Regulatory and Tax Updates
Nonprofits Find New Financing Options Under the Main Street Lending Program
- There are two loan facilities available to nonprofit organizations as part of the Main Street Lending Program.
- Nonprofits can begin to determine eligibility for the facilities of the Main Street Lending Program.
- Organizations can start preparing their strategy for application to the program now with their existing lender.
Nonprofits that are struggling as a result of the coronavirus pandemic now have another option for financial relief. The Main Street Lending Program recently expanded its lending facilities to eligible tax-exempt organizations. To qualify, an organization must be tax-exempt as described in Internal Revenue Code (IRC) Section 501(c)(3) or 501(c)(19).
On August 6, 2020, the Federal Reserve released updated frequently asked questions (FAQs) specific to the Main Street Lending Program (MSLP) facilities for nonprofit organizations. The FAQs provide details to accompany the revised term sheets for the MSLP nonprofit organization facilities released July 17, 2020. The term sheets were updated July 28, 2020, to extend the date special purpose vehicles (SPV) will purchase participations from September 30, 2020, to December 31, 2020.
The facilities expanded to support nonprofits
Two lending facilities were created to support nonprofit organizations impacted by the COVID-19 pandemic and their employees. Unlike Paycheck Protection Program (PPP) loans, the loans made under the MSLP facilities are not guaranteed by the government, are full-recourse, and do not contain a forgiveness feature.
- Nonprofit Organization New Loan Facility (NONLF) — Extends new adjustable rate loans ranging from $250,000 to $35 million to eligible borrowers; however, the maximum loan amount cannot exceed the average quarterly 2019 revenue of the eligible borrower. The loans feature a five-year maturity, deferral of interest for the first year, deferral of principal for two years, and 15% of principal is paid at the end of years three and four, with the remaining 70% due at maturity.
- Nonprofit Organization Expanded Loan Facility (NOELF) — Extends an increase (upsized tranche) to an existing term loan or revolving credit facility. The upsized tranche amount can range from $10 million to $300 million for eligible borrowers; however, the maximum loan amount cannot exceed the average quarterly 2019 revenue of the eligible borrower. The maturity, interest rate, deferral periods, and principal amortization are the same as those applicable to NONLF loans.
Review additional facility terms detailed in the table below and the most updated FAQs and facility term sheets on the Federal Reserve website.
Common features of both facilities
Eligible lenders, applications, and underwriting
- The facilities utilize the same pool of eligible lenders.
- Generally, banks, savings associations, and credit unions are eligible lenders, but ask your current lender whether it is participating in existing and future MSLP facilities. Active lender participation in MSLP facilities has been limited so far.
- Eligible lenders will apply their own underwriting standards to loan applicants, documentation requests, and evaluations of financial condition and creditworthiness.
- If a borrower meets the eligibility requirements, it does not mean the applicant will be approved for a loan or for the maximum allowable amount.
As noted above, 501(c)(3) tax-exempt nonprofit organizations and 501(c)(19) tax-exempt veterans organizations are eligible for the Main Street Lending Program. Eligibility is not inclusive of all nonprofit organizations and excludes associations, labor organizations, and others.
For both facilities, a borrower must be able to make all of the required certifications and convenants and meet the following eligibility requirements:
- Has been in continuous operation since January 1, 2015.
- Is not an ineligible business as defined by the Small Business Administrations (SBA) guidelines and modified by the PPP on or before April 24, 2020.
- Was 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.
- Is not participating in more than one Main Street facility, the Primary Market Corporate Credit Facility, or the Municipal Liquidity Facility.
- Has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act).
- If the 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.
- Has 15,000 or fewer employees or 2019 annual revenues of $5 billion or less.
- Employee count should use the average total of persons employed (full-time, part-time, seasonal, and otherwise employed) by the eligible borrower and its affiliates for the 12-month period prior to origination. Employee count should exclude volunteers and independent contractors. A nonprofit organization that is an institution of higher education must exclude student workers participating in a Federal Work Study Program, on the same basis as, and subject to the same conditions and requirements of, the SBA’s regulations at 85 Fed. Reg. 27287-90 (May 8, 2020).
- The 2019 fiscal year-end revenues should include the revenues of affiliates and can be determined utilizing:
- Audited financial statements prepared in accordance with Generally Accepted Accounting Principles.
- Annual receipts reported to the IRS.
- Prior year audited financial statements, or annual receipts if 2019 reports are not yet available.
- Has at least 10 employees.
- Has an endowment of less than $3 billion.
- Has total non-donation revenues equal to or greater than 60% of expenses for the period from 2017 through 2019.
- When computing non-donation revenues, certain government and foundation grants may be included as non-donation revenue even though financial reporting may classify the amounts as contribution revenue, so carefully analyze non-donation revenue.
- Has a ratio of adjusted 2019 earnings before interest, depreciation and amortization (EBIDA) to unrestricted 2019 operating revenue of 2% or greater.
- As with the computation of non-donation revenue, certain adjustments may be allowed for unusual expenses.
- Has a ratio of liquid assets at origination to average daily expenses for the previous year of 60 days or more.
- Has a ratio of unrestricted cash and investments to existing outstanding and undrawn debt, plus its MSLP loan amount plus CMS Accelerated and Advance payments of 55% or greater.
While the program clearly defines eligibility for organizations exempt under 501(c)(3) and (c)(19), it was initially unclear whether public hospitals or institutions of higher education would be eligible. FAQs issued August 6, 2020, addressed this: Although public hospitals and colleges and universities may not be recognized as tax-exempt under 501(c)(3), they may qualify for tax-exemption under another provision of the IRC. As long as the organization qualifies as described in Section 501(c)(3), it is considered a nonprofit organization for the purpose of Main Street funding.
Government-owned entities (except for businesses owned or controlled by a Native American tribe) are considered ineligible for the MSLP. However, a hospital that is otherwise an eligible borrower is not rendered ineligible due to ownership by a state or local government if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid. This exception to the general ineligibility of government-owned entities is consistent with the approach adopted by the SBA for determining PPP eligibility of hospitals.
The definition of an ineligible business for these facilities is derived from the SBA guidelines of businesses that are ineligible for SBA business loans in 13 CFR 120.110(b)-(j) and (m)-(s) and may be expanded or modified by the Federal Reserve.
Borrower certifications and covenants
The eligible borrower should provide any required certifications and covenants to the eligible lender at or before origination. The term sheets and FAQs also include required certifications and covenants applicable to both facilities:
- Restrictions on repayment of principal and interest on other debt unless amounts are mandatory and due;
- Restrictions on cancelling or reducing committed lines of credit;
- The ability to meet its financial obligations for at least the next 90 days and it does not expect to file for bankruptcy during that time period after giving effect to its MSLP loan;
- The eligible 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. The restrictions include:
- Compensation restrictions applicable to officers and employees of the eligible borrower from the date of origination and continuing until 12 months after the loan is no longer outstanding, include limits on total compensation, severance pay, or other termination benefits;
- Stock repurchase restrictions from the date of origination and continuing until 12 months after the loan is no longer outstanding, including a prohibition on the purchase of equity securities listed on a national securities exchange of (1) the business receiving the loan or (2) any parent company of the business while the direct loan is outstanding, except to the extent required under a contractual obligation in effect as of the date of enactment of the CARES Act (March 27, 2020); and
- Capital distribution restrictions from the date of origination and continuing until 12 months after the loan is no longer outstanding, except as noted above, including no payment of dividends or other capital distributions with respect to the common stock of the business receiving the loan.
- 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 of the CARES Act.
Also, while it is not a required certification, each eligible borrower should make reasonable efforts to maintain its payroll and retain its employees during the time their loan is outstanding.
Detailed comparison of facilities
Review the key terms of each facility and its features .
|Main Street Loan Facility|
|Terms||5 year maturity||5 year maturity|
|Principal deferral||2 year deferral of principal payments||2 year deferral of principal payments|
|Interest deferral||1 year deferral of interest payments with unpaid interest capitalized||1 year deferral of interest payments with unpaid interest capitalized|
|Rate||Adjustable interest rate LIBOR (1 or 3 month) plus 3%||Adjustable interest rate LIBOR (1 or 3 month) plus 3%|
Principal amortization as follows:
Principal amortization as follows:
|Minimum loan amount||$250,000||$10 million|
|Maximum loan amount|| Lesser of the following:
|| Lesser of the following:
|Subordination||Not contractually subordinated in terms of priority to any other loans or debt instruments at the time of origination or at any time during the term of the loan||In terms of priority and security, the upsized tranche must be senior to or pari passu or on equal footing with, other loans or debt instruments (other than mortgage debt) at the time of upsizing and at all times this upsized tranche is outstanding|
|Prepayment||Permitted without penalty||Permitted without penalty|
|Recourse||Full recourse||Full recourse|
|Ability to pay other debt||Until this loan is paid in full, eligible borrower must commit to refrain from repaying the principal or any interest that is not mandatory and due on any other debt.||Until this upsized tranche is paid in full, eligible borrower must commit to refrain from repaying the principal or any interest that is not mandatory and due on any other debt.|
|Borrower fees||Up to 1% of the principal amount at the time of origination. The eligible lender may also require the eligible borrower to pay the transaction fee of 1% of the principal amount at the time of origination owed to the special purpose vehicle by the eligible lender.||Up to 0.75% of the upsized tranche amount at the time of upsizing. The eligible lender may also require the eligible borrower to pay the transaction fee of 0.75% of the upsized tranche amount at the time of upsizing owed to the special purpose vehicle by the eligible lender.|
Take action now
Reach out to your lender to apply for a program. Pull together your financial information and meet with your advisors to strategically look at your needs and choose the MSLP facility best suited for your situation.
How we can help
With these new facilities available to nonprofit organizations, CLA is here to help you through this complex, rapidly changing environment. Whether you’re considering MSLP or other financing, our professionals can help you navigate the process. We will work together with you to understand your situation, assist with computing the eligibility criteria, strategize on immediate business decisions, and help you to pull together the information you’ll need to submit your loan application.
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