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    Quick Guide: Main Street Lending Program

    For the past few weeks we’ve been bombarded with information on the most popular aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but the Federal Reserve took additional steps to bolster the economy with the Main Street Lending Program (MSLP). Designed to further assist small and medium-sized businesses this program provides liquidity during the coronavirus crisis. The MSLP enables new financing of eligible term loans from eligible lenders to eligible businesses by making an extra $2.3 trillion in loans available. As with the Small Business Administration’s Paycheck Protection Program (PPP), businesses should reach out to their banks or lenders to apply for one of these loans. However, we need to mention that for now the minimum loan size is $1 million and the interest rate is expected to be higher than that of PPP loans.

    Businesses will need to attest that they require financing due to COVID-19 and have made efforts in the areas of retaining employees as well as maintaining payroll during the term of the loan. An important stipulation of the use of the loan is that the borrower may not use proceeds to repay or refinance pre-existing loans. Small businesses that participate in the PPP may also take advantage of the Main Street Program.

    The MSLP will enhance support for eligible borrowers that were in good financial standing before the crisis by offering four-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Interest rates on this unsecured debt will be based on the Secured Overnight Financing Rate (SOFR) plus 2.5% to 4%, depending on the credit risk. SOFR is a newer benchmark that is due to replace the London Inter-Bank Offered Rate (LIBOR) next year.

    Amortization of principal and interest is deferred for one year (the amortization schedule for an eligible loan is not otherwise specified in the term sheets released by the Federal Reserve). Eligible lenders (banks) may originate new MSLP loans or use them to increase the size of existing loans to businesses.

    Prepayment is permitted without penalty and there is a 1% loan origination fee based on the principal amount of the loan. However, unlike the PPP, these loans contain no provisions for forgiveness.

    The borrower must agree to not use the proceeds of the loan to repay other loan balances and concur that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.

    There are compensation restrictions in that until one year after the loan is repaid, no officer or employee of the business whose calendar year 2019 total compensation exceeded $425,000 receives from the business total compensation that exceeds during any consecutive 12-month period the total compensation received by that person in 2019. Additionally, severance pay or other termination benefits cannot exceed two times the maximum compensation received by that person in 2019.  Lastly, no officer or employee of the business whose total compensation exceeded $3 million in calendar year 2019 may receive during any consecutive 12-month period total compensation in excess of $3 million plus or 50% of the compensation over $3 million of total compensation received from the business in calendar year 2019.

    The good news is that banks are already seeking changes as the Federal Reserve finalizes the MSLP in order to expand eligibility. The feedback has been for new enhancements that make the program workable for lenders as this would get the funds into the real economy quickly. The program’s $1 million minimum loan size appears to be too large and will exclude many small businesses that need to borrow a smaller amount while a minimum of $100,000 seems more appropriate. Calls have been made to reduce the floor to $50,000. As some lenders have yet to adopt to SOFR, those lenders want to use LIBOR or other benchmarks.

    Further, other industry groups have made requests to include more flexibility on the duration of the loans allowed and the maximum size of the loan, as well as giving lenders more discretion as how to supervise capital distribution restrictions that are imposed on borrowers as a condition of the loan.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of the the current economic crisis that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.

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    Quick Guide: CARES Act Payroll Tax Deferral

    News of the Coronavirus Aid, Relief, and Economic Security (CARES) Act has made headlines every day since its enactment in late March. As of April 16, the Small Business Administration (SBA) announced that the initial amounts appropriated for the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) (including up to $10,000 emergency grants) for the COVID-19 virus situation have run out, but fear not for businesses concerned about cash flow can find solace in two other CARES Act provisions.

    One provision of the Act allows the employer portion of payroll tax deposits to be utilized if no PPP loan is forgiven. This provision seeks to alleviate the burden on employers struggling to make payroll by allowing the employer’s share of the 6.2% social security tax that would otherwise be due from the date of enactment through December 31, 2020, to be deferred and then paid in two 50% installments by December 31, 2021 and December 31, 2022. For those who are self-employed, you can immediately defer paying 50% of your self-employment tax that would be due from the date of enactment through the end of 2020 until the end of 2021 (25%) and 2022 (25%).

    This means an employer who incurs its 6.2% share of Social Security tax in 2020 may defer payment of that tax until 2021 and 2022.

    The second provision allows an employer to receive an immediate credit against those yet-to-be paid payroll taxes via the sum of the emergency medical leave credit, sick leave credit, and new employee retention credit. This will increase the cash available to businesses in the coming months. It appears these credits may also be refundable, meaning you can get cash back from the IRS for certain payroll taxes already paid.

    The Czar Beer team is dedicated to providing timely, accurate information on all aspects of the CARES Act and the current economic crisis that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at info@czarbeer.com or call 212 397 2970 with any questions you may have.

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    Why Coops and Condos Should Apply for an Economic Injury Disaster Loan

    By now, you probably have read about the aspect of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress at the end of last month which gives until June 30, 2020 to file an application under the Paycheck Protection Program (PPP). Although the PPP is intended to help with the impact of the COVID-19 pandemic on employers of fewer than 500 persons, much of the commentary regarding the loan program indicates that only with legislative relief will it be afforded to cooperatives and condominiums.

    While we often look to legal counsel to direct our clients, the intent of the Act and the vagueness of the regulations within it seem to leave room to consider filing so long as the bank you have lending relationship or bank account will accept the application or use a third party service that works directly with another Small Business Administration (SBA) lender.

    Regardless of your Board’s decision if your property is experiencing injury, most likely from commercial tenants either indicating that they can’t pay their rent, staffing vacancies which need to be filled by quite expensive security services, or numerous unit owners not being able to pay their monthly charges; then you may want to consider another aspect of the Act, a SBA Economic Injury Disaster Loan (EIDL).  We do have cooperative and condominium clients with SBA disaster loans, so it seems that the requirements appear to be different for EIDLs.

    Until the Act, situations like the one we are currently experiencing did not qualify for disaster loans. However, everything about the current events should be considered disastrous and thus now, disaster loans are available for coops and condos.  The EIDL is quite different from the PPP, in that the amount of the loan is subject to the amount of your losses and there is presently no provision for forgiveness. However, at 3.75%, for properties in need of cash, they provide an option without the longer approval process of standard commercial loans.  You will be assigned a revolving lender by the SBA so there is no need to verify if a bank you have a relationship with are accepting applications.  Presently, that is one of the important barriers that properties are dealing with presently as they decide whether to process PPP applications.

    High demand for the EIDL has led to important changes limiting the size of the payouts for small-business owners. The Massachusetts District Office of U.S. Small Business Administration announced that, nationwide, the SBA has decided to implement a $1,000 cap per employee on the up to $10,000 maximum advance. So, a business with three employees, for example, would be eligible to receive only $3,000 up front, as opposed to the originally stated $10,000.

    Other aspects that are beneficial are that the loan term is 30 years and it can be repaid early at any time or in any partial amount.  The downside is the application process needs to be with a lender that doesn’t know you and even though the intention of Congress was ease in documenting need and qualification.  There has not been enough feedback on this program to conclude whether those aspects are in place.

    The initial application is online, and even though the loan is non-recourse, the application does require personal information of at least an individual.  Taking the first step of filing the application is quite easy, although there has been a lag in excess of the intention turnaround of several days.  When appropriate, Cooperatives and Condominiums, and their managing agents should consider moving forward with preparing these applications, and not necessarily wait too long and possible see the program run out of allocated resources.

    Overwhelming interest in the program has slowed the process which makes it difficult to estimate when applicants will be able to expect their advance. Additionally, as of April 16th the SBA indicated it is currently unable to accept new applications for both the EIDL and PPP programs based on available appropriations funding. Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.

    The Czarnowski & Beer team is dedicated to providing timely, accurate information on all aspects of the CARES Act and the current economic crisis that affect our clients. For more information on how you can prepare for cash flow disruptions see our latest blog post here. If you’re interested in reading our full summary of the provisions outlined for coops and condos in the Act, download our guide here.

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