By Alkesh Patel
Alkesh Patel is the Senior Vice President of Real Estate at Tarsadia Investments. He spent hours pouring through the legislation to devise a strategy to successfully obtain loans for his company through the CARES Act / Paycheck Payment Protection (PPP) loan program. He wants to help make things easier for you.
Attached is a compilation of materials regarding the PPP Loan Program signed into law on 3/27/20. I am not an expert, and this is not legal or tax advice. This is meant only to summarize my personal experience having managed several loan applications for businesses in three different industries with four different banks. Always speak to your attorney and tax advisor about your unique situation. As of Monday, May 10th, there is still $120B left in the program.
If you’re thinking about applying for a PPP Loan, I recommend that you DEFINITELY apply for the EIDL loan program (Economic Impact Disaster Loan) issued directly by the SBA. You can apply for up to $10,000, and the application is easy. It will randomly and without notice show up in your account at some point – I applied mid-March and the funds showed up in my account late April with no notification. This EIDL loan is fully forgivable and is essentially free government assistance during disastrous events. If you have an EIDL loan, you can still apply for a PPP loan – the EIDL loan will essentially be refinanced into the PPP loan. (More information can be found here: SBA Loans Under the CARES Act – Updated as of May 8, 2020.)
Included here regarding the PPP loan program is:
- High-Level Program Summary.
- Link to Congress website of the actual CARES ACT (section 1102 regarding the PPP Program).
- The best current summary article I’ve read explaining the program in detail with links to Treasury-issued FAQ’s that clarify and answer questions arising after the initial issuance on 3/27/20.
- An actual bank-issued PPP loan application.
- A PPP Loan Application and Loan Forgiveness Calculator to give you an idea of how much you could receive and get forgiven (work with your lender for exact qualifications and amounts).
HIGH-LEVEL PROGRAM SUMMARY
The CARES Act signed into law on 3/27/20 provides small businesses government dollars to help offset costs from the economic fallout of the COVID crisis. You can apply for a max amount of 2.5 times your average 2019 monthly payroll (including payroll, state taxes, and any benefits) – the included excel model will calculate the PPP loan amount for you given the inputs are accurate.
The dollars received are to be spent ONLY on payroll, utilities, interest on mortgage obligations, and/or rent on a leasing agreement. Additionally, you must spend AT LEAST 75% of the funds on payroll, and then you can spend 25% on the other categories (utilities, rent, mortgage costs). You CAN NOT spend the PPP dollars on anything outside of these categories, and you will incur 3X the normal penalties if you misappropriate funds.
This loan is part grant, part loan. The loan originates with a 24-month term at 1% interest, with the first 6 months of principal and interest deferred (to help with cash flow issues). For the forgiveness portion, you have 8 weeks to use the money from date of receipt, and then you can apply to the Lender for forgiveness of those amounts used. If approved, those dollars are forgiven from the loan amount and you don’t have to pay it back. The current IRS ruling is that you CANNOT deduct the expenses covered by the forgiven PPP dollars, which affects your taxable income for the year. After 8 weeks, the loan balance of any dollars not forgiven becomes a 1% interest loan for 22 months (original loan term of 24 months less the 8 weeks). You still can only spend the money on the uses outlined above, but now you have 22 months to pay it back.
QUALIFICATIONS
- You must be:
- A small business with less than 500 employees.
- A 501(c)3 with less than 500 employees.
- An individual who operates as a sole proprietor.
- An individual who operates as an independent contractor.
- An individual who is self-employed who regularly carries on any trade or business.
- A Tribal business concern that meets the SBA standard size.
- A 501(c)3 Veterans Organization that meets the SBA standard.
- The 500-employee threshold includes ALL employee types – Full-time, Part-time, and any other status.
CRITERIA FOR APPROVAL
- Borrower does not have an application pending for a loan that is duplicative to your PPP application (do you have another loan outside of the PPP program for the purpose of helping with the COVID situation from another credit source?).
- Lender approval is fairly straight-forward, and an easier process if you have an existing banking or credit relationship because they will be able to pre-qualify you from KYC standards (Know Your Customer –banks are required to do a “deep dive” into who you are).
- If you don’t have a relationship, its still feasible to get the loan done. (I got one funded where we had zero relationship with the bank, which was funded on May 11th.)
- It is recommended to use your local / regional bank – the big guys are useless because it’s all automated and you’ll never get a call back from a human (e.g. not Bank of America, Wells Fargo, etc.).
- This also gives you the opportunity to start an important relationship with a lender without any risk.
- Any bank that does SBA financing will be qualified, and they are HIGHLY motivated to issue these PPP loans because they carry NO risk and get paid a 1-5% fee from the SBA to issue them. One of our regional banks I worked with did 4,000 applications ($1B of loans) in one week.
CRITERIA FOR LOAN CALCULATION
- 2.5X average 2019 monthly payroll costs defined as:
- All salaries and wages capped at $100k (must manually cap employees who make more than $100k before performing calculations).
- All reported cash tips or equivalent.
- State payroll taxes only (federal taxes not eligible).
- All benefits costs (medical, dental, vision, etc).
- Vacation, parental, family, medical, or sick leave.
- Payment of any retirement benefits.
- For Sole Proprietors, Independent Contractors, and Self-Employed individuals:
- All compensation that is wage, commission, income, or net earnings capped at $100k/year.
CRITERIA FOR LOAN FORGIVENESS
- Forgiveness eligibility equals the amount Borrower spent during the 8-week period following the day funds were received on:
- Payroll costs (as calculated for the loan application).
- Utilities, Rent, Mortgage obligation payments.
- IMPORTANT: Your forgiveness application must demonstrate you spent at least 75% of the funds on payroll costs, so if you received $100k in loan amount don’t go spend $90k on rent and interest payments because you will get sued, have to pay 3X in normal damages and fees, and potentially face jail time (the Feds aren’t messing around with this one).
My plan is to only spend 25 cents on utilities, mortgage interest, and rent for every dollar I spend on payroll as I go through the next eight weeks so that I always maintain the 75/25 ratio as dollars are spent. This is the safest way to avoid misappropriating funds without knowing today exactly how much you’re going to spend on what over the next eight weeks.
This post from the law firm Foley & Lardner has more helpful information on this process – SBA Loans Under the CARES Act – Updated as of May 8, 2020.
Alkesh Patel is the Senior Vice President of Real Estate at Tarsadia Investments. He received his M.B.A. from the University of Southern California, and lives in Orange County, California with his family.
This article is intended for personal use only. All rights reserved.
