CARES Act Questions for the Real Estate and Construction Industry - Updated #3

CARES Act Employment Considerations

CARES Act Lending Programs: Small Business Lending

CARES Act Lending Programs: Midsized Business Lending

CARES Act Tax Considerations

Congress recently passed the economic stimulus package referred to as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act1”), the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”), and the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”) (together, the CARES Act1, PPPHCE Act, and PPP Flexibility Act are called the “CARES Act”). The CARES Act is important to certain real estate businesses because it offers necessary financial relief during this unprecedented time. Understanding the available loans and grants, tax provisions, and employment considerations available under the CARES Act could have a tremendous impact on real estate businesses as they make business-critical decisions about their workforce and the continuation of their businesses. As further information becomes available about financial relief offered under the CARES Act, we will update this post.

What are the key provisions in the CARES Act that impact the real estate and construction sector?‎

The CARES Act establishes a new temporary lending program for small businesses (Note: As discussed below, “passive” real estate businesses are ineligible), extends the Economic Injury Disaster Loan (“EIDL”) program and allows for advances, and ‎includes new items relevant to unemployment insurance.‎ In addition, changes in tax rules relating to deductions against non-business income may have substantial benefits to persons holdings ownership interests in pass-through entities, which are common in real estate ownership and fund structures. ‎

Is there relief for borrowers under federally backed multifamily loans?

Yes. In addition to the items above, Section 4023 of the CARES Act specifically provides for 30 days of payment forbearance, with the opportunity for two additional 30-day extensions (for a total of 90 days), to borrowers under federally backed multifamily mortgage loans (excluding construction loans) that are experiencing a financial hardship due to COVID-19. Qualifying loans are generally loans that are secured by multifamily real estate (five or more units) and issued under a federal loan or housing program or that are purchased or securitized by Fannie Mae or Freddie Mac. To be eligible, a borrower must have been current on payments as of February 1, 2020, and will be restricted from evicting tenants based on a failure to pay rent and from charging late fees.

CARES Act Employment Considerations

The CARES Act made federal funds available to states that enter into agreements with the federal government to increase their weekly unemployment benefits and added additional funds available if states eased some of their unemployment requirements.

1. Are workers who were not typically eligible for unemployment now able to receive benefits?

Yes. The CARES Act created a Pandemic Unemployment Assistance program that expands coverage to individuals who would otherwise not be qualified for benefits, including self-employed workers, independent contractors, and part-time workers. As with other recipients, these individuals must still establish that they are able and available to work but cannot because of a COVID-19 related reason. Benefits are administered by the states, which means that states determine eligibility, but these benefits are federally funded and will be eligible through December 31, 2020.

2. Is there an increase in benefits that workers can receive?

Yes. The federal government will provide an additional $600 per week in Federal Pandemic Unemployment Compensation for those who receive unemployment benefits as of the date the state enters into an agreement with the federal government until July 31, 2020.

3. A worker has exhausted their unemployment benefits that a state provides. May they receive more?

Yes. The CARES Act established Pandemic Emergency Unemployment Compensation to provide an additional 13 weeks of unemployment benefits for workers who have exhausted their state benefits, are able and available to work, but cannot work because of a COVID-19 related reason, including but not limited to quarantine, illness, or a movement restriction order. These additional 13 weeks become available as of the date the state enters into an agreement with the federal government until December 31, 2020.

4. How does the CARES Act interact with the Families First Coronavirus Response Act (“FFCRA”) for my employees?

The FFCRA requires employers with fewer than 500 employees to provide up to 80 hours of emergency paid sick leave (“EPSL”) and up to 10 weeks of emergency paid Family and Medical Leave Act (“EPFMLA”) leave in certain circumstances. The CARES Act clarified the amounts that individuals would be paid under these leaves. For example, an individual who takes 80 hours of EPSL because they are seriously ill with COVID-19 symptoms and cannot perform work would be paid their regular daily rate up to a maximum of $511 per day, or $5,110 in totality. If another employee needs to stay home to care for young school-aged children and cannot perform work, that employee would be paid up to two-thirds of their regular daily rate to a maximum of $200 per day, or up to $12,000 in totality (if you combine their EPSL and EPFMLA leave). The CARES Act also clarified that an individual who was laid off on or after March 1, 2020, worked for an employer at least 30 of the last 60 calendar days before the layoff, and is rehired is eligible for EPFMLA leave.

5. Does seeking tax credits under the FFCRA for emergency sick leave and extended leave make me ineligible for a Paycheck Protection Program (“PPP”) loan?

No, you may seek tax credits under the FFCRA and still apply for a PPP loan. You just cannot apply the payments you make under the FFCRA to employees for emergency sick leave or extended FMLA leave toward PPP loan forgiveness if you are seeking a tax credit for the same funds. That would be “double-dipping.”

6. Is the calculation of the number of employees for the FFCRA and PPP the same?

No. For purposes of the FFCRA, companies count all employees as of the time the FFCRA related leave is being requested, including full-time and part-time employees, employees on leave, temporary employees, and those employees who are jointly employed with another employer or considered part of the “single integrated employer.” Please be careful. The calculation analysis differs under the PPP. See Question 7 under the CARES Act Lending Programs Section.

7. For purposes of counting employees under the FFCRA, are all employees counted or only those employees whose principal place of residence is in the United States?

The FFCRA does not require the employee’s permanent residence to be in the United States for purposes of counting. 

CARES Act Lending Programs

Small Business Lending

1. What programs are available?

The Paycheck Protection Program (“PPP”) was established and the Economic Injury ‎Disaster Loan (“EIDL”) program was extended to certain businesses, and advances were allowed. The PPP is administered through lenders and the Small Business ‎Administration (“SBA”), and it is designed to provide a direct incentive for small businesses to keep their workers on the payroll. ‎

2. How does the PPP application process work? 

The PPP loans are first come, first served. For PPP, lenders began taking applications on‎ April 3, 2020, for small businesses and sole proprietorships, and on April 10, 2020, for independent contractors ‎and self-employed persons. Applications were suspended as of April 16, 2020, due to lack of funds. The funds have been replenished as of April 24, 2020, by $310 billion, of which $250 billion is for PPP and an additional $60 billion is set aside for PPP to be issued by certain depository institutions. See Question 3A. Assuming funding is not exhausted, PPP loans will be available under the program through June 30, 2020.‎ Some banks have been limiting applications to customers only. Eligible applicants should reach ‎out to their bank as soon as possible. As of April 24, 2020, an additional $50 billion was allocated to EIDLs and an additional $10 million was allocated for EIDL grants. Applications will soon be accepted; check the EIDL website for the current status.‎

3. Are PPP funds available as of April 24, 2020? 

Yes. The PPP originally had $349 billion available, which was exhausted as of April 16, 2020. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”) went into effect with an additional funding of $310 billion.

3A. What are the set-aside provisions for rural, minority, and women-owned small businesses?

The purpose of the set-aside provisions is to help rural small businesses, minority small businesses, and women-owned small businesses get access to the PPP funds. The set-aside provisions reserve certain amounts for PPP, specifically:

•  $30 billion for loans made by insured depository institutions and credit unions that have assets between $10 billion and $50 billion; and
• $30 billion for loans made by community development financial institutions, minority depository institutions, Small Business Investment Alliance (“SBIA”) development companies, and intermediaries (“Community Financial Institutions”) and small insured depository institutions and credit unions with assets of less than $10 billion.

PPP loans may be available to tenants of commercial real estate meeting the eligibility requirements and forgiven under the program to the extent the funds are used to ‎cover not only payroll and other qualifying costs, but also rent payments. This may indirectly benefit passive real estate businesses in the short term. Note, however, that no more than 25% of the forgiven amount may ‎be for non-payroll cost. See Question 12.

4. What other rules govern eligibility for the Paycheck Protection Program?

‎Other real estate and construction businesses may be eligible under any of the following situations:

• If they meet the Small Business Administration (“SBA”) size standards. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. See NAICS Codes – 13 CFR 121.201.
• If they meet both tests in the SBA’s “alternative size standard” as of March 27, 2020: (1) the maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
• If they are sole ‎proprietorships, independent contractors, and self-employed individuals.

The affiliation rules apply for most businesses. See Questions 5 and 6.

Second, the eligible business must:

• Have had operations on February 15, 2020; and
• Either had employees for whom the business paid salaries and payroll taxes or paid independent contractors.

As part of the application, the business will need to supply documentation and certifications relating to these items. See Questions 14 and 15.

4A. Do businesses owned by large companies or private companies, in each case, with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

FAQ 31 issued April 23, 2020, and FAQ 37 issued April 28, 2020 (FAQS), answered these questions as follows: 

In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 18, 2020 will be deemed by SBA to have made the required certification in good faith.

Since this determination is fact based and situational, please discuss with legal counsel.

4B. On May 18, 2020, the SBA issued an Interim Final Rule stating that to calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances in which the affiliation rules expressly do not apply to the entity.  If the borrower used the eligibility criteria that it has 500 or fewer employees whose principal place of residence is in the United States to obtain a loan, what are the consequences to the borrower?

In the Interim Final Rule, the SBA stated:

… [A]s an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.

See Interim Final Rule on Treatment of Entities with Foreign Affiliates

5. Who determines eligibility and applies the affiliation rules?

The borrower is responsible for this analysis and must certify that it is eligible to receive a PPP loan, including that it has applied the applicable affiliation rules. Lenders are not required to make an independent determination and may rely on the borrower certification. Knowing misrepresentations or false statements, in the borrower certification or otherwise, can result in civil and criminal penalties.

6. What are the affiliation rules?

In most cases, a borrower will be considered together with its affiliates for purposes of determining eligibility for the PPP. Under SBA rules, entities may be considered affiliates based on factors including stock ownership, overlapping management, and identity of interest. The Borrower Application Form, SBA Form 2483, released on April 2, 2020, requires applicants to list other businesses with which they have common management. Applicants should use the information supplied as they assess whether they have affiliates that should be included in their number of employees reported on SBA Form 2483.

A Treasury FAQ has provided the following example that is illustrative:

Company X wholly owns Company Y and Company Z (as a result, Companies X, Y, and Z are all affiliates of one another). Company Y owns a restaurant with 400 employees. Company Z is a construction company with 400 employees.           

Company Y is eligible for a PPP loan because it has 500 or fewer employees. The affiliation rules do not apply to Company Y, because it has 500 or fewer employees and is in the food services business (with a NAICS code beginning with 72).

The waiver of the affiliation rules does not apply to Company Z, because Company Z is in the construction industry. Under SBA’s affiliation rules, 13 CFR 121.301(f)(1) and (3), Company Y and Company Z are affiliates of one another because they are under the common control of Company X, which wholly owns both companies. This means that the size of Company Z is determined by adding its employees to those of Companies X and Y. Therefore, Company Z is deemed to have more than 500 employees, together with its affiliates. However, Company Z may be eligible to receive a PPP loan as a small business concern if it, together with Companies X and Y, meets SBA’s other applicable size standards[.]

7. What time periods should borrowers use to determine their number of employees and payroll costs? For seasonal employers, what time periods determine eligibility? 

In general, borrowers can calculate their aggregate payroll costs for their employees who reside in the United States using data either from the previous 12 months or from calendar year 2019. For seasonal employers, the applicant may elect to use either (a) the average monthly payroll for a 12-week period between February 15, 2019, or March 1, 2019, and June 30, 2019; or (b) the average total monthly payment for payroll during any consecutive 12-week period between May 1, 2019, and September 15, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020.

For purposes of applying an employee based size standard, borrowers may use their average employment over the previous 12 months or from calendar year 2019, or for seasonal employers, a 12-week period between February 15, 2019, or March 1, 2019, and ending June 30, 2019. Alternatively, borrowers may elect to use the SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months). 

For purposes of determining whether a seasonal employer is eligible and in operation as of February 15, 2020, a lender may consider whether the seasonal employer was in operation:

• on February 15, 2020, or
• for an eight-week period between February 15, 2019, and June 30, 2019, or
• for any eight-week period between May 1, 2019, and September 15, 2019.

8. May all employees be included in the PPP calculation? Is there any limitation based on immigration status (such as H-2A and H-2B) or U.S. citizenship? 

Only employees whose “principal place of residence” is in the United States count toward eligibility and calculation of the payroll costs. PPP applicants and lenders may consider IRS regulations (26 CFR 1.121-1(b)(2)) when determining whether an individual employee’s principal place of residence is in the United States. That regulation lists the following criteria:

• The principal residence depends upon all the facts and circumstances;
• If the individual alternates between 2 properties, using each as a residence for successive periods of time, the property that the individual uses a majority of the time during the year ordinarily will be considered the individual’s principal residence.
• In addition to the individual’s use of the property, relevant factors in determining a person’s principal residence, include, but are not limited to -
  • The individual’s place of employment;
  • The principal place of abode of the individual’s family members;
  • The address listed on the individual’s federal and state tax returns, driver’s license, automobile registration, and voter registration card;
  • The individual’s mailing address for bills and correspondence;
  • The location of the individual’s banks; and
  • The location of religious organizations and recreational clubs with which the individual is affiliated.

Also, only employees who are work authorized may be counted. The regulations do not explicitly restrict PPP loans based on citizenship or immigration status. However, the Oregon Department of Agriculture has interpreted the PPP’s requirement that employees’ “principal place of residence” be in the United States to mean that nonimmigrant guest workers such as those employed in H-2A or H-2B status are excluded (which thus likely reduces the loan amount available to some agricultural producers). Also, some banks have reportedly restricted loans to cover only employees who are either U.S. citizens or lawful permanent residents. Further guidance is expected in this area.

9. What is the loan amount and other terms?

The maximum loan amount is two and a half times the “average monthly ‎payroll cost” (with some adjustment for seasonal employers) or $10 million. No collateral or personal guarantees are required. There is a six month deferment on payment. The interest rate is 1%, and there is a two year maturity. Only ‎one loan per business is permitted—this means that a business should consider applying for the ‎maximum amount. E-signature and e-consent can be used. ‎

See the April 24, 2020 guidance: How to Calculate Loan Amounts – by Business Type.

9A.  If a seasonal employer received a PPP loan before the alternative criterion for determining the maximum loan amount for partnerships or seasonal employers became available (posted originally on April 27, 2020, and revised on April 28, 2020), can the loan amount be increased based on a revised calculation using the alternative criterion?

Yes. On May 13, 2020, the Interim Final Rule – Loan Increases was issued, providing that a seasonal employer that received a PPP loan before the alternative criterion for such employers was posted on April 28, 2020, would be eligible for a higher maximum loan amount under the alternative criterion. The lender may submit an increase of the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report has been submitted to the SBA, or after the date the initial SBA Form 1502 report was required to be submitted to the SBA, the loan cannot be increased. For the alternative criterion, see Interim Final Rule – Additional Criterion For Seasonal Employers.

9B.  If a partnership received a PPP loan that did not include any compensation for its partners, can the loan amount be increased to include partner compensation?

Yes. On May 13, 2020, the Interim Final Rule – Loan Increases was issued, providing that a partnership that received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, would be eligible to have the loan increased to include appropriate partner compensation. The lender may submit an increase of the PPP loan amount, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to the SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report has been submitted to the SBA, or after the date the initial SBA Form 1502 report was required to be submitted to the SBA, the loan cannot be increased. The interim final rule posted on April 14, 2020, describes how partnerships, rather than individual partners, are eligible for a PPP loan. Guidance describing how to calculate partnership PPP loan amounts and defining the self-employment income of partners was posted on April 24, 2020 (See How to Calculate Maximum Loan Amounts, Question 4.)

10. For what purposes may the borrower use its loan?

The loans are primarily intended to be used to pay employee compensation and benefits ‎during the COVID-19 crisis, including salaries, health care costs, paid leave, and state and ‎local taxes. For the purposes of determining the PPP loan amounts and to calculate loan forgiveness, businesses can only include amounts for employees whose principal place of residence is inside the United States. The ‎loans can also be used for rent payments, utility bills, mortgage interest payments, interest ‎on other debt, and to refinance an SBA EIDL, if applicable. The lender is to make the first disbursement no later than 10 calendar days from the date of loan approval. The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period, and the eight-week period begins on the date the lender makes ‎the first disbursement of the loan. There is also a limitation on forgiveness, in that at least 60% of the loan proceeds must be used for payroll costs and up to 40% of such amount may be used for non-payroll items.

11. What are “payroll costs”?

“Payroll costs” consist of compensation to employees (whose principal place of residence is in the United States) in the form of salary, wages, commission, or similar compensation; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commission, income, or net earnings from self-employment or similar compensation. Independent contractors are not employees for purposes of PPP loan calculations, and they have the ability to apply for a PPP loan on their own.

Payroll costs do not include the following:

• $100,000 cap on an ‎annualized basis of cash compensation for each employee (does not apply to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans, payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes assessed on compensation of employees).
• Compensation of an employee whose principal place of residence is outside of the United States.
• Federal employment taxes imposed or withheld between February 15 and June 30, 2020, including the employee’s and employer’s shares of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees.
• Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (“FFCRA”).

Please note that current guidance from the Treasury provides that a limited liability company (“LLC”) may count up to $100,000 per LLC member to the extent that the member would treat that as self-employment income on the member’s personal tax return. The current guidance also requires the LLC to be the applicant, not the individual who is an LLC member.

12. Can the loans be forgiven? If the loan is forgiven, what happens for federal tax purposes? Are the expenses deductible?

Loans under the program are eligible for forgiveness to the extent the funds are used to ‎cover payroll costs, rent payments, utility bills, or mortgage interest payments for the period beginning on the date of the origination of the loan and ending on the earlier of 24 weeks after the date of origination or December 31, 2020. A borrower that received a loan prior to the enactment of the PPP Flexibility Act may elect that the covered period end on the date that is 8 weeks after the date of the origination of such loan. At least 60% of the loan proceeds must be used for payroll costs and up to 40% of such amount may be used for non-payroll items. Lenders are monitoring this—they want the loans to be fully ‎forgiven.

Loan forgiveness will be reduced to the extent that businesses reduce their full-time employee ‎head count or employee salaries and wages by more than 25%. To encourage employers to ‎rehire any employees who have already been laid off due to the COVID-19 crisis, ‎borrowers that rehire workers previously laid off will be given credit for forgiveness ‎purposes. The forgiveness calculation takes the number of employees and reduced ‎compensation into consideration. There are also various exemptions and safe harbors—see Loan Forgiveness Application, Interim Final Rule on Loan Forgiveness, and PPP Flexibility Act.

Loan forgiveness will not lead to cancellation of indebtedness income. That being said, the IRS has concluded in Notice 2020-32 that taxpayers may not deduct as business expenses the amounts that gave rise to the cancellation of the underlying PPP loan. As a result, taxpayers who have a PPP loan forgiven should plan for the tax consequences that may arise due to their inability to claim certain expenditures of the loan proceeds as tax deductible.

12A. Will the SBA review individual PPP loan files following the lender’s submission of the borrower’s loan forgiveness application?

Yes, if the amount of the loan is in excess of $2 million. In FAQ 39 dated April 29, 2020, the Treasury answered this question as follows:

Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.

Since this determination is fact based and situational, please discuss with legal counsel.

13. How does the PPP application process work?

The PPP loans are first come, first served. For PPP, lenders began taking applications on ‎April 3, 2020, for small businesses and sole proprietorships and on April 10, 2020, for independent contractors ‎and self-employed persons. The funds have been exhausted as of April 16, 2020, and applications are no longer being accepted. Assuming additional funding, PPP loans will be available under the program through June 30, 2020.‎ Some banks have been limiting applications to customers only. Eligible applicants should reach ‎out to their bank as soon as possible if and when the program receives additional funding. As of April 16, 2020, there were no funds for EIDLs and applications were no longer being accepted—check the EIDL website for the current status.‎

14. What does the application look like?

The Treasury Department has posted a form of application as of April 2, 2020. ‎Please review the application carefully. There is more information in response to Question 15.

14B.  How will the SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

In FAQ 46 dated May 13, 2020, this question was answered as follows:

When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. The SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to its review for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If the SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from the SBA, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request. The SBA’s determination concerning the certification regarding the necessity of the loan request will not affect the SBA’s loan guarantee.

15. What documents and certifications are required?

Documents: Per the SBA, the following documents are required:

• Payroll processor records, payroll tax filings, or Form 1099-MISC, or income and expenses for a sole proprietorship.
• For borrowers that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.

Banks are also requiring other documents, like organizational and authorization documents. Please contact the lender for required documents.

Certifications: As of April 2, 2020, the certifications stated by the SBA are:

• Applicant has read the statements included in this [application], including the Statements Required by Law and Executive Orders, and understands them.
• Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (the Paycheck Protection Program Rule).
• Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 employees or, if applicable, meets the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
• Applicant will comply, whenever applicable, with the civil rights and other limitations in this form.
• All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program Rule.
• To the extent feasible, Applicant will purchase only American-made equipment and products.
• Applicant is not engaged in any activity that is illegal under federal, state or local law.
• Any loan received by the Applicant under Section 7(b)(2) of the Small Business Act between January 31, 2020 and April 3, 2020 was for a purpose other than paying payroll costs and other allowable uses loans under the Paycheck Protection Program Rule.
• The authorized representative of the Applicant must certify in good faith to all of the following:
  • Applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on Form(s) 1099-MISC.
  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.
  • The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.
  • Applicant will provide to the Lender documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following this loan.
  • I understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.
  • During the period beginning on February 15, 2020 and ending on December 31, 2020, the Applicant has not and will not receive another loan under the Paycheck Protection Program.
  • I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
  • I acknowledge that the Lender will confirm the eligible loan amount using required documents submitted. I understand, acknowledge and agree that the Lender can share any tax information that I have provided with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews. 

16. What records should I keep?

We expect that those that receive PPP loans that are forgiven will be subject to audit by the SBA at some point. Keep all materials to apply for the loan, as well as documents relating to the forgiveness amounts. It is likely the focus of the audit will be on substantiating the forgiveness amounts.

17. What other guidance is available?

Additional CARES Act guidance, including more detailed information on PPP loan issues, is available on our website. The Treasury Department and SBA have issued ‎interim final rules, applicable affiliation rules, an interim final rule on affiliation, the application, frequently asked questions, and other information.

18. What happened with the EIDLs and the advances?‎

The changes include:

• Extended to small businesses, nonprofits (including faith based), sole proprietors, ‎and independent contractors
• Up to $2 million working capital loan (as of April 10, 2020, the SBA local offices have announced that the loan limit is $15,000)
• Payments deferred for a year ‎
• Loans based on credit scores; no tax returns required; up to $200,000 without a ‎personal guarantee
• No collateral for $25,000 or less; general security interest instead of real estate for ‎larger loans
• Up to $10,000 emergency grant within 3 days that does not have to be repaid (as of April 10, 2020, the SBA local offices have announced that this amount was limited to $1,000 per employee up to $10,000)
• Apply through SBA.gov
• Intersects with the PPP, in that ‎an outstanding EIDL used for payroll costs made between January 31, 2020, and April 3, 2020, less the amount of an advance is added to a PPP loan calculation. If the EIDL loan was not used for payroll costs, it does not affect eligibility for a PPP loan.

Midsized Business Lending

19. What loans would be made available to midsized businesses ‎under the CARES Act?

There is no process as of April 30, 2020, to apply for either a Midsize Business Loan or a Main Street Loan. However, on April 8, 2020, and April 30, 2020, the Federal Reserve took additional actions to provide for the Main Street Lending Program. Regulations are in process, but the CARES Act does not include a specific timeline for the launch of these programs. 

• The Department of Treasury is required to endeavor to seek the implementation of a ‎Federal Reserve lending program that targets U.S.-eligible businesses (and, to the ‎extent practicable, nonprofit organizations) with between 500 and 10,000 ‎employees, subject to additional terms and conditions.‎
• The CARES Act also suggests that the Federal Reserve may establish a Main Street ‎Business Lending Program or facility that supports lending to small and midsized ‎businesses on such terms and conditions that are consistent with its authority under ‎the Federal Reserve Act.‎ See Question 21.
• For both programs, the CARES Act contains restrictions on certain stock buybacks, paying dividends, and executive ‎compensation.
• Midsize loans are not eligible for loan forgiveness and are also subject to specified conflicts of interest rules.

20. What restrictions will be placed on borrowers that receive loans under the ‎midsized businesses program, if it is implemented?‎‎

• The funds received must be used to retain at least 90% of the borrower’s workforce, ‎with full compensation and benefits, through September 30, 2020. ‎
• The borrower must intend to restore not less than 90% of the workforce that existed as ‎of February 1, 2020, and to restore all compensation and benefits to the workers no later ‎than 4 months after the termination date of the public health emergency. ‎
• The borrower must be domiciled in the United States with significant operations and ‎employees located in the United States. ‎
• The borrower will not pay dividends while the loan is outstanding.‎
• The borrower would be prohibited from engaging in stock buybacks if they are listed on ‎an exchange.‎
• The borrower must agree to caps on employee compensation for a period ending one year after the loan is repaid (for officers receiving over $425,000 in 2019 there is one cap; and for officers that made over $3 million in 2019, there is another cap).
• The borrower is not a debtor in a bankruptcy proceeding.
• Borrowers would be prohibited from outsourcing or offshoring jobs for the term of ‎the loan plus an additional two years.‎
• The borrower would be prohibited from abrogating existing collective bargaining ‎agreements for the term of the loan plus an additional two years.‎
• The borrower would be required to remain neutral in any union organizing effort for ‎the term of the loan.‎

21. What is the Main Street Lending Program?

On April 9, 2020, the Federal Reserve announced that it had taken actions to ensure credit flows to small and midsized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Main Street Lending Program is intended to enhance support for small and midsized businesses that were in good financial standing before the crisis by offering four-year loans to companies employing up to 15,000 workers or with revenues of less than $5 billion.

On April 30, 2020, the Federal Reserve declared an expansion of the scope of the Main Street Lending Program in response to public feedback and to account for the varied financial needs of eligible businesses. The expanded Main Street Lending Program will operate through three facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”). All three facilities use the same lender and borrower eligibility criteria, and have many of the same features, including the same maturity (4 years), interest rate (LIBOR plus 3%), deferral of principal and interest for one year, and the ability of the borrower to prepay loans without penalty. Below are brief summaries of the distinct features of each loan facility.

• MSNLF: Under the MSNLF, eligible lenders extend loans to eligible borrowers with such loans ranging in size from $500,000 to $25 million. The maximum size of a loan made in connection with the MSNLF cannot, when added to the borrower’s outstanding debt and undrawn available debt, exceed four times the eligible borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The MSNLF loan must not be, at the time of origination or at any time during the term of the loan, contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments. Additional information about the unique features of MSNLF loans is provided in the MSNLF term sheet.
• MSPLF: Under the MSPLF, eligible lenders extend new loans to eligible borrowers with such loans ranging in size from $500,000 to $25 million. The maximum size of a loan made in connection with the MSPLF cannot, when added to the borrower’s outstanding debt and undrawn available debt, exceed six times the borrower’s adjusted 2019 EBITDA (compared with four times adjusted EBITDA for MSNLF loans). At the time of origination and at all times thereafter, the MSPLF loan must be senior to or on equal footing (pari passu) with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt. Eligible borrowers may, at the time of origination of the MSPLF loan, refinance existing debt owed by the borrower to a lender that is not the lender eligible to issue the MSPLF loan. Additional information about the unique features of the MSPLF loans is provided in the MSPLF term sheet.
• MSELF: Under the MSELF, eligible lenders increase (or “upsize”) an eligible borrower’s existing term loan, or revolving credit facility. The upsized tranche is a four-year term loan ranging in size from $10 million to $200 million. The maximum size of a loan made in connection with the MSELF cannot exceed (i) 35% of the borrower’s existing outstanding and undrawn available debt that is on equal footing (pari passu) in priority with the MSELF loan and equivalent in secured status (whether secured or unsecured); or (ii) when added to the borrower’s existing outstanding and undrawn available debt, six times the borrower’s adjusted 2019 EBITDA (similar adjusted EBITDA requirement as MSPLF loans). At the time of upsizing, and at all times thereafter, the upsized tranche must be senior to or on equal footing with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt. Additional information about the unique features of the MSELF loans is provided in the MSELF term sheet.

Depending on the type of Main Street Loan, eligible banks originating Main Street Lending Program loans will retain either a 5% or 15% share, selling the remaining 95% or 85% to the Main Street facility, which will purchase up to $600 billion of loans. Firms seeking Main Street Loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Businesses classified as S corporations or other tax pass through entities may make distributions to the extent such distributions are reasonably required to cover owners’ tax obligations with respect to the business’s earnings. Firms that have taken advantage of the PPP may also take out Main Street Loans. For additional information regarding borrower eligibility for Main Street Lending Program loans, see Question 21A.

The Federal Reserve and the Treasury recognized that businesses vary widely in their financing needs, particularly at this time, and, as the program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds. See the April 30, 2020 press release.

On May 27, 2020, the Federal Reserve issued additional information regarding the Main Street Lending Program.

On June 8, 2020, the Federal Reserve issued additional information regarding the Main Street Lending Program, including:

• Lowering the minimum loan size for certain loans to $250,000 from $500,000;
• Increasing the maximum loan size for all facilities;
• Increasing the term of each loan option to five years, from four years;
• Extending the repayment period for all loans by delaying principal payments for two years, rather than one; and
• Raising the Reserve Bank’s participation to 95% for all loans.

See the Federal Reserve Press Release.

21A. Which businesses are eligible to participate in the Main Street Lending Program?

The borrower eligibility criteria are the same for each of the Main Street Lending Program facilities. A business that has received a PPP loan, or that has affiliates that have received a PPP loan, is permitted to borrow under the Main Street Lending Program provided that the borrower meets all eligibility criteria. Below is a summary of the key Main Street Lending Program borrower eligibility criteria.

• The business must have been established prior to March 13, 2020. Businesses seeking loans under the Main Street Lending Program must have been formed prior to March 13, 2020, under the laws of the United States, one of the states, the District of Columbia, any of the territories and possessions of the United States, or an Indian tribal government.
• The business must not be an ineligible business. The Federal Reserve will deem businesses ineligible based on the Small Business Administration’s ineligibility criteria, as set forth in 13 CFR 120.110(b)-(j), (m)-(s), and as this criteria has been modified and amended by the Small Business Administration for purposes of the Paycheck Protection Program on or before April 24, 2020. The Federal Reserve may further modify the application of these eligibility restrictions to the Main Street Lending Program. 
• The business must meet one of two conditions tied to either employee headcount or annual revenues. Eligible borrowers must either (i) have 15,000 employees or fewer or (ii) had 2019 annual revenues of $5 billion or less. To determine these figures, the borrower must aggregate its employees and revenue figures with the employees and revenues of the borrower’s affiliates.
• The business must be a U.S. business. Only businesses created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States.
• The business may only participate in one of the Main Street facilities (MSNLF, MSPLF, or MSELF) and must not also participate in the PMCCF.
• The business must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act.) A business is not eligible if it has received support pursuant to section 4003(b)(1)-(3) of the CARES Act.
• The business must be able to make all certifications and covenants required under the Main Street Lending Program. The certifications and covenants are mostly the same under each of the three Main Street Lending Program facilities, with a variation related to debt repayment in connection with the MSPLF.

A “business” must be a legally formed entity that is organized for profit as a partnership, a limited liability company, a corporation, an association, a trust, a cooperative, a joint venture with no more than 49% participation by foreign business entities, or a tribal business concern.

22. What are the differences between the Main Street Lending Program and other federal programs established in the CARES Act to aid businesses during the COVID-19 pandemic?

Like the Paycheck Protection Program (“PPP”) overseen by the Small Business Administration and the Federal Reserve’s Primary Market Corporate Credit Facility (“PMCCF”), the Main Street Lending Program was established to support companies adversely affected by the COVID-19 pandemic. Each of the three federal programs aims to provide liquidity to companies of different sizes. Below is description of the types of companies each of the programs is focused on assisting.

• PPP: The PPP supports the payroll and operations of small businesses through the issuance of government-guaranteed loans that include a forgiveness feature for qualifying borrowers.
• Main Street: The Main Street Lending Program is designed to support small and mid-sized businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan. Unlike PPP loans, loans issued under the Main Street Lending Program are not forgivable.

PMCCF: The PMCCF was established to support large companies through the purchase of investment grade corporate bonds from, and lending through syndicated loans to, large companies. Unlike PPP loans, PMCCF loans are not forgivable.

CARES Act Tax Considerations

1. What are the key tax provisions in the CARES Act that may be of interest to real estate and construction businesses?‎

The CARES Act includes various tax provisions that may be of benefit to the real estate and construction industry, including contractors, owners, developers, and investors. Specifically:

• Employer Retention Credit for Employers § 2301. The Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees. In order to be an “eligible employer,” the taxpayer must have had its operations fully or partially suspended by government action, or experienced a greater than 50% reduction in quarterly receipts (as measured on a year-over-year basis). The definition of “wages” depends on whether the employer had 100 or fewer full-time employees, with smaller employers receiving better treatment under this provision. This credit is not available with respect to any employee allowed a Work Opportunity Credit under Code Section 21.
• Delay of Employer Payroll Tax Payments § 2302. The Act permits taxpayers to defer payment of the employer portion of certain payroll taxes through the end of 2020. Those payroll taxes include Social Security taxes. Taxpayers are permitted to defer 50% of the payment to December 31, 2021; and the remaining 50% to December 31, 2022. Given the risks associated with the deferral of payroll taxes, we highly recommend seeking counsel before taking advantage of this provision of the Act.
• Temporary Repeal of Net Operating Loss (“NOL”) Limitations § 2303. The Act temporarily removes limitations on the carryback of NOLs by permitting taxpayers to carry back NOLs up to five years.
• Modification of Limitation on Losses of Noncorporate Taxpayers § 2304. The Act permits noncorporate taxpayers to deduct excess business losses arising in 2018, 2019, or 2020. An “excess business loss” is the excess of (1) the taxpayer’s aggregate deductions from a trade or business over (2) the sum of the taxpayer’s aggregate trade or business gross income/gain plus $250,000.
• Acceleration of Corporate Minimum Tax Credit § 2305. The Act allows corporations to claim 100% of alternative minimum tax credits in 2019 or, by tentative refund claim, 2018.
• Interest Expense Deductibility Temporarily Increased § 2306. For tax years beginning in 2019 and 2020, the Act provides for an increase in the deductibility of interest expense under Section 163(j)(1) from 30% of AGI to 50%. A special rule is provided for partnerships and their partners.
• Bonus Depreciation for Qualified Improvement Property § 2307. The Act provides a technical correction to existing tax law by providing that certain “qualified improvement property” is 15-year property for depreciation purposes and, therefore, eligible for bonus depreciation.

2. How does the NOL carryback provision work?

Under the CARES Act, companies with losses from 2018, 2019, and 2020 may be able to carry those losses back five years and offset up to 100% of taxable income. That could generate tax refunds that businesses could put to use upon receipt.

3. Why should real estate and construction businesses care about the increase in the interest deduction?

Under the CARES Act, the maximum amount of business interest deductions is increased from 30% of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) to 50% of EBITDA. This means businesses can reduce their taxable income for 2020 and 2021 by deducting more interest expense. Although this takes longer for businesses to realize the savings, it is a net win. Businesses should note, however, that this provision sunsets starting in 2022.

4. Payroll tax deferral and employee retention credits are lumped together. Looking at them one at a time, what more do we need to understand about deferral of payroll taxes?

Under the CARES Act, businesses are permitted to defer payment of the employer’s share of Social Security taxes through the end of 2020. Businesses deferring payroll taxes under this provision are permitted to pay half of the deferred amount by the end of 2021 and the remaining half by the end of 2022. All the while, no penalties or interest will accrue. So in some ways, you can view this as a short-term interest-free loan from the government. 

5. What can you tell me about the employee retention tax credit?

The CARES Act creates a new, temporarily refundable payroll tax credit for “eligible employers” affected by COVID-19. An eligible employer is an entity (1) whose operation is fully or partially suspended in response to governmental orders limiting commerce, travel, or group meetings or (2) that has experienced a significant decline in gross receipts, defined as a decline of 50% or more in quarterly receipts when compared to the prior year quarter. If an employer meets that definition, the credit is 50% on the first $10,000 of certain wages incurred or paid from March 13, 2020, through December 31, 2020. The credit is not available to those employers getting PPP loans.