PH COVID-19 Client Alert Series: Update to Overview of the CARES Act and its Applicability to the Hospitality and Leisure Industry
On April 2, 2020, the Small Business Administration released its Interim Final Rule (herein, the “Interim Rules”) in connection with the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Matters of significance for the Hospitality and Leisure Industry under the Interim Rules include the following items:
As to matters of eligibility, the Interim Rules confirmed that many of the pre-existing eligibility requirements applicable to the Section 7(a) lending program will remain and will apply to Small Business Interruption Loans. Of note in this regard, applicants should review the regulations contained at 13 CFR 120.110 and the Small Business Administration’s SOP 50 10, Subpart B, Chapter Also, the Small Business Administration affiliation rules continue to apply to applicants unless otherwise waived in connection with the CARES Act (as is the case for businesses having a NAICS code 72, such as hotels).
As to the inclusion within payroll costs (for the purposes of calculating the maximum amount of a Small Business Interruption Loan) of amounts paid to independent contractors, the Interim Rules provide that such amounts should not be included.
As to permitted uses of Small Business Interruption Loan proceeds, the Interim Rules require that 75% of the loan proceeds must be applied to payroll costs. This requirement is a significant narrowing of the CARES Act, which appeared to allow use of proceeds for any use allowed generally with respect to a Section 7(a) loan, with the consequence of use for matters other than payroll, mortgage interest, rent, and utilities simply being that amounts so used would not be subject to forgiveness. Owners with properties that have closed due to governmental order or reduction in revenue during the COVID-19 crisis should be mindful that not more than 25% of the loan proceeds may be used to pay expenses other than payroll. For properties that will remain closed for an indefinite period, this development will raise questions as to the overall benefits of the loan. In addition, there are some concerns in the market as to when the proceeds of a Small Business Interruption Loan must be used. The text of the CARES Act does not appear to impose a requirement (aside from the period necessary to qualify for forgiveness) as to time for use, and the text to the Interim Rules, similarly, does not appear to impose any such requirement. Nevertheless, in light of the text of the Interim Rules pertaining to government intent, applicants should be watchful with respect to further guidance and plan to expend funds for payroll at the earliest practical date.
As to the potential for forgiveness of a Small Business Interruption Loan, the Interim Rules provide that not more than 25% of the amount to be forgiven may be used for costs other than payroll, with any amounts to be forgiven to be expended within the eight-week period following loan funding. For properties that are closed and are likely to remain closed for the coming weeks, the Interim Rules significantly reduce the prospects for loan forgiveness. It was hoped that the Interim Rules would provide some clarity to the rehiring exception relating to loan forgiveness (i.e., the elimination by June 30, 2020, of any reductions on workforce or salary). No such clarity was given, other than the recognition that meeting the requirements for forgiveness will be difficult, especially for properties that are now closed.
As to the compatibility of the payroll related provision of the CARES Act with typical hotel ownership structures, little overall clarity was given by the Interim Rules. The final version of the loan application for the Small Business Interruption Loans, however, appears to support the proposition that payroll paid through a third-party property manager for the effective employees of a hotel should be included in the calculations for maximum loan amount. A contrary result would seem to be at odds with any intent behind the CARES Act to provide assistance to the hotel industry.
Although the CARES Act, following the issuance of the Interim Rules, remains of benefit to the Hospitality and Leisure Industry, the extent of the potential benefits has certainly been curtailed. Those still considering application should be particularly mindful of the requirements regarding use of loan proceeds and the difficulties in obtaining forgiveness in situations where significant workforce reductions or closures have already occurred.