CARES Act: Paycheck Protection Program (PPP) for Restaurant and Hospitality Businesses

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), adopted and signed into law by President Trump on March 27, 2020, in response to COVID-19, is a $2 trillion economic stimulus package that includes a wide range of relief, from direct payments to individuals and loans to small businesses, to multi-billion dollar bailout loan programs for airlines and other critical businesses, and extensive assistance programs for America’s healthcare system that has been and will continue to be under substantial stress as a result of COVID-19.

In addition, the CARES Act will implement the $349 billion Paycheck Protection Program (PPP) administered by the U.S. Small Business Administration (SBA) to support small businesses whose workforces have been impacted by the uncertainty of the pandemic. Up to 100% of the principal amount of these Paycheck Protection Program loans (PPP Loans) are forgivable and will not be required to be repaid so long as the proceeds are used for certain qualified expenses. An overview of the new PPP, as well as expanded eligibility for loans under the SBA’s Economic Injury Disaster Loan Program (EIDLs) under the CARES Act, can be found here.

In a significant departure from historical SBA loan programs, the CARES Act will extend eligibility for loans under the PPP to a potentially significant portion of restaurant and hospitality businesses that rely on guests and travelers who have been kept at home as a result of this public health crisis. The SBA is required to provide additional guidance related the PPP within thirty days following adoption of the CARES Act, which may impact certain details and procedures related to the PPP, but this is what we know now based on the form of bill signed by the President.

Is My Business Eligible?

In addition to businesses meeting the standard definition of a “small business concern” under the SBA, loans made under the PPP will be available to the following:

• Any business concern that employs not greater than 500 employees, or, if greater, the applicable SBA size standard for number of employees (published here).
• Sole proprietors/independent contractors/self-employed persons.
• Any business concern operating within the restaurant, food and beverage service and hospitality industries under a North American Industry Classification System (NAICS) code beginning with 72, and having not more than 500 employees per physical location of the business.

The industries with NAICS codes beginning with 72 are as follows:

Notably, under the PPP, SBA affiliation rules will be waived for any of the following loan applicants:

• Any business concern operating within one of the above listed NAICS code subsectors having not more than 500 employees.
• Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA (a list of which can be found here).
• Any business concern that receives financial assistance from a Small Business Investment Company (SBIC).

The SBA affiliation rules generally aggregate a loan applicant together with all of its affiliates when determining the loan applicant’s size such that many businesses with a controlling private equity or venture capital investor cannot apply for loans under the SBA because they are affiliated with the investor’s other portfolio companies. Under the PPP, such other portfolio companies will be disregarded for borrowers within one of the three categories above.

As a result, subject to further SBA guidance, we anticipate that a hotel franchisee or restaurant operator will generally be eligible to apply under the PPP without regard to the number of locations owned (so long as each location has less than 500 employees) and, for business concerns with not more than 500 employees, without regard to any other businesses under common control with the franchisee or operator. We anticipate that multiple location businesses that are consolidated under a single tax identification number will be treated as a single borrower under the PPP, while separate, but affiliated business concerns may be treated separately; however, the SBA’s forthcoming guidance related to the PPP may provide clarity. Combined, the per-location headcount analysis and waiver of affiliation rules will make the PPP potentially available to a significant portion of businesses within the restaurant and hospitality industries.

Further, an otherwise eligible borrower that has, since January 31, 2020, already obtained an EIDL for purposes other than paying payroll costs and making certain other payments will continue to be eligible for an additional PPP loan. If a would-be borrower has already taken out an EIDL for payroll and certain other costs, it may be able to refinance its EIDL through the PPP.

How Much Can My Business Borrow?

Eligible businesses can apply for a PPP Loan in an amount up to the lesser of $10 million, or two and one-half (2.5) times the applicant’s average total monthly payroll costs during the one year preceding the date of the PPP Loan (with different measurement periods applicable to businesses that are seasonal employers or that were not in business during the period beginning on February 15, 2019, and ending on June 30, 2019). Under the PPP, “payroll costs” will include the following:

• Payments of any compensation with respect to employees that is a:
  • salary, wage, commission, or similar compensation;
  • payment of cash tip or equivalent;
  • payment for vacation, parental, family, medical, or sick leave;
  • allowance for dismissal or separation;
  • payment required for the provisions of group healthcare benefits, including insurance premiums;
  • payment of any retirement benefit; or
  • payment of State or local tax assessed on the compensation of employees.
• Payments of any compensation to or income of a sole proprietor or independent contractor in an amount that is not more than $100,000 in one year, as prorated for the relevant period.

“Payroll costs” will be reduced by and will not include: (i) compensation to an individual employee in excess of an annual salary of $100,000, as prorated for the relevant period; (ii) certain specified employment taxes; (iii) compensation to any employee whose principal place of residence is outside of the United States; or (iv) qualified sick leave wages and qualified family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (which credits are discussed here).

If an eligible business has previously taken out an EIDL, it may also refinance its outstanding EIDL through the PPP, subject to the $10 million total PPP Loan cap.

Are There Other Terms and Conditions?

PPP Loans will have an interest rate of not more than 4% and a maturity date for any balance not forgiven will not exceed 10 years from the date on which an application for loan forgiveness is made. PPP Loans will be non-recourse to the extent applied to a permitted use, will not require collateral or any personal guarantee, and initial payments can be deferred for a period of between 6 and 12 months from origination. As part of the application process, borrowers will be required to certify in good faith that:

• The PPP Loan request is necessary to support the ongoing operations of the business as a result of current economic conditions.
• The PPP Loan funds will be used to retain workers and maintain payroll, or make mortgage payments, lease payments and utility payments.
• The applicant does not have multiple PPP Loan applications, and has not otherwise received funds under a PPP Loan, for the same purpose or for duplicative amounts.

The CARES Act also includes a statement that instructs the SBA to issue guidance to PPP lenders and agents to ensure that the processing and disbursement of PPP Loans prioritizes traditional small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation for less than 2 years. Until formal guidance is issued by the SBA, it is unclear how this will impact restaurant and hospitality businesses that might not fall within these categories.

Will My PPP Loan Be Eligible for Forgiveness?

Any PPP Loan will be eligible for forgiveness under the CARES Act in an amount up to the sum of certain qualified costs incurred and payments made during the eight-week period beginning on the date the PPP Loan is issued to the borrower. These qualified costs and expenses are as follows:

• Payroll costs (as defined above), including any additional wages paid to tipped employees.
• Any payment of interest on any mortgage debt originally incurred prior to February 15, 2020.
• Any payment of rent obligations under a lease agreement in force prior to February 15, 2020.
• Any payment for utility services which were in place prior to February 15, 2020 (including electricity, gas, water, transportation, telephone, or internet access).

All qualified costs and expenses must be adequately documented and the maximum forgiveness amount cannot exceed the principal borrowed. In addition, the amount of the PPP Loan that might otherwise be forgivable will be reduced by factors that take into account any reduction in number of employees or any material reductions in salary and wages paid to employees otherwise earning less than $100,000 per year when compared to a prior unaffected period (these provisions are described in more detail here).

For example, if during the eight-week period following the PPP Loan, the borrower employs only half of the workforce it did in the prior unaffected period, the maximum loan forgiveness amount would be reduced by half. In addition, the forgiveness amount will be further reduced dollar-for-dollar to the extent a PPP Loan borrower pays an employee total salary or wages during the eight-week period that is less than 75% of the total salary or wages paid to that employee during the most recent full quarter during which the employee was employed prior to obtaining the PPP Loan. When calculating these reduction factors, any reductions in employee numbers or reductions in salary that occurred between February 15, 2020, and 30 days following enactment of the CARES Act, will generally be disregarded so long as the borrower has restored the full-time equivalent employee count and/or the employee to the prior salary or wage not later than June 30, 2020.

Each of these forgiveness conditions are designed to incentivize PPP Loan borrowers to promptly return their full workforce to full wage or salary following receipt of the PPP Loan. For affected hotel operators with no need for full staff, or full-service restaurants that have converted to carry-out and delivery only models, we think it is possible that the PPP Loan borrower could satisfy these forgiveness criteria through extended emergency paid vacation programs for staff not needed until the business returns to full operations. The business would benefit in this instance by keeping their employees ‘on-call’ and ready to re-mobilize once needed.

Forgiveness applications will be processed by the individual lenders, and the cancelled indebtedness amounts will not be taxable to the borrower.

What Can I Do Now?

Restaurant and hospitality businesses should promptly evaluate their eligibility to participate in the Paycheck Protection Program. Given the nature of the PPP and the limited restrictions on eligibility for restaurant and hospitality businesses, it will be an attractive relief program for a potentially significant portion of operators within these industries.

While lenders are awaiting the forthcoming SBA guidance, potential applicants should prepare to apply by taking the following steps:

• Identify one or more potential lending sources by communicating with banks that intend to participate in the Paycheck Protection Program. In this regard, prior banking relationships may prove beneficial, but shouldn’t be required (a list of the most active SBA lenders is available here).
• Gather and review prior year’s payroll cost records to determine the maximum PPP Loan eligibility.
• Prepare an eight-week budget for payroll costs, mortgage and rent payments, and utility expenses. When establishing this budget, potential borrowers should plan modifications to headcount and paid wages and salaries taking into account the potential reduction factors noted above, and should be aware of payment deferrals offered by lenders or landlords, or utility providers, in order to maximize the potential forgiveness amount of the PPP Loan.
• Compile documentation and records to support your application and determinations related to PPP Loan and forgiveness amounts.
• Prepare a summary statement demonstrating why the PPP Loan request is necessary to support the business operations as a result of current economic conditions.

Potential borrowers should also be aware that PPP participants will not be eligible for the Employee Retention Payroll Tax Credit, which provides that a company that has seen (i) operations fully or partially suspended by government order or (ii) gross receipts fall by more than 50% in a quarter measured against the same quarter from 2019, may be eligible for a refundable tax credit equal to 50% of the qualified wages of each of the company’s employees up to a total of $10,000 per employee. If the Employee Retention Payroll Tax Credit for a particular borrower would exceed the potential forgivable amount of a PPP Loan, they may want to select the tax credit relief instead.

We anticipate that loans under the PPP will be in high demand, so all potential borrowers should be adequately prepared to apply once the program goes live on April 3, 2020.

We will continue to monitor developments and share updates related to the CARES Act and the Paycheck Protection Program (PPP) for Restaurant and Hospitality Businesses. If you have further questions that were not addressed here, please contact one of the authors of this alert.