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May 20, 2020

COVID-19 UPDATE: Federal PPP Loan Forgiveness, Stay-At-Home Order Challenges And Local Procurement Opportunities

We continue our efforts to keep you informed of key legal developments relating to COVID-19. Today, we are providing updates on federal economic assistance programs, as well as recent federal court rulings on the Governor’s stay-at-home order and local procurement opportunities. For our previous updates, please see HERE.


SBA Releases Loan Forgiveness Application

This week, the SBA released the Paycheck Protection Program (“PPP”) Application for Loan Forgiveness (“Application”) (see HERE). The Application clarifies some issues related to calculation of the forgiveness amount and required documentation. Borrowers seeking forgiveness are required to submit the Application and related documentation to the lender from whom they received (or who is servicing) their PPP loan.

The Application provides a calculation worksheet for borrowers to determine the eligible amount of loan forgiveness. Amounts used for payroll costs, business mortgage interest, rent and utilities are eligible for forgiveness as we explained in our prior update HERE. We highlight below answers provided in the Application to a few of the questions that we have been receiving from clients.

  1. Definitions. The Application clarifies the rules concerning costs incurred but not paid during the eight-week period beginning on the PPP loan disbursement date (the “Covered Period”).
    • Generally, payroll costs must be paid (e.g. paychecks are distributed) during the Covered Period. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date. The Application also allows for borrowers with a biweekly (or more frequent) payroll schedule to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following the loan disbursement date (the “Alternative Payroll Covered Period”).
    • An eligible nonpayroll cost (i.e. business mortgage interest, rent or utility payment) must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
    • The previous guidance was unclear as to whether PPP funds used for rents on leases of equipment and other personal property would be eligible for forgiveness. The application clarifies that rent includes “business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (business rent or lease payments).” Mortgage interest on real and personal property is also eligible for forgiveness.
  2. Calculation Method. The Application asks the borrower to separate eligible payroll and eligible non-payroll costs it has spent over the Covered Period. This is the base amount that may be forgivable. Then, there are reductions to the forgivable amount for borrowers that have reduced pay by over twenty-five (25%) for certain employees (“Wage Reduction”) and/or have not rehired employees to reach the same number of pre-pandemic average full-time equivalent employees (“FTE Reduction”).
    • Wage Reduction. The Application’s Schedule A Worksheet separates employees paid at an annualized rate of less than or equal to $100,000 in 2019 (or who were not employed by the borrower at any time in 2019) in Table 1 from those paid at an annualized rate above $100,000 in the same period in Table 2. The Wage Reduction calculation only applies to employees in Table 1.
    • FTE Reduction and FTE Safe Harbor. The Application provides step-by-step guidance on calculating the applicable average number of FTEs during the Covered Period in comparison to a pre-pandemic reference period, which may be, at the borrower’s choice, either: (i) February 15, 2019 to June 30, 2019; or (ii) January 1, 2020 to February 29, 2020. We strongly advise borrowers to carefully choose the reference period that results in the maximum amount of loan forgiveness. If the borrower does not satisfy the FTE test during the Covered Period, it may still avoid the FTE Reduction if it restores its FTE levels by June 30th.
    • Payroll Cost 75% Requirement. As a final step, the Application explains that the eligible payroll costs must account for at least seventy-five percent (75%) of the amount being requested for loan forgiveness. Any amounts of eligible non-payroll expenses that exceed twenty-five percent (25%) of the combined amounts will not be forgiven; so, we suggest that employers confirm that they are maximizing forgivable payroll expenses to correspondingly maximize non-payroll expenses eligible for forgiveness.
  3. Documentation. To document the payroll costs, the SBA is requiring each of the following:
    • Bank accounts or third-party payroll service reports documenting the cash compensation paid to employees.
    • Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period. For tax forms, the SBA is requesting payroll tax forms (usually 941) and state quarterly wage and unemployment filings.
    • Payment receipts, cancelled checks or account statements documenting the amount of employer contributions to employee health insurance and retirement plans.

The Application does not state what documents a sole proprietor or partnership that does not have payroll and does not file 941s will use. There are also documentation requirements for mortgage interest, rent and utility payments.

Finally, there are documents that the SBA requires a borrower to maintain but are not required to submit. As we explained in a prior note (see HERE), the SBA has indicated that it does not plan to audit a borrower’s certification as to the necessity of the PPP loan if it is receiving $2 million or less in PPP funds.

Please feel free to reach out to us if you have questions on how to properly calculate your loan forgiveness amounts, given the guidance provided in the Application, or for any other issue.

Main Street Loans

In a prior update, we described the expansion by the Federal Reserve (the “Fed”) of the Main Street Lending program (see HERE). The program is aimed at mid-sized companies that are too large to access PPP loans (though businesses that have received PPP loans are not precluded from applying) but do not have easy access to the capital markets. Each of the three (3) types of Main Street Loans are for four (4) years with payments deferred in the first year.

Yesterday, Boston Fed President Eric Rosengren, whose regional bank is administering the program for the central bank, announced that the program will kick off by the end of May. Fed Chairman Powell has said that adjustments could be made to the program, including the minimum loan amount of $500,000, depending on demand. The Fed regularly updates its FAQs on the program on its website (see HERE).


Stay-at-Home Order Challenges

Governor Pritzker’s stay-at-home order has been challenged multiple times in court through different legal arguments. Recently, a federal judge for the Northern District of Illinois, Judge Robert Gettleman, rejected a constitutional challenge to the stay-at-home order from two Illinois churches. The churches claimed that the stay-at-home order violates the First Amendment of the U.S. Constitution. However, Judge Gettleman upheld the constitutionality of the stay-at-home order, ruling that “even the foundational rights secured by the First Amendment are not without limits; they are subject to restriction if necessary, to further compelling government interests — and, certainly, the prevention of mass infections and deaths qualifies. After all, without life, there can be no liberty or pursuit of happiness.”

The churches have appealed the decision to the 7th Circuit and requested an emergency injunction eliminating the stay-at-home order pending the outcome of the appeal. In a brief opinion (see HERE), the 7th Circuit denied the request for an emergency injunction, ruling that the churches had “not shown a sufficient likelihood of success on the merits to warrant the extraordinary relief of an injunction pending appeal.” Although the emergency injunction was not granted, the appeal is still pending in the 7th Circuit.

City of Chicago Procurement

The City of Chicago's Department of Procurement Services has been transitioning from paper bids to eProcurement online bids. Almost all active paper bid solicitations have recently been converted to the City's eProcurement system. As a result, the solicitation documents can now only be viewed under the eProcurement Bid Opportunities page.

Registration with the eProcurement system is not necessary to view bids, however, vendors must be registered in the system if they wish to bid on a project. The City has placed training materials on its website that explain how to register as a vendor and bid on projects. These materials can be found HERE. The City is also hosting online workshops for which pre-registration is required, including a virtual eProcurement workshop on May 21, 2020 at 2:00 pm. This workshop is open to all vendors interested in doing business with the City. Vendors can register for the event by clicking HERE.

We will continue to send periodic updates on topics that may be helpful to your businesses. If you have a particular issue that you’d like us to address or if you’d like to be removed from the distribution list, please let us know.

Feel free to contact us with any questions.

Gery Chico, Jon Leach, and Alpita Shah

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