I. SBA Loans
One of the most hotly discussed aspects of the CARES Act relates to the expansion of SBA loan programs. Generally, the SBA makes loans available to eligible small businesses under the 7(a) program; the SBA also provides low interest disaster loans in certain circumstances under its Economic Injury and Disaster Loan (EIDL) program. The CARES Act creates the new PPP to provide (1) loans to eligible small businesses for payroll and other fixed obligations; (2) a mechanism for loan forgiveness where the small business can demonstrate that the loan proceeds were used for payroll and certain other costs; and when forgiven, (3) the ability to not recognize the forgiven loan as revenue for tax purposes. In addition, the CARES Act increased eligibility for the EIDL loans, and the CARES Act makes available grants of up to $10,000 to cover immediate operating costs of eligible businesses applying for EIDL assistance. The CARES Act provides nearly $350 billion of additional funding for these loan programs during the covered period – February 15, 2020 to June 30, 2020. In addition, on April 7, 2020, the Treasury Department indicated it will seek additional funds to address the high level of public interest in, and applications for, these loan programs.
Who is eligible for a PPP loan?
Small businesses that meet the SBA’s definition of a small business are eligible. Also, the CARES Act includes business concerns, non-profit organizations, veterans organizations, and tribal businesses provided that such entities employ not more than the greater of (i) 500 employees (which includes full-time and part-time employees) or, if applicable, (ii) the employee-based or revenue-based size standard for the industry in which such entity operates; or (iii) if 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. To determine whether a company is small, the SBA affiliation rules set forth at 13 CFR 121.301 are applicable. The SBA published an Interim Final Rule on Affiliation on Friday April 3, 2020, which set forth four tests for affiliation pursuant to 13 CFR 121.301: (1) affiliation based on ownership, (2) affiliation arising under stock options, convertible securities, and agreements to merger, (3) affiliation based on management, and (4) affiliation based on identify of interest. Guidance released by the SBA confirms these tests for affiliation. As a result, the employees of the borrower and its affiliates are aggregated for purposes of the calculation.
The CARES Act provides limited waivers of affiliation rules for entities in the accommodations and food services industries (see North American Industry Classification System (NAICS) Sector 72) that have more than one physical location, provided that such entities employ fewer than 500 employees per physical location. Franchise operators approved by the SBA are likewise afforded some relief from the affiliation rules, as are business that have received funding from a Small Business Investment Company (SBIC). However, the application of the affiliation rules is complex and fact-specific, particularly if a borrower shares a management company and/or is sponsored by private equity, venture capital, and similar financial sponsors. Borrowers that share a management company and/or are sponsored by these entities are encouraged to consult with their attorney to walk through the detailed analysis related to whether financial sponsors and the sponsors’ other portfolio companies are likely to be deemed “affiliated” with the borrower for eligibility purposes for the PPP loan.
Loan forgiveness
The CARES Act states that the SBA will forgive up to the full principal amount of qualifying loans guaranteed under the PPP, and any accrued interest. The goal of the PPP is to help employers retain employees at their current pay rate (where those pay rates do not to exceed $100,000 per year) for eight weeks of payroll. To be forgiven, at least 75 percent of the PPP loan proceeds have to be used for payroll costs. Small businesses seeking loan forgiveness will be required to verify the number of full-time equivalent employees on payroll together with pay rates for the applicable measurement; payroll tax filings with the Internal Revenue Service, any state income, payroll, and unemployment insurance filings; and documentation verifying payments on covered mortgage, lease, and utility amounts. Receipt of other types of SBA financial assistance does not preclude a small business from obtaining a 7(a) loan under the PPP loan program. However, the small business cannot use the PPP loan to cover the same expenses as a different SBA loan.
The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. The interim rule promulgated by the SBA confirms that the SBA will forgive the total PPP loan that meets the CARES Act’s requirements. However, to obtain forgiveness, the borrower may not use more than 25 percent of the PPP loan amount for non-payroll costs, such as mortgage, lease or utility payments.
How do I apply?
Eligible businesses interested in applying for a PPP loan can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating in the program. The SBA website also indicates that other regulated lenders are being approved to participate in the program and will be available to make these loans once they are enrolled in the program. Eligible businesses should consult with their local lender as to whether the lender is participating in the program and consult the SBA website for more specific information. The PPP loan application is available on SBA.gov.
EIDL program and advances (grants)
The SBA’s EIDL program provides loans to small business borrowers that have suffered economic injury as a result of a pandemic or other disaster. On March 20, 2020, the SBA made an Administrative Declaration of an Economic Injury Disaster due to the COVID-19 pandemic; accordingly, small businesses are eligible to apply for an EIDL in all 50 states and the U.S. territories. The small business qualification attributes related to Section 7(a) loans are generally applicable to EIDLs; however, it does not appear that the relief from affiliation rules (e.g., for borrowers in the accommodation and food services industries) for Section 7(a) loans applies to EIDLs. In addition to being a small business, the EIDL borrower must (1) be located in a declared disaster area; (2) have suffered “substantial economic injury”1 as a direct result of a declared disaster; and (3) not own property subject to a federal judgment lien. EIDL amounts are generally limited to $2 million. Personal guaranty requirements are waived for loans of $200,000 and less. The CARES Act does not specify any changes to existing collateral or guarantee requirements (collateral is generally required for EIDLs of more than $25,000), so we believe that they continue to apply. The CARES Act makes available grants of up to $10,000 to cover immediate operating costs of eligible businesses applying for EIDL assistance. The SBA’s authority to provide these grants will terminate on December 31, 2020. These grants do not need to be repaid, even if the EIDL application is ultimately denied. However, businesses likely will need to account for how the grant monies are spent and that they are spent for proper purposes in accordance with the EIDL program.
The SBA has set up a streamlined application process for its EIDL program, which can be found on its website. The applicant must provide certain information to the SBA which will be used to determine whether the applicant is eligible for an EIDL. The SBA states that if an applicant does not provide all of the requested information via the online portal, the loan application cannot be fully processed. Applicants should note that the application requires a certification from the applicants under penalty of perjury for verification purposes. As such, borrowers need to ensure that they are providing accurate information in their loan applications.
II. Reimbursement for paid leave for contractor employees
Congress recognized that many government contractors that regularly work on a government site have been, or may be, affected by an inability to work onsite. Accordingly, the CARES Act authorizes federal agency contracting officials to reimburse contractors for paid leave related to COVID-19. This authorization applies to federal contracts where (1) the contractor’s employees or subcontractors are not able to perform work on a government-approved site, including government owned or leased sites, and (2) the employees or subcontractors cannot telework because their job duties cannot be performed remotely. The CARES Act specifically references other agreements, indicating that contracting officials may also reimburse eligible paid leave on grants or task orders.
For contractors affected by this situation, the CARES Act vests contracting officials with the discretion to reimburse contractors for paid leave, including sick leave, at the minimum applicable contract billing rates and not to exceed an average of 40 hours per week, that the contractor incurs to “keep its employees or subcontractors in a ready state, including to protect the life and safety of government and contractor personnel.” This provision may cover contractors that provide paid leave to employees or subcontractors that are currently diagnosed with, suspect they may have, or have been exposed to COVID-19, and who cannot perform their job duties remotely. This is also likely to cover leave for employees who cannot access the government worksite and, due to security requirements, cannot perform work remotely.
It is important to note that the use of this authority is discretionary, not mandatory, and therefore contractors may see agency contracting officials utilize this authority to differing degrees. For example, the Department of Defense (DOD) recently released guidance on this authority provided for by the CARES Act, and stated that it “provides discretion for the agency to modify the terms and conditions of the contract to reimburse paid leave where contractor employees could not access work sites or telework but actions were needed to keep employees in a ready state.” DOD stated it would provide implementing guidance. We will be on the lookout for that implementing guidance to be published because it will be important for DOD contractors.
In light of this authority, government contractors are advised to communicate with their contracting officers regarding the availability of this paid leave and options to telework. Government contractors are further advised to keep records of any paid leave that is allocable to COVID-19 to accurately document the impact. Keeping records will be useful in documenting the need for a request for equitable adjustment or future claim for this time under the Contract Disputes Act. It should be noted that the CARES Act does not allow contractors to double-dip on benefits received under the Families First Coronavirus Response Act (FFCRA), P.L. 116-127. Specifically, any reimbursement allotted under the CARES Act for paid leave will be reduced by any tax credits for paid sick, family, and medical leave that the contractor claims under Division G of the FFCRA.
III. Other Transaction Authority Changes
In an effort to expand the Biomedical Advanced Research and Development Authority’s (a division of the Department of Health and Human Services (HHS)) ability to quickly obtain certain goods and services from businesses, the CARES Act expands the use of “other transaction authority,” which provides an alternative to traditional government contracting and avoids much of the standard statutory and regulatory requirements imposed on a traditional contract with the federal government.
Section 3301 of the CARES Act amends Section 319L(c)(5)(A) of the Public Health Service Act, to remove the current requirement obligating the secretary to obtain a written determination, for any project that is expected to cost the HHS in excess of $100 million, that the use of such other transactions authority by HHS is essential to promoting the success of the project. Specifically, Section 3301 amends Section 319L(c)(5)(A) by adding a new subsection establishing that, notwithstanding the restriction requiring the secretary to obtain a written determination for projects in excess of $100 million, the secretary shall – “to the maximum extent practicable” – use competitive procedures when entering into transactions to carry out projects during a public health emergency declared by the secretary. This should make it easier for HHS to enter into other transaction agreements during the pendency of the pandemic. Businesses interested in this type of work are encouraged to contact HHS to identify procurement opportunities.
IV. Grants to Educate and Inform Small and Minority Businesses Impacted by COVID-19
The CARES Act contemplates a partnership with private organizations to provide grants from the SBA to educate both the small and minority business communities about COVID-19, resources available to them, and information needed to combat the virus.
First, the CARES Act appropriates $265 million in grants to resource partners, including small business development centers and women’s business centers, to assist small businesses that have had supply chain disruptions, staffing challenges, decreases in revenue or customers, or closures. Specifically, the grants may be used to provide education, training, and advice to these small businesses regarding (a) access to resources, including capital; (b) the hazards and prevention of transmission and communication of COVID-19 (and other communicable diseases); (c) the potential effect of COVID-19 on supply chains; (d) teleworking; (e) remote customer services; (f) risks and mitigation of cyber threats resulting from remote work; (g) mitigating effects on reduced travel or activities; and (h) other relevant business practices to mitigate the economic effects of COVID-19. In addition, grants may be awarded to associations that represent resources partners, to provide a centralized hub for this type of information, such as an online platform or training programs. Grants are likely to be awarded by the SBA Office of Entrepreneurial Development, which will work directly with the resource centers to establish goals and metrics for the grant funds.
The CARES Act also appropriates an additional $10 million in grant funds available for minority business centers and minority chambers of commerce to provide the same type of education, training, and advice to minority business enterprises.
These grants will be provided to the Small Business Development Centers, Women’s Business Centers, as well as the Minority Business Development Agency’s Business Centers, to provide help to small businesses. Companies interested in helping deliver this help should contact these agencies directly for more information.
V. Loans for the National Security Industry
The CARES Act additionally appropriates $17 billion for loans and loan guarantees to businesses that are determined critical to maintaining national security. Unlike the SBA loans, these loans will not be forgivable; however, the objective of this section of the CARES Act is to inject liquidity into eligible businesses that are not eligible for SBA loans or other forms of credit. Section 4003(c) of the CARES Act details the terms and conditions of these loans. We await additional instructions and/or regulations from the Department of the Treasury on eligibility, minimum requirements, and applications for these loans.
VI. Conclusion
Government contractors should avail themselves of the new economic relief measures when applicable. Expanded SBA loan programs, new provisions that impact contractor employee benefits, broader contractor opportunities to support the federal government during this crisis, and the availability of provided funds for pandemic education have all resulted from the CARES Act, and will provide a number of ways for government contractors to shore up their defenses against the COVID-19 pandemic. The government contracts and grants team at Reed Smith stands ready to address any questions regarding the CARES Act and how it may affect businesses during this time, and to assist those businesses in accessing the CARES Act’s various programs.
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13 C.F.R. Section 123.300(a) provides that a substantial economic injury means that a business concern is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses.
Client Alert 2020-221
