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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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    Everything You Need to Know About the Paycheck Protection Program

    The world that we live in today is quite different to the one we started off the new year with and in it new heroes have emerged. Instead of our usual caped crusaders, we’re now celebrating medical personnel, police and firefighters who are on the frontlines of the pandemic and out there preserving our lives. These brave professionals are the ones who rush to help when everyone else seems to be hiding away, doing whatever they can to assist the sick and maintain our society. Not to be left out, many other professionals are working hard to ensure that things remain as “business as usual” as possible. Teachers search for methods to continue to invest in children and we can also look at our elected representatives with admiration for the two, usually dueling, parties have come together with a $2 trillion coronavirus economic stimulus bill referred to as the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

    There has been a lot of publicity concerning the Paycheck Protection Program (PPP) which is designed to help individuals and businesses survive by maintaining cash flow. Appropriately named, the PPP is a Small Business Administration (SBA) loan which will turn into a grant if the funding is used to pay employees that you had prior to the pandemic. Congress allocated just under $350 billion towards preventing layoffs and business closures while workers stay home during the outbreak for companies with 500 employees or less. This will be done through small business loans through local lenders and given for 2 and a half times the average monthly employee payroll costs.

    Most any business, including a qualifying nonprofit organization, is eligible to apply for a PPP loan if it meets the applicable North American Industry Classification System (NAICS) code-based size standard and has an employee headcount that is lower than generally 500 employees. Further, sole proprietorships, independent contractors, and self-employed individuals are also eligible.

    All or part of this loan may be forgiven so long as it is spent during the first eight weeks after the loan is received to fund the same number of persons you had employed just before the crisis. The loan needs to be utilized for payroll costs (excluding pro-rated amounts for individuals) with compensation for an individual being no greater than $100,000; for leases in force before February 15, 2020, then rent as well; and using that same date: expenses in effect prior to then for electricity, gas, water, transportation, telephone, or internet access expenses, and group health insurance premiums and other healthcare costs.

    For the portion not forgiven, payments are deferred for six months and the maximum interest rate is 4% with a loan term of up to 10 years. There is no personal guarantee or collateral needed for the loan.

    One of the most advantageous features of this program is that the loan could potentially be forgiven in full. The program was made for those operating under uncertainty of current economic conditions which make it difficult to support ongoing operations. The potential shortfall of revenue should unit owners, and more importantly commercial tenants; be unable or unwilling to pay their monthly charges is one that none of us can foresee. At this point we don’t know what the costs will be of securing relief employees so it may be better to play it safe.

    Most of our clients keep enough operating funds available to handle an emergency, but this is an economic crisis and no one can truly forecast what will happen in the future. It would seem to be venturing a guess to say just how long operating reserves might last. While capital improvement funds can be borrowed, in order to maintain the beneficial individual income tax status as additions to apartment basis when paid they need to be utilized solely for capital, not operating expenses. Further, this situation tends to have lenders withdraw a portion or entire existing credit facilities, thus your use of a line of credit might be limited.

    If you talk to 20 business owners they’re all hearing something different from their banks. In general, properties are submitting applications to the banks that they either have existing financing with or that they maintain their bank accounts with. A further barrier to getting an application moving is that banks are choosing varying methods to service existing clientele to the extent that those with existing loans come first.

    There is a basic application on the SBA website, but many lenders are requiring you to access their own application portal and in many cases further information than asked for in the SBA document is being requested. It is best to check your lenders website to determine their requirements and see if there is an option to print the application out before you attempt to fill it in. We do not recommend that you put a lot of time into completing a partially completed application nor destroy the information that you’ve accumulate to prepare without assuring the work you invest can be saved and updated.

    As part of the application process, SBA is expecting you to be able to certify the following:

    • Current economic uncertainty making the loan necessary to support your ongoing operations.

    • Assurance the funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments.

    • You have not and will not receive another loan under this program.

    • You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan. Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities.

    • All the information provided in your application and in all supporting documents and forms is true and accurate.

    • Acknowledgement that the lender will calculate the eligible loan amount using the tax documents you submitted.

    • The tax documents provided are identical to those you submitted to the IRS. And that you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives.

    • Whether or not the business, any of its owners, or any business owned or controlled by any of them has ever obtained a direct or guaranteed loan from SBA or any other federal agency that is currently delinquent or has defaulted in the last 7 years and caused a loss to the government.

    • Whether or not the business has common management with any other business? If yes, attached a listing of all affiliates and describe the relationship.

    • Whether the business has received an SBA Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020? If so, provide the details.

    You will need to complete the PPP loan application and submit it with the required documentation to an approved lender that is able to process your application by June 30, 2020.

    While there is with no certainty that we can state the benefits from the PPP will be available to cooperatives and condominiums anytime soon; accumulating information, verifying the process that your bank is following, verifying legal issues with Counsel and preparing an application are certainly worth pursuing. Some are recommending filing as the guidance is unclear and the worst that happens is that loan is not granted or the federal government requires it to be paid back with little interest. This lack of clarity should in itself create a defense against any assertion of penalties and leaves no basis to assert any kind of fraudulent behavior occurred by filing the application.

    The SBA website uses the verbiage, “when in doubt, apply.” Further, there appears to be no reference in the regulations that an entity needs to be materially impacted or even details the extent of the effect that is necessary before a loan can be applied for. This means that boards of directors/managers need to consider when and how they have been affected, the most common indicators are a reduction in revenue receipts and the cost of relief workers as opposed to union staff should an employee not be able to or chooses not to report to work due to the situation.

    While significant benefits might be available to cooperatives and condominiums, the details as to the benefits available under the program cannot be confirmed until the SBA finishes publishing and implementing final regulations. However, the interim guidelines published on April 2, 2020 indicate passive entities such as apartment buildings do not qualify and thus the National Cooperative Bank (NCB) has come out to indicate that cooperatives and condominiums do not qualify. We all hope for legislative relief by Congress to this oversight as part of future stimulus packages.

    Although the current $350 billion to be distributed by the program seems like a lot of money, with so much economic burden one would rightfully be concerned that at some point the demand might exceed the supply. We believe that cooperatives, condominiums, and their managing agents, should consider moving forward with preparing their applications and not necessarily awaiting the final regulations to be prepared. Keep in mind that to file you must be experiencing economic hardship which will interfere with paying your employees, which shouldn’t be hard as most non-essential businesses have seen their revenue deteriorate, if not evaporate.

    The CARES Act contains numerous other important benefits which we plan to chronicle over the coming months. While the Act has two emergency loan programs available you may be hearing less about the Economic Injury Disaster Loan (EIDL), which is a second opportunity for receiving emergency funds to keep your business afloat in these trying times and provides protection from the effects caused by present economic situation.

    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.

    All things being considered, after you review your situation if feel you have or will have an imminent financial problem we advise that for now it may be best to gather the relevant information, keep it on hand for future use, and await legislative relief.

    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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