March 27, 2020

CARES Act Provides Substantial Economic Assistance in an ESOP-Friendly Manner

Title 1 of the CARES Act directs the U.S. Small Business Administration to make certain loans to qualifying small businesses to cover payroll, costs related to continuing group health care benefits, salaries or commissions, payment of interest on any mortgage obligation, rent, utilities, and debt obligations incurred before the covered period. Generally, the law applies to companies with 500 or fewer employees, with some exceptions, most notably for multi-location restaurants and hospitality companies and for larger companies that meet the SBA size standards anyway. ESOP companies can apply for this assistance, and some of the normal barriers that they might face have been removed.

Loans are capped at the lesser of $10 million or 2.5 times the average total monthly payroll costs, mortgage payments, rent payments, and payments on any other debt obligations incurred in the one-year period before the loan is made (or for seasonal employers, the average monthly payroll costs from February 15, 2019, or at a company’s election, March 1, 2019, to June 30, 2019), plus the amount of certain existing SBA loans.

The law allows SBA-qualified bank lenders to make determinations on borrower eligibility and credit worthiness without going through all of SBA’s regular channels. The law also provides for the Treasury Department to approve additional lenders to help keep workers paid and employed. These lenders will only be permitted to make “Paycheck Protection Program loans,” not regular SBA 7(a) loans.

Collateral and guarantee requirements for the loans are waived, as are lender and borrower fees. The interest rate on these loans is capped at 4%. Critically, borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the loan is made for payroll, interest on mortgages, rent, and utilities. The amount forgiven would be reduced in proportion to any reduction in employees and/or pay cuts over 25%.

In addition, companies can apply for disaster relief loans at 4% for up to 30 years for up to $2 million. These apply to companies otherwise unable to receive credit. If a company gets a loan under the 7(a) program described above, it cannot get this loan as well. ESOPs and worker cooperatives of 500 employees or less are specifically included under this provision. The first $10,000 of the loan does not have to be repaid. The existing requirement for personal guarantees on loans under $200,000 is waived.

Companies seeking more details on the programs can go to the SBA website, which will be updated as regulations and procedures are updated, or can go to their any SBA certified lender.

Alexander Mounts of Krieg DeVault contributed useful comments on this blog post.