Our CLA professionals shares insights and details into the Agribusiness industry, the Economic Injury Disaster Loan and PPP Updates.
- Leslie Boyd, CLA Principal, Manufacturing
- Rick Krueger, CLA Principal
- Paul Neiffer, CLA Principal, Agribusiness
- Jack Rybicki, CLA Principal, Managing Principal of Industry, Real Estate
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Boyd: Hello CLA Family members, clients, community partners, and friends. Welcome back to our livestream series. I want to give a brief overview of our session today and welcome our presenters! As we said Tuesday, the Federal Reserve Board expanded its Main Street Lending Program on Monday to allow more small- and medium-sized businesses to be able to receive support. Todd Sprang will cover the key points related to the important Main Street lending developments. The Board expects the Main Street program to be open for lender registration soon and to be actively buying loans shortly afterwards.
We also have Paul Neiffer on the show today to talk about the impact of the COVID-19 legislation on the agribusiness community. Paul is a principal from our Walla Walla, Washington office. Paul authors our agribusiness blog, Farm CPA Today, that can be found on CLAconnect.com.
Finally, last night, the Treasury released a new interim final rule (IFR) related to the PPP Flexibility Act Implementation. We have Jack Rybicki back to talk about this and continue to unpack the PPP Forgiveness Act, and provide some planning strategies at the end of the session. Welcome to all three of you!
Before we dive in, we would like to cover an important point. We are saddened and concerned for each person who viewed inappropriate chat statements on Tuesday. In response to that, we have created a more safe and secure environment for you to participate in the conversation with us and ask your questions. Please submit questions throughout the session today via our email address Livestream@CLAconnect.com. We have CLA family members monitoring the inbox and directing questions to our session. We will also post the frequently asked questions on our website as a follow up to the session. I’d like to start today talking with Todd about changes to the Main Street Lending Program changes. Todd thank you for joining us to bring us up to speed on these important points.
Sprang: Thanks, Leslie.
Boyd: In the introduction, I alluded to the fact that the Main Street Lending Program has had several developments. Can you go over the key developments and what they mean?
Sprang: Sure, as I analyzed those changes and others to date, I think going into detail of each change can cause confusion rather than provide clarity. Instead, I’ll summarize the modified program terms as they exist today.
I’ll start with how Main Street Facilities integrate with your assessment of funding needs.
- Rate remained unchanged and prepayment without penalty
- Five-year overall term with a fee paid by the borrower. For loans under the new and priority funds, the fees will be between 100 and 200 basis points.
- Year 1 – no principal or interest payments. Interest accrues, but is capitalized.
- Year 2 – interest accrues and is paid by the borrower in accordance with their loan agreement
- Years 3 thru 5 – Payments at the end of each year with payments weighted heavily to year five. Principal includes capitalized interest.
- Loan sizing considerations
- By lowering the minimum loan sizes for the new and priority facilities, it allows more entities to meet the loan sizing criteria. This addresses some entities with low EBITDA who couldn’t meet the old $500,000 minimum.
- Raising the maximum loan sizes provides some relief to those who were limited by consideration of affiliates.
- In no case could the affiliated group’s total participation in a single Main Street facility exceed the maximum loan size that the entire affiliated group that is eligible to receive on a consolidated basis. As result, an eligible borrower’s maximum loan size would be limited by:
- Its own leverage level
- The leverage level of the affiliated group on a consolidated basis
- The size of any loan extended to other affiliates in the group
When it comes to loan sizing, here’s an additional consideration: it is beneficial for those impacted negatively during 2020, but not useful to those who have grown operations in this environment, since the EBITDA multipliers for loan sizes are based on historical data.
Boyd: Thanks, Todd. Can you recap the common eligibility questions?
Sprang: There are seven eligibility requirements. Most are straightforward, such as the requirement to include affiliates when determining if you have less than 15,000 employees or revenues less than $5 billion, but recent questions tend to center around the definition of “significant operations in the United States”.
The business’s operations should be evaluated on a consolidated basis together with its subsidiaries, but not its parent companies or sister affiliates. While not an exhaustive listing, the FAQ provides the following examples to determine significant operations. It states that you meet this requirement if greater than 50% of the eligible borrower’s:
- Assets are located in the United States
- Annual net income is generated in the United States
- Annual net operating revenues are generated in the United States
- Annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States
What about a U.S. company that is a subsidiary of a foreign company?
- They do qualify, provided that the borrower itself is created or organized in the United States or under the laws of the United States, and the borrower, on a consolidated basis, has significant operations in and a majority of its employees based in the United States. However, an eligible borrower that is a subsidiary of a foreign company must use the proceeds of a Main Street loan only for the benefit of the eligible borrower, its consolidated U.S. subsidiaries, and other affiliates of the eligible borrower that are U.S. businesses. The proceeds of a Main Street loan may not be used for the benefit of an eligible borrower’s foreign parents, affiliates, or subsidiaries.
Boyd: Thanks, Todd. Can you also discuss the lenders that will originate these loans, the relationships between the borrower, the lender and the Federal Reserve?
Sprang: Yes, that’s an important consideration with respect to this program, so let me summarize the roles of both the lender and the Federal Reserve.
- Determines definition of adjusted EBITDA and other underwriting criteria
- Addresses issues of subordination and interaction with existing debt
- Originates loan
- Sells 95% to Federal Reserve and retains 5% interest
- Continues loan servicing including collection and submission of periodic financial information to Federal Reserve
- Monitors loan via information from lender
- May transfer ownership based on managing its balance sheet and portfolio monitoring
- Controls/influences collection processes
Boyd: Todd that has been really helpful to understand. I think the Main Street Lending Program is going to continue to gain relevancy in the coming weeks, and we’ll be looking forward to having you back as we learn more details.
In addition to Main Street Lending, we all focus really heavily on the PPP, EIDL, and other economic relief related issues right now. Agribusiness has some especially unique applications with respect to economic relief and we are thrilled to have Paul Neiffer address these issues. Welcome, Paul!
Neiffer: Thanks, Leslie – it’s good to be here.
Boyd: First of all, thank you for all your thought leadership and up to date information you provide to all of us on your blog. I wanted to start by asking you if you could walk through a few key bullet points for PPP specific to the Agribusiness industry.
Neiffer: First, it appears that SBA does not understand farmers very well. Their guidance has been specific to Schedule C taxpayers. Farmers file a Schedule F. Commodity wages paid by farmers will not count for forgiveness. They will need to pay cash wages during the covered period. Also, housing provided to employees will not count as payroll unless they pay it in cash and report it on the employee’s W-2.
Boyd: Thanks, Paul. There have been some requests that you cover self-employment PPP matters. Specifically, the Interim Final Rule (IFR) released on April 14 limits forgiveness for self-employed individuals to eight weeks’ worth of 2019 net profit. As a result, self-employed individuals would not get forgiveness of any payroll costs for employees or any non-payroll costs. The May/June IFR seems to allow payroll costs for employees under a sole proprietor, but perhaps I’m reading the latest IFR incorrectly?
Neiffer: Self-employed farmers with employees should get 24 weeks of payroll costs. They also should get credit for 24 weeks of 2019 net farm income on Schedule F, but we need final guidance on this.
Boyd: Self-employed farmers typically do not pay themselves. What do they need to do?
Neiffer: To get forgiveness for self-employed farmers, it is important to pay yourself the required amount, even if you put it back in the same account. The IFR says you don’t need to, but the forgiveness application seems to require it. It is better to be paid than rely on the IFR for now. There is one thing to be aware of. Loan forgiveness is tax-free; however, the self-employed farmer will need to reduce their expenses by the forgiveness even if they only write a check to themselves, unless Congress steps in and overrides the IRS.
Boyd: Thanks, Paul. I think this has been immensely helpful to our audience and our clients. I’d like to move the discussion back to the more general frequently asked questions and key points related to the PPP, including new IFR information received just last night.
Rybicki: Thanks, Leslie – it’s good to be back.
Boyd: Jack, we received a new IFR last night, so I want to start with that. Could you please hit a few highlights of what that included?
Rybicki: Key takeaways:
- The loan forgiveness and extension of the deferral period for PPP loans are effective as if they were in the CARES Act, so retro back to March 27 – this is huge for banks as it would seem to impact maturity schedule of all loans issued thus far.
- Confirmed five-year term is prospective only – loans after June 5
- Clarifies that if borrower submits forgiveness application within 10 months of the end of the covered period, then payment of remaining loan balance does not commence until the SBA pays the lender the forgiveness amount. If borrower doesn’t submit application within 10 months, then loan starts amortizing then based on full balance.
- Clarifies that SBA will interpret the 60% on payroll test as a proportional limit on non-payroll costs as a share of forgiveness rather than a threshold for receiving forgiveness.
- Modifies previous IFR language regarding 75/25 to make it 60/40.
Boyd: What does it not tell us?
Rybicki: Still no information on if the 24-week period means max per employee goes up to $46,000 or stays at $15,385, but I suspect that will be coming as these IFR’s will start conforming existing IFR’s and FAQs to the new 24-week period in stages. The CARES Act, as modified by the PPPFA, sets this amount based on $100,000 annualize rate prorated for the covered period. However, the loan forgiveness application and various IFR’s have made reference to the $15,385 calculated amount, which is causing some confusion and raising questions regarding whether or not this amount will be updated.
Boyd: That’s good to know. I also want to ask you to talk about the Senate Small Business Committee Meeting that happened yesterday. Can you tell us what we learned and heard?
Rybicki: It was noted by many committee members that there is still approximately $130 billion in unused PPP funds, and that many businesses that received PPP funds are expected to fully use the loan proceeds before they are able to fully resume operations. Senator Collins asked Secretary Mnuchin whether he would “support allowing small borrowers in heavily-affected sectors, such as the tourism industry that cannot fully reopen because of state restrictions, to seek additional PPP funds – apply again, or extend perhaps for another four weeks – so that they can just make it through this period where they’re forced to be closed, because they are viable businesses.”
Secretary Mnuchin responded, “I think that restaurants and hotels in particular do need more help. We’ve taken great pride in the bipartisan work, so if there is support from you in the committee in a bipartisan basis, we’re very seriously going to look at that issue.”
Additionally, on behalf of a number of business owners who have expressed confusion about when to apply for PPP loan forgiveness, Senator Collins asked Secretary Mnuchin whether small businesses must wait for the end of the 24-week duration of the loans. Secretary Mnuchin clarified that small businesses can begin applying for forgiveness as soon as they have used all of their funds.
Leslie: Thanks, Jack. I think that’s a great bit of updated information. Is there anything else you’d like to cover?
Rybicki: Senator Romney questioned the need for a revenue test in forgiveness to address those businesses that ultimately were not impacted by COVID-19. Secretary Mnuchin mentioned that a revenue test was considered during drafting of the PPPFA but was ultimately rejected because it would have impacted so many borrowers and that he hopes borrowers will “self-select” to not seek forgiveness if they didn’t need the PPP funds to support ongoing operations. There is also a big push to simplify the forgiveness application process.
Boyd: Can a farmer apply for PPP loan if they didn’t show any income in 2019, or basically had a Schedule F loss?
Neiffer: If they had a Schedule F loss, they still can apply for a loan. If they have employees, they can qualify. They need to have wages that were paid to employees.
Boyd: How does negative EBITDA affect Main Street lending sizing?
Sprang: Unfortunately, with the lower minimums if you do the adjusted EBITDA calculations in accordance with the lenders standard and you don’t meet the minimum loan requirements, you do not meet the eligibility requirements for the program and you would not be able to participate.
Boyd: Some employees are getting technology allowances with working from home and their companies are covering that, would those be considered allowable costs?
Rybicki: We think that most allowances that are included in your W-2 wages are going to be an includable wage and would be all subject to the $100,000 annualized cap. If the technology allowance is treated in the same manner, we do think it would likely be includable.
Boyd: Unfortunately, that’s all we have time for today. Thank you to our guests today for the valuable information, and to you in the audience for your participation.
We’d like to remind you to continue to visit our COVID-19 Landing page at CLAconnect.com for more information on PPP forgiveness as well as other hot topics. You should also take a minute to subscribe to our emails so that we can continue to share up-to-date information with you around our forgiveness tool, including a demo of the tool itself, and how we can continue to support you during this time. Please continue to send us your questions. We will be back next week with more information.