The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed by the U.S. Senate on Wednesday, March 25, 2020, the U.S. House of Representatives on Friday, March 27, 2020 and signed by President Trump later that day.

The CARES Act is an 880-page piece of legislation with an estimated $2 Trillion price tag.  It is designed to provide cash relief to U.S. citizens, facilitate public health spending to combat the coronavirus, enhance small business lending and allocate and appropriate significant amounts of money to industries and organizations significantly impacted by the Coronavirus.

While the CARES Act is broken down into various Divisions and Titles, the following is a summary of what is contained in Title I of the CARES Act (Title II provides funding for unemployment compensation, establishes a recovery rebate for most U.S. taxpayers, contains provisions related to retirement accounts, encourages charitable giving, grants credits to certain employers and revises certain Federal income tax provisions.  Title III contains provisions related to Coronavirus testing, changes certain sick and family leave conditions and modifies various health savings account terms.  Title IV allocates $500 billion for loans, loan guarantees and investment in certain eligible businesses.  Title V contains a $150 billion appropriation for state and local governments to use in responding to the Coronavirus.  Title VI provides borrowing authority for the U.S. Postal Service.  Finally, Division B consists of appropriations for various programs that will be made available to companies).

For more specific information, analysis and insight into this or any other Title of the CARES Act, contact the Pillar+Aught attorney with whom you regularly work.

What Does Title I do?

The Small Business Act is amended so that businesses who otherwise would not be eligible for SBA loans are now eligible for these loans during the “covered period.”  The term “covered period” is defined by the CARES Act as February 15, 2020 through June 30, 2020.  Banks currently authorized to make SBA loans are specifically authorized to make loans under the CARES Act.

Who can Obtain a Loan Under the CARES Act?

Generally, any business, including nonprofits and sole proprietorships, employing not more than 500 employees are eligible for loans during the covered period.  There are two caveats to this general rule: (i) if the Small Business Administration has designated a smaller size standard for a particular industry, that number applies; and (ii) if the employer is in the hospitality and dining industry, has more than one physical location and an NAICS code beginning with 72 (accommodation and food services), as long as there are 500 or fewer employees per location, the business is eligible for a loan during the covered period.

What are the Terms of the Loans?

Loan amounts are capped at $10 million and will, generally, be granted in an amount equal to 2.5 times a businesses’ total monthly payroll costs in the one-year period before the loan is made.  The interest rate on the loans may not exceed 4% and the requirements to obtain a loan are fairly easy to meet: (i) the business must have been operating on 2/15/2020; (ii) the business must have had employees that it paid; and (iii) the business must certify that (A) the loan is needed to continue operating during the COVID-19 emergency, (B) it will use the funds to retain workers and maintain payroll or make mortgage, lease or utility payments and (C) it does not have other applications pending for similar loans.

What can the Loan Proceeds be Used for?

Businesses can use the loan proceeds to pay for payroll, health benefits, interest on mortgages, rent, utilities and interest on debt acquired prior to the covered period.

When Does the Loan Have to be Repaid?

While the maturity date on the loans cannot exceed 10 years, the loans are automatically eligible for repayment deferral for six months to one year.  Additionally, there is a special loan forgiveness provision built into the CARES Act.  The loan, upon application and submission of certain materials that verify employees, costs, etc., will be forgiven (in the form of debt cancellation that is specifically made exempt from Federal income tax) in an amount equal to the following costs incurred and payments made during the 8-week period beginning on the date of the origination of the loan: payroll, interest on mortgages, rent and utilities.  This amount is, however, reduced for employee cuts and wage reductions.

The employee cuts formula is: maximum amount of relief computed above x (average full time employees per month during the 8-week period beginning on the date of the origination of the loan / average full time employees per month from either (A) 2/15/2019 to 6/30/2019 or (B) 1/1/2020 to 2/29/2020.

The wage reduction formula is a straight reduction by the amount of reduced salary of an employee during the 8-week period beginning on the date of the origination of the loan in excess of 25% of the employee’s salary during the most recent quarter of employment before such period.

Even so, there are limited circumstances where these reductions will not apply, specifically where a business rehires or makes up wage reductions by June 30, 2020.

Are There Any Other Special Provisions Associated with These Loans?

  • No fees will be charged for processing these loans.
  • There is no requirement that a business demonstrate that it cannot obtain credit elsewhere.
  • No personal guarantee is required with respect to the loans.
  • There is no prepayment penalty associated with the loans.
  • The total amount appropriated for loans under this program is $349 Billion.

Does Title I Impact the Current SBA Disaster Loan Program?

A borrower under the SBA Disaster Loan Program may refinance any such loan obtained on or after January 1, 2020 under this program.  Moreover, the SBA Disaster Loan Program is amended for the period January 31, 2020 through December 31, 2020 so that businesses with 500 or fewer employees can participate.  A business applying for a loan under the Disaster Loan Program may request an advance of up to $10,000, which it will not have to repay even if the loan application is denied.

Will Further Guidance on Title I be Forthcoming?

Regulations are to be issued on these CARES Act provisions by April 26, 2020.

Are There Other Loan Options Out There Similar to This?

The COVID-19 Working Capital Access Program is administered by the Pennsylvania Industrial Development Authority.  Please contact Pillar+Aught for additional information about this program.