CARES ACT Expands SBA Loan Eligibility for Hotels and Restaurants
The heavily hit hotel and restaurant industries are better positioned than other industries to benefit from a $349 billion lending program created to provide relief for small businesses under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”). Under the CARES Act’s so-called Paycheck Protection Program (“PPP”), the United States Small Business Administration (“SBA”) will guarantee 100% of any loan up to $10 million (each, a “Covered Loan”) that eligible United States small businesses borrow from participating lenders between February 15, 2020 and June 30, 2020 (the “Covered Period”). The many favorable terms of PPP Covered Loans include (i) low interest rates (capped at 4%), (ii) no personal guarantee or collateral requirement, (iii) no fees, (iv) prepayment without penalty, (v) mandatory deferral of loan payments for at least six months, and (vi) eligibility for forgiveness up to the aggregate amount of payroll costs and certain mortgage, rent and utility payments incurred during the eight weeks following loan origination (subject to certain conditions). While a recent publication by our future colleagues at Pepper Hamilton LLP [1] provides a general overview of the PPP program, the summary below highlights PPP’s expanded eligibility for hotels and restaurants to receive Covered Loans.
Employee Count by Physical Location. All “small business concerns” under existing SBA regulations are eligible to obtain a Covered Loan. To be considered “small” under such regulations, a business concern must meet a size standard (expressed in either number of employees or annual revenue in millions of dollars, depending on the industry). [2] The PPP has expanded the eligibility for Covered Loans beyond “small business concerns” to include certain other small businesses and organizations. In general, a business is eligible under the PPP as long as it has 500 or fewer employees (full-time, part-time, or otherwise). [3] This means that a business that does not meet the existing SBA size standard (measured by revenue or number of employees) is eligible under the PPP as long as it (together with its affiliates) employs no more than 500 employees. Under this general rule, a business operating in multiple physical locations that employs more than 500 employees in the aggregate across all locations would not be eligible to receive a Covered Loan even if its employee count at each physical location is less than 500. However, businesses in industries for which the SBA has set a size standard in number of employees that is higher than 500 still will be eligible under the PPP as long as the business (together with its affiliates) employs no more than such higher number of employees set by the SBA. [4] For example, the SBA size standard for “small” book publishers is no more than 1,000 employees. Therefore, as long as a book publisher (together with its affiliates) has no more than 1,000 employees, it will be eligible for a Covered Loan. To be considered “small” under existing SBA regulations, hotels, restaurants, and other businesses in the accommodation and food services industries have to meet certain size standards measured in annual revenue. Under the PPP, even if a business in these industries fails to meet the SBA revenue test for being “small,” it still will be eligible for a Covered Loan as long as it employs no more than 500 people. Furthermore, to address the issue noted above, the PPP provides special relief to the businesses in these industries by providing that a business in these industries will be eligible to receive a Covered Loan as long as the business does not employ more than 500 employees at any of its physical locations at the time of disbursal, even if its total employee count exceeds 500 across all locations. [5] Note that the relevant time to determine the employee count is when the Covered Loan is disbursed.
Waiver of Affiliation Rules for Employee Count. As noted above, in calculating the number of employees of a business for purposes of determining its eligibility under the PPP, the SBA’s affiliation rules still generally apply. These rules [6] define affiliation broadly and require counting the employees of each affiliate of the business in such calculation. Such broad application of the affiliation rules would limit the ability of many businesses to access Covered Loans, particularly the portfolio companies of private equity funds, which are likely to be deemed affiliated with each other. The CARES Act’s PPP provides a special exemption for companies in the accommodation and food services industries by waiving the applicability of these SBA affiliation rules with respect to the eligibility requirements for a Covered Loan. [7] In addition, such waiver also is available to any franchises recognized by the SBA’s franchise directory and any businesses that receive financial assistance from a Small Business Investment Corporation, a privately owned and managed investment fund that is licensed and regulated by the SBA. [8]
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Next Steps. Hotels, restaurants, and other businesses in the accommodation and food services industries are facing challenging times, but hopefully the advantages available to them under the CARES Act’s PPP will provide much needed relief. Businesses in need of relief should consider applying for Covered Loans as soon as possible, as the Covered Period expires on June 30, 2020. Please contact us if you have any questions regarding your eligibility for PPP Covered Loans or need assistance with your applications.
[1] On January 9, 2020, Troutman Sanders and Pepper Hamilton announced the firms had agreed to merge effective July 1, 2020. Read the firms’ full statement here.
[2] See 13 C.F.R. § 121.201, available at https://www.law.cornell.edu/cfr/text/13/121.201.
[3] § 1102(a)(2)(D)(i)(I).
[4] § 1102(a)(2)(D)(i)(II).
[5] § 1102(a)(2)(D)(iii).
[6] See 13 C.F.R. § 121.103, available at https://www.law.cornell.edu/cfr/text/13/121.103.
[7] § 1102(a)(2)(D)(iv).
[8] § 1102(a)(2)(D)(iv).