of the facilities and when the lender will start taking applications.

Since eligible lenders will apply their own underwriting standards to loan applicants, documentation requests and evaluations of financial condition and creditworthiness will vary and meeting the requirements to be considered an eligible borrower for these facilities does not mean the applicant will be approved for a loan or for the maximum allowable amount.

Rohen: We have a question from chat, are lenders allowing add-backs to the EBITDA calculation?

Sprang: Yes, there are add-backs to EBITDA, it was missing from the original term sheet, but got changed. Add-backs are not up to your discretion, they are up to the lender to decide.  Our CLA professionals and our private equity group can guide you with what those typical add-backs might be.

Rohen: Earlier in this session we discussed the certification matters related to PPP loans. Are there borrower certifications for the Main Street Program?

Todd:  Yes there are. There borrower has to certify:

  1. To not seek to cancel or reduce any of its committed lines of credit
  2. That it has a reasonable basis to believe that it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
  3. For a period from the date of origination until 12 months after the loan is paid off the borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, with an exception for an S corporation or other tax pass-through entity that may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
  4. The eligible borrower must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

    Also, while not specifically included as a required certification, the borrower should make commercially reasonable efforts to maintain its payroll and retain its employees during time their loan is outstanding. While that sounds a bit like PPP, it’s not the same and these loan funds don’t require you to spend the proceeds payroll of other allowable expenses so you have more flexibility.

    Rohen: We have a few more questions, do staff covered on grants still count on the PPP loan?

    Rybicki: If an individual is already being reimbursed under another state or federal grant program that compensation is not considered allowable compensation, you can’t get compensated twice by the federal government.

    Rohen: What is included in the definition of "utilities" and what we hope to see for future guidance?

    Krueger:  This is an area we wish we had more certainty on. Hard line utilities that are coming into a physical building are clearly included in the definition. Questions related to cell phones, these are probably not included within utilities. There isn’t clarity or guidance yet of what is or isn’t.

    Rybicki: We are getting questions on what does transportation as a utility mean, but we have no guidance on transportation. Does that mean all of the gas we put into vehicles, is that a utility? We don’t know, but some of those things that you use for delivery of services, or in the revenue-generating process likely would be a little bit of a stretch to be included in that utility bucket unless it’s really part of your cost of sale or cost of delivery. We don’t have clear guidance on transportation.

    Rohen: That is all we have time for today. Please continue to reach out to us at CLAconnect.com for answers to your questions. We will continue to provide you with information about what you need to know, and we can connect you with an advisor for your specific needs.  Thank you to our presenters, our chat moderators, and to the audience for another great livestream.

    Be sure to tune in Thursday, we are going to stay flexible depending on guidance of who are guests will be, but we’re hoping to bring back Omar Nashishibi to cover what’s happening in Washington, along with Samantha Metcalf to talk about EIDL loans, and Jack Rybicki again to bring us up to speed on any new developments with the PPP program. Thanks for watching, and be well.

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