In this session, we'll be covering our most common PPP and EIDL questions with our team of CLA professionals. Please be sure to submit your questions ahead of our session to livestream@CLAconnect.com and we will dive in and discuss what you need to know around these ever changing regulations.
- Leslie Boyd, CLA Principal, Manufacturing
- Rick Krueger, CLA Principal
- Jack Rybicki, CLA Managing Principal of Industry, Real Estate
In case you missed it:
What you missed:
Leslie Boyd: Good afternoon to our CLA clients, family members, community partners, and friends. Welcome back to our livestream series. We sincerely hope that you are continuing to stay safe and healthy at this time.
Today, we are going to be talking about Main Street Lending Program (MSLP) and relevant Paycheck Protection Program (PPP) updates, which continue to evolve as we continue to learn more! Todd Sprang, Jack Rybicki, and Rick Krueger are all back to walk through some updates, as well as to answer your questions. Welcome back, guys!
Todd, I’d like to start with you today and any updates you have on the MSLP. We have heard it’s off to a slower start than expected – what can you tell us?
Todd Sprang: It is true that the Main Street Program is off to a slower start than most borrowers hoped. I think the Federal Reserve expected the program to have a more immediate impact.
Boyd: What are some of the most common questions you’re receiving as part of this program?
Sprang: Below are a few questions that we’ve seen and the answers we’ve been providing:LA Principal, Manufacturing
- Is there a list of MSLP lenders?
- Not that I’m aware of.
- When I inquire about MSLP with my bank they either aren’t aware of the program or aren’t participating. What’s causing this?
- The program seems to be a solution for a narrow band of borrowers. Bankers have analyzed the program terms and aren’t thrilled.
- What are some other factors causing slow roll out?
- The “relationship disruption” caused when borrowers utilize the refinancing option of the priority facility.
- Lenders suggesting more customary arrangements that are tailored to the customer’s needs.
- The structural issues associated with the sales of loans into the SPV.
Overall, I still believe there is a disconnect between the borrower understanding of the MSLP facilities, so I advise the following:
- Start with a determination of your cash needs over the next 12-18 months. Consider CLA Intuition if you don’t know where to start.
- Compare your needs to MSLP terms, and don’t hesitate to reach out to CLA for assistance as we understand it’s not a short document.
- Discuss your needs with your lender, as they may be able to craft a better solution for you.
Boyd: I know there’s a large amount of information related to nonprofits. Can you talk about some of these key points that we need to know?
Sprang: Sure. I’ll cover three things that were revealed since the release of the nonprofit term sheets:
1. The addition of the nonprofit facility as part of the existing overall MSLP.
- The terms are essentially the same as the previously announced facilities (rate, maturity, principal payment schedule, deferment). In my opinion, that was disappointing. I expected the loan terms to better align with the perceived needs of the nonprofit industry at this time. While I understand that designing a single facility that works for all nonprofits isn’t possible, I would hope to see some tailoring based on outreach and comment letters on the term sheets.
2. The loan sizing and eligibility requirements were altered for nonprofits.
- Loan sizing minimums and maximums are essentially the same as the previously announced facilities, except the max loan cap is based on average quarterly revenues in 2019 (think 25% of 2019 revenue).
- Loan eligibility requirements, in addition to those applying to the other facilities, include the following:
- Established prior to January 1, 2015? – Big difference from other facilities (March 2020)
- At least 50 employees?
- Endowment less than $3 billion?
- Liquid assets to average daily exp ratio?
- Unrestricted cash and investment to debt ratio?
- Ratio of adjusted EBIDA to unrestricted operating revenue <5%
- Ratio of donations to total revenues <30%
3. By including the nonprofit facility under the same structure as the other facilities, I think it’s reasonable to assume that nonprofit borrowers may experience the same frustrations as their for-profit counterparts, as those same factors that I just covered – which caused the lukewarm rollout – can have the same effect on the nonprofit facility roll out.
Boyd: Thanks, Todd, for these helpful updates on the Main Street Lending Program. We will keep you here for questions we get in the inbox, and also keep you coming to future sessions. We are going to pivot to bring in Jack and Rick to talk about more with PPP and forgiveness. We got a big interim final rule (IFR) this week that we started to unpack on Tuesday. The questions have been pouring in to this point about the EZ form, as well as the time period for forgiveness. Rick, let’s start with you giving us an overview of the IFR from Monday night, as well as where things stand with Form EZ.
Rick Krueger: Sounds great, Leslie. I know Jack talked in a bit more detail Tuesday, so I’ll just hit a few highlights so we can all keep them front of mind.
- Apply before the end of the covered period (CP). Note that this doesn’t change your covered period—that remains either 8 or 24 weeks—but it does give borrowers some additional flexibility, and means you don’t need to wait until the end of 2020 to apply. The challenge is we don’t yet have much on the practicalities of applying before the end of the covered period. While they provided instructions for wage reductions when applying early, they haven’t explained how to treat an FTE reduction if you apply in the middle of your covered period.
- Another key item is limitations on owners. They’ve been publishing owner limits in bits and pieces over the past few weeks, and this is the most comprehensive to date. As part of that we’re getting a little closer to understanding what the Small Business Administration (SBA) means when they use the term “owner-employee.” They’ve now stated this includes both S- and C-Corp owners. So, we seem to have the basic entity types, but they really haven’t addressed anything deeper than this surface level issue. I know I get lots of questions on changes in ownership, situations with spouses/parents/kids, and more complicated equity arrangements, but unfortunately, we’re not quite sure yet what the SBA intends.
- Last key point is an update to the FTE safe harbor for reductions in business activity. If borrowers can document in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with COVID-19 requirements or guidance. That “or indirectly” is a key addition and certainly provides borrowers flexibility. SBA does provide us an example, but as with much of PPP though, we’re living in a world of gray, blurry lines and it’s hard to know which situations exactly fall on which side of the SBA’s line.
Boyd: Jack, we have a big June 30 deadline for PPP lending. In light of the deadline, when should people plan to submit applications?
Jack Rybicki: As of June 20, there are still over $100 billion in funds available, but the SBA can only approve applications through June 30. If you are going to get a loan in, you need to apply ASAP.
Boyd: Thanks, Jack. That’s really helpful. I’m going to dig into these questions that have come in leading up to the livestream, as well as those coming in during the session today. Let’s start with this one from Jeff:
I know the forgiveness application is due 30 days after the end of the covered period. Over the eight-week period we have almost covered the 75/25 requirement, and would have some relatively small loan amounts that would not be forgiven. If we opted for the 24-week period, the 2.5-month timeframe would almost entirely use the loan amount for payroll costs. Other eligible costs would cover the balance.
- Can we file for forgiveness after we have covered the loan amount even if we have not gotten to the end of the 24-week period?
- Also why is there a reference to 2019 wages in the calculation? Is that a limiter for employees with annual wages under $100,000?
Our loan is between $2,000,000 and $5,000,000. Of course, this assumes our bank is ready to accept applications, which they are not.know the forgiveness application is due 30 days after the end of the covered period. Over the eight-week period we have almost covered the 75/25 requirement, and would have some relatively small loan amounts that would not be forgiven. If we opted for the 24-week period, the 2.5-month timeframe would almost entirely use the loan amount for payroll costs. Other eligible costs would cover the balance.
Rybicki: Yes, you can apply early once you’ve spent the funds, met the documentation requirements, and your bank is ready to accept it. It might be worth pointing out a couple other items in the question too, since the guidance has evolved over time:
- The application doesn’t have a due date (unless the loan agreement has one specific to your bank), but if you don’t apply within 10 months after the end of your CP, then you need to start servicing the loan.
- The 75/25 requirement has been reduced to 60/40, which is great for borrowers.
- For the 24 weeks, most employees are capped at $46,154. There is a 2.5-month cap for owner-employees though.
- 2019 wages come into play in a couple places
- Wage reduction test excludes high earners from 2019
- Owners are limited by their 2019 wages/profits
Boyd: Shauri asked a good question related to headcount reduction:
It appears that we may be eligible to use the 3058 EZ form due to:
- "The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND"
- "The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period."
My question: we lost two employees in May; one was terminated for performance, and one voluntarily quit. Is there an exception to the above statement based on the fact that we didn't choose to voluntarily reduce the number of employees? We've since hired another person.
Krueger: Maybe is the short answer. There are three certifications that let a borrower file the EZ form and this is one of them. It sounds like wages were maintained (at least with 25%), so the FTE requirement is the big question. The application essentially requires that the borrower maintained the number of FTEs from January 1 until the end of the covered period. It does provide a couple exceptions you can ignore. It doesn’t specifically mention terminations that a borrower left unfilled.
That said, the full application does provide an FTE reduction exception when someone is fired for cause. So that might be appropriate to apply for the EZ form application too. However, it’s worth noting that there’s often a difference between performance issues and termination for cause. The latter has specific meaning in the HR world and typically requires some sort of grave misconduct. Having a performance issue that doesn’t meet the standard of “for cause” might count against a borrower, unless you attempt to replace the person.
Boyd: Susan is a sole proprietor and asked the following:
I received a PPP on April 21, and have some questions in regard to 24 weeks for forgiveness. Do I have to start using the dollars for payroll on the date I received the loan back in April, or can I use it to pay myself for any 2.5 months up to the Dec. 31 deadline? The answer will help me to determine my pandemic unemployment assistance (PUA) as I do not want to double dip, but I do want to maximize my benefits.
Rybicki: You’ll need to use it during your 8- or 24-week period, depending on which you elect. For sole proprietors for the 24-week period, you include amounts paid to owners capped at $20,833 or the 2.5-month equivalent of their 2019 compensation (whichever is lower). For eight weeks, that cap is $15,385 or eight-week equivalent of 2019 compensation. As far as what it means to pay a self-employed owner, we’re not 100% sure, but it might be safest to simply cut yourself a check and deposit it back so you have a paper trail to submit.
Boyd: We have a question to help interpret language of the IFR from Jerome:
Regarding the IFR wording listed below, would a requirement by the governor for the general public “stay at home” meet the threshold or not? The stay at home order reduces the customers available for the business.
- “or (B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”
Rybicki: The IFR clarified that both direct and indirect compliance with COVID-19 requirements or guidance is included in that. They specifically discuss the relationship between federal agency guidelines and the state and local government shutdown orders.
Boyd: Lori asked a good question about one of the differences between the EZ application and the regular as it relates to FTEs:
The updated PPP forgiveness application doesn’t explain what to do if an employee chose to leave during the covered time. The longer app does give some explanation – it just says to keep that person as a single FTE.
We had a person leave May 31, and we haven’t filled that position. The payroll amount will be less for the two payrolls periods in June. I do have a signed resignation document from the former employee – should I add that to the documents that go with the application?
Krueger: I agree. The EZ form doesn’t specifically give as many FTE reduction exceptions. If you follow the instructions exactly, you may end up completing the longer form, but in the end, the result to forgiveness should be the same regardless of which you use and in reality, you still need to pull a lot of the same FTE information for both the EZ form and the long form, since it is required support. That said, the EZ form is certainly easier to fill out; hopefully SBA will be flexible for situations like this.
Boyd: Unfortunately, that’s all we have time for today. Thank you to our guests today, to you for your questions, and to our moderators for all the support, great information, and answers.
Thanks for watching, and have a great weekend.