- On March 27, 2020, President Donald J. Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide emergency assistance for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act provides three ways for nonprofits to receive financial support during the pandemic.
- Nonprofit organizations and veterans organizations that are exempt from federal income tax pursuant to section 501(c)(3) or 501(c)(19) of the Internal Revenue Code with no more than 500 employees1 are eligible to receive loans under the Paycheck Protection Program.
- Private nonprofit organizations that have been in operation since January 31, 2020 and are exempt from federal income tax pursuant to section 501(c), (d) or (e) or are organized under state law are eligible to receive loans and grants under the EIDL program.
- Faith-based organizations are also eligible under the PPP and EIDL loan programs, regardless of their religious identity or activities.
- Title IV of the CARES Act authorizes the Federal Reserve to provide financing to banks and other lenders to provide low interest rate loans to organizations with between 500 and 10,000 employees, including nonprofit organizations.
On March 27, 2020, President Donald J. Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide emergency assistance for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act is the third of three legislative initiatives responding to the COVID-19 pandemic.
The CARES Act provides three ways for nonprofits to receive financial support during the pandemic, which are currently in the process of being rolled out by the Treasury Department and lending institutions. This Dechert OnPoint provides an overview of the Paycheck Protection Program, the Economic Injury Disaster Loan Program and the Mid-Sized Business Loan Program and provides an FAQ for nonprofit organizations as to the differences between the programs. We note that the guidance from the Treasury Department and Small Business Administration (the “SBA”) is evolving rapidly. The latest FAQ as of this writing can be found here.
Paycheck Protection Program
Title I of the CARES Act allocates US$349 billion to support loans made pursuant to a new SBA Paycheck Protection Program authorized under Section 7(a) of the Small Business Act through June 30, 2020.
Nonprofit organizations and veterans organizations that are exempt from federal income tax pursuant to section 501(c)(3) or 501(c)(19) of the Internal Revenue Code with no more than 500 employees1 are eligible to receive loans under the Paycheck Protection Program. Although prior drafts of the bill carved out nonprofit entities that received Medicaid expenditures, the law as enacted allows all 501(c)(3) and 501(c)(19) nonprofit organizations to receive Paycheck Protection Program loans. Religious groups are eligible to receive Paycheck Protection Program loans, regardless of whether they provide secular social services, and are not required to have received a tax-exempt determination letter from the IRS before applying for a Paycheck Protection Program loan.2
The maximum amount a borrower may receive under the Paycheck Protection Program is 2.5 times the applicant’s trailing twelve month average monthly payroll expenses,3 with an overall cap of US$10,000,000. Although the statute authorizes interest rates of up to 4% per annum and terms of up to ten years, the SBA has stated that all Paycheck Protection Program loans will carry an interest rate of 1% and have a term of two years. All payments will be deferred for six months, but interest will accrue during deferment.4
Paycheck Protection Program loans are being administered by private lending institutions including existing SBA lenders, and participating federally insured depository institutions and federally insured credit unions. An application form has been provided by the SBA. Treasury Department guidance requires lenders to verify payroll documentation for prospective borrowers for purposes of the application and amount borrowed and establish anti-money laundering procedures for Paycheck Protection Program loans. Not all lenders have made applications available at this time. Paycheck Protection Program loans are authorized until June 30, 2020, but the Treasury Department has stated that loans will be granted on a first come first served basis until the funds allocated to the program are depleted.
The Paycheck Protection Program loans may be used for5 payroll costs (as described above), mortgage interest and rent payments, utility payments, and interest on other debt obligations. Paycheck Protection Program loans may also be used to refinance existing debt obligations.6 Paycheck Protection Program loans are non-recourse, so long as the loan proceeds are used for an authorized purpose.
Paycheck Protection Program loans can be forgiven up to the full principal amount of the loan and any accrued interest. Loans can be forgiven up to the total amount of payroll costs, mortgage interest payments, rent payments and utility payments paid by the borrower during the 8 week period following origination of the loan. Treasury Department guidance, however, requires that no more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. Lenders are not required to conduct any verification of borrower documentation for loan forgiveness that the borrower has attested is accurate. Borrowers will, however, have to document the proceeds used for payroll costs to determine the amount forgiven.
Economic Injury Disaster Loan Program
Title I of the CARES Act also allocates US$562 million to support disaster loans made in response to COVID-19, including pursuant to the existing Economic Injury Disaster Loan (“EIDL”) program authorized under Section 7(b) of the Small Business Act. Additionally, the CARES Act allocates US$10 billion to support EIDL emergency grants through December 31, 2020.
Private nonprofit organizations that have been in operation since January 31, 2020 and are exempt from federal income tax pursuant to section 501(c), (d) or (e) or are organized under state law are eligible to receive loans and grants under the EIDL program. Faith-based organizations are also eligible under the EIDL program, regardless of their religious identity or activities.
The CARES Act waives the previously required personal guarantee on EIDL loans of up to US$200,000, and the requirement to demonstrate an inability to obtain credit elsewhere. Additionally, eligible entities are no longer required to have been in operation for a year or to submit tax returns to the SBA to demonstrate their ability to repay loans. Through December 31, 2020, the SBA is authorized to approve EIDL loans based solely on an applicant's credit score or an alternative appropriate method. However, for loans exceeding US$25,000, the SBA may still require applicants to pledge collateral, which may be real estate when available. Nevertheless, the SBA will not deny an application solely due to lack of collateral. 7
The maximum amount a borrower may receive under the EIDL loan program is US$2 million, with a maximum term of 30 years and no early prepayment penalties. The maximum loan amount is limited to the economic injury of the business as determined by program standards. The interest rate for nonprofit organizations is 2.75%. EIDL loans may be used for working capital purposes, including as payment for fixed debts, payroll, accounts payable, sick leave, and other bills that could have been paid had the COVID-19 disaster not occurred. Ineligible uses of EIDL loans include expansion of facilities or acquisition of fixed assets, repair or replacement of physical damages, refinancing of long term debt and paying down or paying off loans provided or owned by a federal agency or Small Business Investment Company.8
Entities applying for EIDL loans, including nonprofit organizations, may also apply for a US$10,000 grant, which operates as a loan advance and is provided by the SBA within three days of application. EIDL grants do not have to be repaid, regardless of whether the receiving entity is subsequently denied for an EIDL loan. These grants may be used for any of the following purposes: (1) providing paid sick leave to employees unable to work a result of COVID-19, (2) maintaining payroll to retain employees during business disruptions or substantial slowdowns, (3) meeting increased costs to obtain materials unavailable from the organization’s original sources due to interrupted supply chains, (4) making rent or mortgage payments, and (5) repaying obligations that cannot be met due to revenue losses.
EIDL loans and grants are processed and administered directly by the SBA, and organizations may apply directly the SBA website. Organizations may apply for both PPP and EIDL loans, but their proceeds may not be used for the same purposes. Furthermore, if an organization receives an EIDL loan for COVID-19 purposes before it receives a PPP loan, the EIDL loan amount may be refinanced. However, if an organization received an EIDL loan between January 31, 2020 and April 3, 2020 and used it for payroll costs, any PPP loan it receives must be used to refinance the EIDL loan. Proceeds from any EIDL advance up to US$10,000 would be subtracted from the loan forgiveness amount on the PPP loan.9
Mid-Sized Business Loan Program
Title IV of the CARES Act authorizes the Federal Reserve to provide financing to banks and other lenders to provide low interest rate loans to organizations with between 500 and 10,000 employees, including nonprofit organizations “to the extent practicable.”10 Mid-Sized Business Loans will carry an interest rate of not more than 2% and will provide for six months of payment deferral. Borrowers will have to make several “good faith certifications,” including that it intends to retain 90% of its workforce until September 30, 2020 and restore not less than 90% of the workforce that existed as of February 1, 2020. The CARES Act does not impose any deadlines on the Treasury Department or Federal Reserve as to the creation of the Mid-Sized Business Loan Program. As of this writing, the Federal Reserve has not provided any further guidance on the Mid-Sized Business Loan Program, including other application requirements and what collateral would be required.
Questions and Answers
1. Paycheck Protection Program Q&A:
Q. When should I apply for a Paycheck Protection Program loan?
A. Immediately. The applications submitted under the Paycheck Protection Program will be processed until the earlier of (i) June 30, 2020 or (ii) until funds made available for this purpose are exhausted. The PPP funds are being disbursed on a “first come, first served” basis.
Q. Where can I apply?
A: Online with a participating lender. The SBA’s “partnering lenders” (aka banks) will be providing these loans directly. However, as of this writing, not all banks are accepting PPP loan applications, and some banks are only making PPP loans to borrowers that have an existing account or other banking relationship already in place.
Q. Should I apply for one PPP Loan now and then another when it is more clear when the state-mandated social distancing rules will expire (but before June 30th)?
A. No. You may only apply for and receive one PPP Loan.
Q. How much should I apply for, and what proof do I need to show?
A. You will need documentation as to your average monthly payroll costs and, using that monthly amount, you can calculate your maximum loan amount, which will generally be at 2.5 times the average monthly payroll cost, up to a maximum loan amount of US$10mm.
Q. Are PPP Loans really “loans’ that will need to be repaid?
A. This will depend on how the proceeds of the PPP Loan are used. The loan may be forgiven in part or in full (including accrued interest) if (i) 100% of the loan proceeds are used for forgivable purposes (with at least 75% of that attributable to payroll and up to 25% can be used for mortgage interest, rent and utilities), and (ii) employee and compensation levels are maintained for eight weeks after receiving the PPP Loan. In addition, these loans are not automatically forgiven. You will need to submit an application for loan forgiveness to your lender, and the application must include documentation including, but not limited to, cancelled checks, payment receipts, account transcripts or similar document verifying payments on mortgages, leases and utilities - so be sure to keep track of these documents.
Q. I’ve already let some employees go. Can I still get a PPP Loan?
A. Yes, but the amount of loan forgiveness may be reduced if they are not re-hired.
Q. Can I include independent contractors or freelancers as “employees” for PPP Loan purposes?
Q. Can I include hourly workers for PPP Loan purposes?
Q: My charitable organization is a religious group, can I apply for the PPP?
Q. If my organization is eligible for Medicaid and receive Medicaid payments can we apply for PPP?
Q. What if my non-profit has more than 500 employees?
A. You should look to the Mid-Size Business Loan Program, which may provide loans to nonprofits with 500 to 10,000 employees (e.g., hospitals and universities) at 2% interest and no payments due for the first six months.
2. Emergency Economic Injury Disaster Loan (EIDL) Q & A
Q. Is the EIDL a real “loan” in that it must be paid back with interest?
A. Yes, the EIDL is a loan and the interest rate for non-profits is 2.75%. However, the US$10,000 advance is treated as a grant and will be forgiven, even if you are denied the EIDL. However, the US$10,000 advance must be used to pay sick leave, payroll, increased costs due to supply chain disruptions, mortgage/rent and debt service. It should be noted that payments of principal and interest may be deferred for up to four years.
Q. Is a religious organization eligible for an EIDL?
A. Yes. The SBA has clarified that all faith-based organizations affected by COVID-19 are eligible under the EIDL program, regardless of their religious identity or activities.
Q. How do I apply for an EIDL?
A: The application is on the SBA website and can be found at this link: https://covid19relief.sba.gov/#/
Please note that the website states that it will take approximately 2 hours and ten minutes to complete the application.
3. Q & A on both PPP and EIDL
Q. Can I apply for EIDL and PPP?
A. Yes, however, you can’t get two loans for the same expenses. The PPP and EIDL both cover employee payroll, rent/mortgage payments, and repayment of certain debt. Therefore, if you can’t get PPP to cover payroll for the length of the PPP forgiveness period (eight weeks from the date of the loan application), you would have to use the EIDL for different operating expenses or payroll for a different period. There are some loan proceeds uses that are specific to the EIDL and would not be covered under the PPP. For example, a PPP loan may only repay interest on any debt incurred before February 15, 2020. The EIDL can be used for any repaying obligations that cannot be met due to revenue loss. The EIDL also can be used toward increased costs due to supply chain disruptions. Additionally, if you received an EIDL loan between January 31, 2020 and April 3, 2020 and the loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan.
Q. If I apply for both the EIDL and the PPP, will the US$10,000 advance be forgiven, as well as the full amount of the PPP loan?
A. No. The amount that you receive as a grant under the EIDL will reduce the amount forgiven under PPP.
1) Borrowers are subject to the SBA’s affiliation rules, which look to, among other things, common management as well as common ownership.
2) The SBA has produced an FAQ specifically for faith based organizations and the Paycheck Protection Program and EIDLs.
3) “Payroll cost” is defined as the sum of: any salary, wage, commission or similar compensation; tips; payments made for vacation, parental, family, medical or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; and payment of state or local taxes assessed on the compensation of employees. The following is excluded from the definition of payroll costs: (i) compensation of any employee whose principal place of residence is outside of the U.S.; (ii) federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; (iii) qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act; and (iv) payroll cost does not include the portion of any employee compensation that is in excess of US$100,000.
4) See the interim final rule for the Paycheck Protection Program.
5) Although the CARES Act states that Paycheck Protection Program loans may be used for other allowable purposes under section 7(a) of the Small Business Act, the Treasury Department guidance requires borrowers to use the proceeds of the loan for the uses listed above.
6) Obligations to pay mortgages, rent, and other covered non-payroll expenses must have been incurred before February 15.
7) See the SBA’s EIDL FAQs.
8) See SBA field office materials.
9) See the interim final rule for the Paycheck Protection Program.
10) CARES Act sec. 4003.