CARES Act

  • NAFA Administrator posted an article
    Overview of the GAO Report on FAA see more

    In March of 2020, at the request of Congressmen Stephen Lynch and Peter King with the Subcommittee on National Security and the Committee on Oversight and Reform, the GAO released its long-awaited report on the FAA Registry’s ability to handle fraud and abuse risks in aircraft registrations.  As the title of the report clearly implies, the GAO found that the FAA Needs to Better Prevent, Detect, and Respond to Fraud and Abuse Risks in Aircraft Registration.  

    More specifically, however, the report found that the FAA needs to better review and vet the actual owners of aircraft.  As we all know, the FAA currently takes filed documents at face value, and records them if they meet certain requirements as set by the FAA itself.  While the rest of the industry has been subject to more and more demands to Know Your Customer, and to adhere to KYC and OFAC guidelines, the FAA has remained immune.  This report suggests that it is time for the FAA itself to do more due diligence and better vet the entities registering aircraft on its registry.

    There is also a clear need to allow law enforcement agencies more access to the data contained in the FAA registry.  Currently, registration information is mostly provided in .pdf format which is not easily searchable or accessible.  Many law enforcement agencies expressed frustration with an inability to have easy access to this information, and the report outlines opportunities for the FAA to be a center point to house data that could help law enforcement agencies to not only have better access to information, but to potentially allow for better cross-agency coordination to crack down on illegal activity involving the registration and use of general aviation aircraft.  

    The report seems to focus on increasing transparency in “Opaque Ownership Structures” for registering aircraft, which the GAO believes are at the highest risk for fraud and abuse.  Opaque Ownership Structures are legitimate business structures that are widely used by corporations and individuals to facilitate commerce as well as for asset and tax management. However, they lack transparency related to aircraft registrations and can create challenges for safety and law-enforcement investigators seeking information about beneficial owners to support timely investigations. 

    These ownership structures can include the following:  

    • shell companies, especially in cases where there is foreign ownership that is spread across jurisdictions; 
    • complex ownership and control structures involving many layers of shares registered in the name of other legal entities;
    • formal nominee shareholders and directors where the identity of the beneficial owner is undisclosed;
    • trusts and other legal arrangements that enable a separation of legal ownership and beneficial ownership of assets; 
    • use of intermediaries in forming legal entities, including professional intermediaries.  

    It is worth noting that the report specifically excludes publicly traded companies, shifting the focus of these security measures away from commercial airlines and towards the general aviation industry.  

    On pages 58-59 of the report, the GAO outlined 15 recommendations for Executive Action by the FAA.  Many of the recommended improvements to the FAA system are expected to be implemented in the FAA’s modernization project, slated to be completed by October 2021.  Generally speaking, the modernization project is expected to help streamline and automate the aircraft registration process,  and make the FAA records available to the public at all times.  The GAO report includes recommendations for using this new system to improve the FAA’s vetting process of owners registering aircraft on the FAA’s system, and using that technology to allow law enforcement officials more access to registry data.  Initial conversations with the FAA indicate they are on track to complete this project by the stated October 2021 deadline.  

    While the GAO has many recommendations to the FAA, there are still many questions to be answered.  These are the Top Issues we have identified:

    • The biggest unanswered question causing the most consternation in the industry, is the one involving transparency of ownership information.  How much transparency will there really be?  Will all aircraft ownership information be made available to the public, or only some?  Will there be sections of registry data that remain “private” and only made available to authorized government agencies?  That remains to be seen.  
    • Possibly the second largest question includes cost.  The report is clear that the $5 filing fee set in 1964 is not enough to cover even today’s operating expenses, much less the costs to modernize the system.  FAA has been talking about increasing registration costs for years, so an increase can likely be expected, but the question of how much remains to be answered.   How much will it cost to register an aircraft in the future?  
    • Time is money, so questions about increases in registration time also remain.  If FAA will be doing more vetting of its registrants, how much time will that take?   How much longer will it take to register an aircraft with the FAA?  What will this do to aircraft closing timelines?
    • Lastly, there is the issue of international operations.  The report expresses clear concern for FAA’s ability to issue Declarations of International Operations without knowledge or consent of specific law enforcement agencies.  FAA currently expedites requests for international flights on a daily basis for the general aviation community, but will they be able to do that in the future?  Or will there be a more stringent system of checks and balances required to issue Declarations of International Operations?  And how long will it take to finally have one issued?

    The FAA has yet to officially respond to the GAO’s report, but they have updated their website on the CARES Initiative to enhance and modernize the FAA registration services.  To learn more about it, you can go to their website here:  https://www.faa.gov/about/initiatives/cares/

    Furthermore, on March 30, 2020, they issued their Third Request For Information, requesting information from the industry.  To participate, click here:  https://beta.sam.gov/opp/8b7d6e20940d4d5b8b4e8e9e76a991b3/view  

    As NAFA members, it is important that we participate in any proposed changes to the FAA registration process as much as possible.  To the extent that you have time to fill out the FAA’s RFI, we encourage our members to do so. 

    NAFA will continue to monitor the proposed changes and the FAA’s eventual response and will report those to the membership.  

    The full report can be found here:  https://www.gao.gov/assets/710/705505.pdf

     

  • Tracey Cheek posted an article
    U.S. Transportation Secretary Elaine L. Chao Announces $10 Billion in Relief for America’s Airports see more

    WASHINGTON – U.S. Transportation Secretary Elaine L. Chao today announced the award of approximately $10 billion to commercial and general aviation airports from the Trump Administration's newly created Coronavirus Aid, Relief, and Economic Security (CARES) Act Airport Grant Program. The effort will provide unprecedented and immediate relief to American families, workers, and businesses.  

    “This $10 billion in emergency resources will help fund the continued operations of our nation’s airports during this crisis and save workers’ jobs,” said U.S. Transportation Secretary Elaine L. Chao. 

    In less than two weeks since the bill was signed into law, the U.S. Department of Transportation’s Federal Aviation Administration (FAA) is ready to deliver CARES Act grants to eligible airports throughout the nation. The grants will provide economic relief to airports around the country affected by the COVID-19 public health emergency.

    “Thank you to the dedicated men and women from the FAA’s Office of Airports for creating an entirely new program in record time to assist airport sponsors in desperate need of these funds,” said FAA Administrator Steve Dickson.  

    This funding will support continuing operations and replace lost revenue resulting from the sharp decline in passenger traffic and other airport business due to the COVID-19 public health emergency. The funds are available for airport capital expenditures, airport operating expenses including payroll and utilities, and airport debt payments.

    The FAA encourages airport sponsors to spend the grants funds immediately to help minimize any adverse impact from the current public health emergency. Airport sponsors should work with their local FAA Office of Airports field office on the application and grant-agreement process. 

    The CARES Act also provides funds to increase the Federal share to 100 percent for grants awarded under the fiscal year 2020 appropriations for Airport Improvement Program (AIP) and Supplemental Discretionary grants. Under normal circumstances, AIP grant recipients contribute a matching percentage of the project costs. Providing this additional funding and eliminating the local share will allow critical safety and capacity projects to continue as planned regardless of airport sponsors’ current financial circumstances.

    The FAA will use a streamlined application and grant-agreement process to make this funding immediately available for critical airport needs. The funds will be available as soon as the airport sponsor executes a grant agreement. 

    The CARES Act provides new funds distributed by various formulas for all airports that are part of the national airport system. This includes all commercial service airports, all reliever airports and some public-owned general aviation airports. 

    There is additional program information on the CARES Act website.

    This release was originally published by the U.S. Department of Transportation on April 14, 2020.

  • Tracey Cheek posted an article
    Federal Excise Taxes Suspended for Many Business Aviation Operators see more

    NAFA member, NBAA, discusses federal excise tax suspensions for business aviation operators.

    This information is intended to provide members with an introduction to certain provisions of the CARES Act. Readers are cautioned that this information is not intended to provide more than an introduction to the subject matter, and since the materials are necessarily general in nature, they are no substitute for seeking the advice of legal and tax advisors to address your specific business/personal needs.

    The recent suspension of air transportation federal excise taxes (FET) that apply to commercial operations – including Part 135 operators – is an example of NBAA’s round-the-clock efforts to help mitigate the impact of the COVID-19 pandemic on the general aviation industry. As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides more than $2 trillion of relief to the economy, NBAA played a key role in securing the following excise tax relief provisions included in the legislation:

    • The federal air transportation excise taxes that apply to commercial operations (i.e., Part 135 flights) are suspended effective March 27, 2020, through Jan. 1, 2021.
    • The suspension of taxes is not retroactive and only applies to flights conducted after March 27, 2020.
    • The suspension includes all taxes that a commercial operator normally pays, including the 7.5% tax on amounts paid, applicable domestic and international segment fees and the 4.3 cents per gallon portion of the fuel tax (the 0.1 cents per gallon tax to fund the leaking underground storage tank fund is not included in the suspension).
    • Any business that was collecting or remitting these taxes before is covered by the suspension. For example, if an air charter broker collects and remits these taxes on behalf of an operator, the suspension would apply to them.
    • In addition to Part 135 operations, there are some Part 91 flights that the IRS deems commercial, such as timeshare flights. The suspension would apply to these flights as well.

    In addition, the 6.25% tax on air transportation of property is suspended through Jan. 1, 2021.

    “We urge our members to consult NBAA’s Federal Excise Taxes Guide for more details on how air transportation excise taxes are administered and to check our website frequently for new details as they become available,” said Scott O’Brien, NBAA senior director, government affairs. “While we understand the significant impact that the pandemic has had on operations, we are working relentlessly to make sure that relief for business aviation operators is included in the CARES Act and other economic stimulus efforts.”

    O’Brien noted that NBAA was in the forefront of efforts to secure excise tax relief for general aviation commercial operators, which included a letter to congressional leadership, follow-up with individual U.S. House and Senate offices, and a call to action to affected NBAA members.

    For more information, review NBAA’s coronavirus (COVID-19) resources and federal excise taxes resources.

    This article was originally published by NBAA on March 31, 2020.

  • Tracey Cheek posted an article
    CARES Act Includes Tax Provisions Affecting Business Aircraft Operators see more

    NAFA member, John B. Hoover, Partner at Holland & Knight, LLP, discusses the CARES Act tax provisions that affect business aircraft operators.

    This information is intended to provide members with an introduction to tax provisions in the CARES Act. Readers are cautioned that this information is not intended to provide more than an introduction to the subject matter, and since the materials are necessarily general in nature, they are no substitute for seeking the advice of legal and tax advisors to address your specific business/personal needs. Download a copy of this article in PDF format.

    The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) was signed into law on March 27, 2020. It includes numerous relief provisions that may benefit companies operating business aircraft. In addition, the CARES Act provides a tax holiday for the remainder of 2020 from the federal excise tax on air transportation and amends several income tax code sections that may affect owners and operators of business aircraft.

    Given the complexity of these tax law amendments, this resource offers only a general description of the amendments. For details regarding the calculations and their application to fiscal years, please refer to the statute.

    Federal Excise Tax (CARES Act § 4007; I.R.C. § 4261)

    The CARES Act provides that the federal excise tax (FET) on air transportation under Internal Revenue Code (I.R.C.) §§ 4261 and 4271 does not apply to amounts paid during the excise tax holiday period from the day after enactment of the CARES Act (i.e., from March 28, 2020) through the end of calendar year 2020. This means that FET does not need to be collected on amounts paid for charter flights, time share flights, or any other flights, irrespective of whether the flights are conducted under FAA Regulations Part 91, 135 or otherwise.

    During this excise tax holiday period, no fuel tax will be required to be collected on jet fuel used for commercial aviation. If fuel tax is collected on kerosene used for commercial aviation, then the purchaser can request a refund of such fuel tax. The foregoing exemption does not apply to the 0.1 cent per gallon Leaking Underground Storage Tank (LUST) tax. This means that only the 0.1 cent LUST tax is ultimately due on fuel purchased for commercial aviation.

    The definition of commercial aviation for tax purposes is generally based on whether air transportation is provided for compensation or hire, and it is not tied to the FAA Regulatory definition. I.R.C. § 4083(b). Accordingly, only the 0.1 cent LUST should ultimately apply to typical charter flights and flights conducted pursuant to a time sharing agreement. However, the full fuel tax amount (21.9 cents or 24.4 cents per gallon) would apply to fuel purchased for use in noncommercial operations such as when a company purchases fuel for use in operating its aircraft for flights conducted for its own business.

    Fuel purchased for fractional program aircraft is subject to the fuel tax on fuel used for noncommercial aviation (21.9 cents or 24.4 cents per gallon) plus a surtax of 14.1 cents per gallon. Since the excise tax holiday does not apply to fuel for noncommercial aviation or the surtax, the fuel taxes paid by fractional program operators would not appear to be affected by the excise tax holiday.

    Limitation on Deduction of Business Interest (CARES Act § 2306; I.R.C. § 163(j))

    Under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) beginning in 2018, taxpayers’ deductions of business interest expense were limited to 30% of adjusted taxable income (generally net business income). The excess business interest was not deductible and was treated as business interest expense subject to the limitation in the next year.

    Although the deduction limitation applied beginning in 2018, adjusted taxable income is calculated without deducting depreciation in 2018 through 2021. In the case of partnerships and S corporations, the interest deduction limitation was determined at the entity level. The deduction limitation generally did not apply to taxpayers with gross income below $25 million (determined by aggregating income of related entities).

    This limitation is particularly important in the case of business aircraft that are financed. After the three-year grace period during which depreciation is not deducted in calculating adjusted taxable income, this limitation will become even more relevant to business aircraft.

    The CARES Act increases the interest deduction limit from 30% of adjusted taxable income to 50% of adjusted taxable income in 2019 and 2020. This temporary increase in the limitation provides some relief to owners of business aircraft. (Taxpayers can elect out of this increased deduction limit.)

    There is an exception to this temporary relief in the case of partnerships (although not for S corporations). While the 50% limit applies to partnerships in 2020, it does not apply to partnerships in 2019. Instead, a special limitation applies to partnerships in 2019. Under the special rule, the 30% limit applies, and if the partnership has any excess business interest expense, 50% of the excess is allowed as deductible business interest in 2020 (unless the partner elects out of this special rule). The other 50% of excess business interest is carried over like other excess business interest.

    Taxpayers can also elect to use their 2019 adjusted taxable income to calculate their business interest deduction limitation for 2020. This special rule provides some relief for taxpayers whose taxable income decreases in 2020.

    Net Operating Losses (CARES Act § 2303; I.R.C. § 172)

    Owners of business aircraft may incur Net Operating Losses (NOLs), particularly due to large depreciation deductions. Under the TCJA, effective generally with respect to NOLs arising in 2018 or subsequent years, NOLs could only be carried forward (not back) and could be deducted against only 80% of taxable income in future years. Under the CARES Act, these limitations are temporarily relaxed.

    Under the CARES Act, NOL carryforwards can offset 100% of taxable income in 2020 or earlier years. In 2021 and later years, taxpayers can deduct: (1) NOL carryforwards arising in 2017 and earlier years against 100% of their taxable income (because the TCJA 80% limit did not apply to NOLs arising in 2017 and earlier years), and (2) NOL carryforwards arising in 2018 and later years against up to 80% of their taxable income. Also under the CARES Act, NOLs arising in 2018, 2019, and 2020 can be carried back 5 years. Allowing NOL carrybacks can be particularly valuable to corporations in view of the higher corporate income tax rates prior to 2018.

    Excess Business Losses (CARES Act § 2304; I.R.C. § 461(l))

    Beginning in 2018 under the TCJA, individuals’ deductions of net business losses were limited to $250,000 for single taxpayers and $500,000 for married taxpayers. Their excess business losses were carried forward as NOLs. In the case of partnerships and S corporations, this loss limitation was imposed at the partner or shareholder level. The business losses subject to this rule included active trade or business losses and any otherwise allowed passive losses.

    This provision can be especially important to business aircraft owners who incur large depreciation deductions that result in business losses. However, since excess business losses were carried forward as NOLs, and as NOLs they were not subject to the excess business loss limit in future years, the limitation on excess business losses often resulted in only a one-year delay in the deduction.

    Nevertheless, the excess business loss limitation was problematic for taxpayers who reported large capital gains from the sale of a business in the same year that they incurred large business losses from depreciation deductions on aircraft. In that situation, the excess business loss from aircraft depreciation would result in NOL carryforwards to future years, which may not be deductible if the taxpayer had no significant business income in future years.

    Under the CARES Act, the excess business loss limitation is retroactively amended so that it does not apply in 2018, 2019, and 2020. Instead, it first applies in 2021.

    The CARES Act also made changes to the excess business loss calculation, which will become relevant when the limitation applies in 2021. The calculation of net business losses that could be taken into account under the TCJA appeared to include salaries and wages income, but the CARES Act clarifies that such income is excluded from the calculation. In addition, the CARES Act clarifies that gains from sales of capital assets are only included if such gains are attributable to a trade or business, and losses from sales of capital assets are excluded entirely.

    Acknowledgements: NBAA thanks Tax Committee member John B. Hoover for contributing this article for the benefit of members. Hoover is a partner with NBAA member Holland & Knight, LLP, specializing in business aviation tax matters. He can be reached at 703-720-8606 or by email.

    This article was originally published by NBAA on April 2, 2020.

  • Tracey Cheek posted an article
    Can Your Association Obtain Assistance Under the CARES Act? see more

    NAFA member, Katharine Meyer, with GKG Law, discusses if your association can obtain assistance under the CARES Act.

    On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The legislation included various provisions that assist tax-exempt organizations by providing programs and tax benefits to reduce some of the financial stress created by the COVID-19 pandemic. Unfortunately, one of the most popular parts of the Act, the Paycheck Protection Program (PPP), which makes low-interest loans available to cover payroll costs and then forgives or partially forgives those loans so long as the borrower meets certain requirements, is not available to 501(c)(6) organizations.

    However, the CARES Act still provides assistance to associations. This relief is primarily limited to two categories: emergency lending in the form of Economic Injury Disaster Loans (EIDLs) and refundable payroll tax credits.

    The Economic Injury Disaster Loan and Grant Program

    The Economic Injury Disaster Loan Program (the Program) is a pre-existing Small Business Administration (SBA) loan program that is intended to alleviate economic injury to small businesses or private non-profits experiencing injury. In the past, these loans were commonly used after natural disasters, like Hurricane Sandy. 

    The CARES Act formally declared the COVID-19 pandemic to be a “disaster” under the Small Business Act. This declaration gave small businesses, including private non-profit organizations, the ability to access the Program. Additionally, the CARES Act provided the Program with $10 billion in additional funds to assist small business owners impacted by the outbreak.  

    Under Section 1110 of the CARES Act, private non-profit organizations that were in operation prior to January 31, 2020 are eligible for EIDLs up to $2,000,000, provided the loan proceeds are used for regular expenses, such as payroll and operating expenses, that could have been met but for the COVID-19 pandemic. In order to increase availability of EIDLs, the CARES Act waived certain EIDL Program eligibility requirements. Specifically, a borrower does not have to: (1) provide a personal guarantee for loans up to $200,000; (2) have been in business for at least one year prior to the onset of the disaster; or (3) be unable to obtain credit elsewhere. EIDLs are made directly by the SBA without involving a third-party lender. While these loans are ineligible for forgiveness, loan repayment can be deferred. EIDLs are offered to qualified non-profits at an interest rate of 2.75%.

    One of the most attractive parts of the EIDL Program is the ability to obtain an immediate advance of cash. Private non-profit organizations in need of immediate funds may request a $10,000 emergency cash advance. Such funds shall be provided to them within three days of applying for an EIDL. If the application for the EIDL is denied, the $10,000 cash advance would not need to be repaid. This advance may be used for expenses such as paid sick leave for employees with COVID-19, maintaining payroll during business disruption or government shutdowns, rent or mortgage payments, or increased operational costs.

    For more information, the COVID-19 Economic Injury Disaster Loan Application can be accessed here.

    Employee Retention Credit

    In an effort to encourage employers, including non-profit organizations, to keep employees on their payroll in the wake of the COVID-19 pandemic, the CARES Act included an Employee Retention Credit (ERC). The ERC is a fully refundable tax credit equal to 50% of qualified wages (including allocable qualified plan expenses) that employers pay their employees between March 13, 2020 and December 31, 2020. All tax-exempt organizations are eligible if they were operational during calendar year 2020 and either:

    1. the organization’s operations were fully or partially suspended due to a government order limiting commerce, travel or group meetings due to COVID-19 (such as a ‘stay at home’ order) or
    2. the organization had a reduction in revenue of at least 50% in the first quarter of 2020 compared to the first quarter of 2019. In determining an association’s decline in revenue, the organization must consider its entire operations.

    If these criteria are met, an organization is entitled to a refundable payroll tax credit equal to 50% of qualified wages. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.

    We recommend that you review these options and determine if one or both could be beneficial to your organization.

    For more information on how the CARES Act impacts your organization. Please contact Rich Bar (rbar@gkglaw.com) or Katie Meyer (kmeyer@gkglaw.com).

    This article was originally published by GKG Law on April 6, 2020.

  • Tracey Cheek posted an article
    CARES Act: The Treasury Department's $500B Coronavirus Economic Stabilization Act Program see more

    NAFA members, Christopher J. Armstrong, Kara M. Ward, and Joel E. Roberson, with Holland & Knight, share information on the CARES Act.

    President Donald Trump on March 27, 2020, signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), providing $2.2 trillion of emergency appropriations. The CARES Act provides a wide range of economic relief for businesses of all sizes, tax relief for individuals and businesses, enhanced unemployment insurance for individuals and other policies that are summarized here.

    This Holland & Knight alert outlines the CARES Act's "Coronavirus Economic Stabilization Act" (CESA) found in Title IV. Title IV authorizes $500 billion to the U.S. Department of the Treasury's Economic Stabilization Fund in an effort to provide businesses, states and municipalities access to sources of liquidity in order to maintain solvency during the coronavirus (COVID-19). Title IV also provides significant housing related relief and restrictions, as well as relief to financial institutions, which will be summarized in a future update.

    Program

    In Section 4003, CESA authorizes the Treasury Secretary to use $500 billion to backstop one or more Federal Reserve programs and lending facilities as well as provide direct loans and facilitate private lending through the strategic use of guarantees to aviation, national defense industries and businesses generally. CESA provides for the following division of these funds:

    • $454 billion in loans for qualifying businesses, states and municipalities
    • $25 billion in loans and loan guarantees for passenger air carriers and eligible businesses that are approved to perform inspection, repair, replace or overhaul services that are related to passenger air service, and ticket agents
    • $4 billion in loans and loan guarantees for cargo air carriers
    • $17 billion in loans and loan guarantees for businesses critical to maintaining national security

    The $454 billion listed above is for programs or facilities established by the Board of Governors of the Federal Reserve System (the Federal Reserve) to inject liquidity into the financial system to support lending to eligible businesses, states or municipalities. The Treasury Secretary is given broad authority to determine the terms of the transactions subject to several guideposts in the statute regarding limitations and eligibility. 

    Limitations on Executive Compensation

    For recipients of funds under both Sections 4003 and 4112, discussed below, there are special rules on employee compensation that apply. These requirements are set forth in Sections 4004 and 4116, and cross-referenced to apply to the $454 billion for other eligible businesses in Section 4003(c)(3)(A)(III).

    • No officer or employee earning more than $425,000 in 2019, can receive 1) pay increases or 2) severance upon termination of employment exceeding twice the maximum compensation received in 2019 (for funds under Section 4003, this requirement is from the date the agreement is executed until one year after the loan or loan guarantee is no longer outstanding; for funds under Section 4412, this requirement is from March 24, 2020, to March 24, 2022); and
    • No officer or employee whose 2019 total compensation exceeded $3 million may receive total compensation in excess of $3 million and 50 percent of the excess over $3 million that they received in 2019, including salary, bonuses, awards of stock and other financial benefits.

    Special Terms for Businesses, States and Municipalities 

    As noted above, CESA includes $454 billion in funds to establish a program to inject liquidity into the financial system that supports lending to eligible businesses, states and municipalities. Should one of the implementing programs include direct lending to businesses, the recipient businesses must agree to the following terms that will be in effect for the term of the loan plus 12 months: 

    • neither the business nor any affiliate may engage in stock buy-backs unless it is under a preexisting contractual obligation to do so, and
    • the business may not pay dividends or make other capital distributions with respect to common stock

    CESA also provides that the Treasury Secretary "shall endeavor" to implement a program within the $454 billion that provides financing to banks and other lenders that make direct loans to eligible businesses, including nonprofits with between 500 and 10,000 employees, with an annualized rate not higher than 2 percent. For the first six months of financing under this program, no principal or interest shall be due. While it is not yet clear how this program will contrast with the wider loans, loan guarantees and financing generally available to businesses, CESA details the following required good-faith certifications:

    • the loan is necessary for ongoing operations of the recipient
    • any funds received will be used to retain at least 90 percent of the recipient's workforce until Sept. 30, 2020
    • the recipient must intend to restore not less than 90 percent of its workforce that existed on Feb. 1, 2020, no later than four months after the current crisis
    • the recipient is domiciled in the U.S., with significant operations and employees in the U.S.
    • the recipient is not in bankruptcy
    • the recipient will not pay dividends with respect to common stock, or buy-back shares during the term of the loan
    • the recipient will not outsource or offshore jobs for the term of the loan and two years after completing repayment
    • the recipient will not abrogate existing collective bargaining agreements during the term of the loan and two years after completing repayment, and
    • the recipient will remain neutral in any union organizing effort for the term of the loan

    It is important to note that, given the discretionary language of the provision, it remains unclear the degree to which the administration will choose to implement these terms.

    Aviation and National Security Industry Programs

    With regard to support for the aviation industry, the CARES Act includes more direction to the Treasury Department in establishing a program as compared to other sections of the bill. Included in the aviation specific sections of the CESA are grants to cover employee salaries as well as loans and loan guarantees.

    Special Loan Terms for Air Carriers, Cargo Air Carriers and National Security Business 

    These categories of borrowers have a special set of requirements under the new law, which requires the Treasury Secretary to make the following determinations regarding loans and loan guarantees:

    • credit is not otherwise reasonably available to the recipient at the time of the transaction
    • the obligation is prudently incurred
    • the loan or loan guarantee is sufficiently secured, or is made at a rate that reflects risk and, to the extent practicable, is not less than the interest rate based on market conditions of comparable obligations prior to the COVID-19 outbreak
    • the loan or loan guarantee is for as short as practicable, and not longer than five years
    • for the length of the loan or loan guarantee plus 12 months, neither the business nor any affiliate may engage in stock buy-backs
    • for the length of the loan or loan guarantee plus 12 months, the business may not pay dividends or make other capital distributions with respect to common stock
    • until Sept. 30, 2020, the business must maintain its employment levels as of March 24, 2020, to the extent practicable, and in no case can reduce its employment levels by more than 10 percent from that date
    • a business must certify that it is created or organized in the U.S. and has both significant operations and a majority of its employees based in the U.S., and
    • for the purpose of these loans or loan guarantees, the business must have incurred or is expected to incur covered losses such that continued operations are in jeopardy, as determined by the Treasury Secretary

    Furthermore, all air carriers, cargo air carriers and national security businesses that benefit from the financial assistance under CESA must also do the following, as directed by the Treasury Secretary:

    • provide the Treasury Department with a warrant or equity interest if the recipient issues securities on a national exchange, or
    • provide the Treasury Department with a warrant, other equity interest or senior debt instrument

    Employee Retention Grants

    In Section 4112, CESA also provides direct relief for aviation workers in the form of grants, which are available solely for the continuation of payments of employee wages, salaries and benefits, including:

    • $25 billion for passenger air carriers, in an amount equal to the salaries and benefits reported by the carrier to the U.S. Department of Transportation from April 1 through Sept. 30, 2019;
    • $4 billion for cargo air carriers, in an amount that the carrier certifies, using sworn financial statements or other data, as the amount of wages salaries, benefits and other compensation paid from April 1 through Sept. 30, 2019, and
    • $3 billion for related contractors, in an amount that the carrier certifies, using sworn financial statements or other data, as the amount of wages salaries, benefits and other compensation paid from April 1 through Sept. 30, 2019

    For carriers and contractors accepting funds under the payment of wages, salaries and benefits to aviation workers outlined above, the recipient must comply with the following additional requirements:

    • refrain from conducting involuntary furloughs or reducing pay rates and benefits until Sept. 30, 2020
    • cannot engage in stock buy-backs or pay dividends or make other capital distributions through Sept. 30, 2020, and
    • cannot be required by the federal government to enter into negotiations with labor representatives regarding pay or other terms and conditions of employment

    The Treasury Secretary is required to publish streamlined and expedited procedures not later than April 1, 2020, and initial payments are to be made by April 6, 2020. The section also requires related audits and clawback of any financial assistance should the recipient fail to honor assurances, and also authorizes the Secretary of Transportation to require that the carrier maintain scheduled air transportation service as deemed necessary through March 1, 2022, with consideration of the needs of remote communities and the healthcare supply chain.

    Main Street Lending Program

    Finally, CESA permits, but does not require, the Board of Governors of the Federal Reserve to establish a "Main Street Lending Program," or other similar program or facility under its own unilateral authorities (without the federal backstop provided by the Treasury Department's Economic Stabilization Fund), to support lending to small and mid-sized businesses.

    DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.


    Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

    This article was originally published by Holland & Knight on March 30, 2020.

  • Tracey Cheek posted an article
    COVID-19 Upends the Air Transport Market see more

    NAFA members, Anita M. Mosner and Ben Slocum with Holland & Knight, share an overview of Aviation Provisions in the CARES Act and other federal responses.

    Highlights

    • The 2020 Coronavirus Air, Relief, and Economic Security (CARES) Act includes mechanisms to provide economic relief to air carriers, airports and airline contractors during the COVID-19 crisis.
    • The U.S. Department of the Treasury has issued guidelines concerning the allocation of relief to affected industries, and the U.S. Department of Transportation has started to issue guidance concerning carriers' air service obligations.
    • The sector has been granted other relief, such as waivers of the Federal Aviation Administration of airport slot usage rules, and temporary relief from the requirement to collect and remit excise taxes. These items are applicable to both U.S. and foreign carriers.

    The COVID-19 pandemic has had a vast and severe impact on the U.S. economy, and the U.S. air transportation industry has been brought almost to a standstill. While the executive branch moved quickly to address immediate operational challenges, such as waiving slot usage requirements at congested airports,1 the industry looked to Congress to provide financial relief.

    On Friday, March 27, 2020, Congress passed and the president signed the 2020 Coronavirus Air, Relief, and Economic Security (CARES) Act. This law authorizes more than $2 trillion in government spending to address a broad range of economic, health and social challenges. Notably, the measure includes mechanisms to provide economic relief to air carriers, airports and airline contractors during the COVID-19 crisis.2 This summary examines the relief measures provided by the CARES Act to each of these industry sectors.

    The U.S. Departments of the Treasury and Transportation (DOT) will be overseeing the allocation of relief under this statute. The Treasury Department has issued guidelines concerning the allocation of relief to affected industries,3 and the DOT has started to issue guidance concerning carriers' air service obligations, described below.

    Air Carriers

    The CARES Act provides three types of direct economic benefits to air carriers:

    • Loans and loan guarantees
    • Grants to pay employee wages, salaries and benefits 
    • Tax holidays

    Each of these are addressed below.

    Loans and Loan Guarantees

    The CARES Act makes available $25 billion for Government loans and loan guarantees to U.S. passenger air carriers;4 as well as an additional $4 billion in Loans for U.S. cargo air carriers.5

    For a carrier to be eligible for a loan, the Treasury must determine that: i) credit is not reasonably available to the carrier at the time of the transaction; ii) the applicant's intended obligation is prudently incurred; iii) the loan is sufficiently secured or made at a rate that accurately reflects the risk of the loan; and iv) the losses the carrier has incurred, or is expected to incur, place the continued operation of the business in jeopardy.6 The application procedures to obtain a loan will be published by the Treasury no later than April 6, 2020.

    Section 4003 of the CARES Act imposes several restrictions on carriers receiving loans from the government, which must be included in the loan agreement between the carrier and the government (i.e., the loans come with "strings" attached). 

    • The loan must be as short as practicable, and in no event longer than five years.
    • The carrier may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, until 12 months after the loan is repaid.
    • Until Sept. 30, 2020, the carrier must, to the extent practicable, maintain the same employment levels as it had on March 24, 2020, and under no circumstances reduce its employment levels by more than 10 percent from its March 24, 2020, levels.
    • In exchange for the loan, the government receives a warrant for stock or an equity interest in the carrier, which can appreciate, be sold or exercised for the benefit of U.S. taxpayers.
    • Carrier officers and employees whose total compensation7 exceeded $425,000 in 2019 are subject to compensation limits until 12 months after the loan is repaid.8
    • The DOT may require the carrier to continue scheduled air service through March 1, 2022, to any point the carrier served before March 1, 2020. In determining whether to exercise this authority, the DOT must consider the transportation needs of small communities, as well as the need to maintain functioning medical and pharmaceutical supply chains.9 The DOT has issued an order that sets forth its interpretation of this requirement.10

    All Loans to carriers will be made public by the Treasury within three days of the transaction. 

    Grants to Pay Employees

    The CARES Act makes available an additional $29 billion for the government to provide grants of financial assistance to carriers for the sole purpose of paying employee wages, salaries and benefits during the COVID-19 crisis. Of this amount, $25 billion in Carrier Grants are available for U.S. passenger air carriers, and $4 billion in Carrier Grants are available for U.S. cargo air carriers.11

    A business that is approved to receive a Carrier Grant will receive a total amount equivalent to the salaries and benefits they paid from April 1, 2019, through September 30, 2019;12 and will receive an initial payment no later than April 6, 2020. The Treasury published its guidance and procedures for requesting a Carrier Grant on March 30, 2020.13 Notably, this guidance recommends that initial applications be submitted no later than 5 p.m. on April 3, 2020, to receive approval as soon as possible. While applications received thereafter will be considered, they may not receive approval as quickly. Applications received after April 27, 2020, may not be considered.14

    As with the available loans, the CARES Act imposes several restrictions on Carrier Grants received from the government.

    • The carrier may not reduce pay rates or involuntarily furlough employees until Sept. 30, 2020.
    • The carrier may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, through Sept. 30, 2021.
    • As compensation for a Carrier Grant, the Treasury may receive warrants, stock options or other debt instruments issued by the carrier.
    • Carrier officers and employees whose total compensation15 exceeded $425,000 in 2019 are subject to compensation limits until March 24, 2022.
    • The DOT may require the carrier to continue scheduled air service through March 1, 2022, to any point the carrier served before March 1, 2020. In determining whether to exercise this authority, the DOT must consider the transportation needs of small communities, as well as the need to maintain functioning medical and pharmaceutical supply chains.16 The DOT has issued an order that sets forth its interpretation of this requirement.17

    Any carrier that fails to honor these restrictions is subject to audits and the clawback of the Carrier Grant provided.18 Furthermore, should the amount of relief requested in the form of Carrier Grants exceed the amount available to passenger air carriers and cargo air carriers, the Treasury may reduce, on a pro rata basis, each Carrier Grant to be awarded.19

    Tax Holidays

    For the remainder of 2020, no air carrier excise taxes will be charged by the government. This includes the excise taxes normally charged for the transportation of passengers, transportation of property and purchase of kerosene, in accordance with 26 U.S.C. §§ 4261, 4271, and 4041/4081, respectively.20 Unlike the provisions regarding Loans and Grants, which are limited to U.S. air carriers, this provision applies to both U.S. and foreign air carriers. 

    Airline Contractors

    Similar to Carrier Grants, the CARES Act makes available $3 billion for the Treasury to provide grants to airline contractors to pay employee wages, salaries and benefits during the COVID-19 crisis.21 The CARES Act defines "contractor" broadly to cover non-airline workers in functions directly related to the air transportation of persons, property and mail. These functions include, but are not limited to: baggage and cargo handling; catering; assisting passengers with disabilities; airport ticketing and check-in; aircraft cleaning, sanitizing and waste removal; and aircraft ground handling; along with any subcontractors employed by a contractor to perform functions directly related to air transportation.22

    A business that is approved for a Contractor Grant will receive a total amount equivalent to the salaries and benefits they paid from April 1, 2019, through Sept. 30, 2019;23 and will receive an initial payment no later than April 6, 2020.24 The Treasury published its guidance and procedures for requesting a Contractor Grant on March 30, 2020.25 Notably, this guidance recommends that initial applications be submitted no later than 5 p.m. on April 3, 2020, to receive approval as soon as possible. While applications received thereafter will be considered, they may not receive approval as quickly. Applications received after April 27, 2020, may not be considered.26

    As with Carrier Grants, the CARES Act imposes several restrictions on Contractor Grants received from the government.

    • The contractor may not reduce pay rates or involuntarily furlough employees until Sept. 30, 2020.
    • The contractor may not buy back its own stock, or pay dividends or capital distributions to holders of its common stock, through Sept. 30, 2021.
    • As compensation for a Contractor Grant, the Treasury may receive warrants, stock options, or other debt instruments issued by the contractor.
    • Carrier officers and employees whose total compensation27 exceeded $425,000 in 2019 are subject to compensation limits until March 24, 2022.28

    Any failure by a contractor to honor these restrictions can result in audits and the  rescission of the Contractor Grant provided. Furthermore, should the amount of relief requested in the form of Contractor Grants exceed the $3 billion available to contractors, the Treasury may reduce, on a pro rata basis, each Contractor Grant to be awarded.

    Airports

    The CARES Act provides a supplemental appropriation of $10 billion for airport grants-in-aid "to prevent, prepare for, and respond to coronavirus."29 This $10 billion is 100 percent federal share (i.e., there is no local matching requirement), will remain available until it is expended, and will be distributed as follows:

    • $500 million will fund the required local shares of airports under fiscal year (FY) 2020 Airport Improvement Program (AIP) grants
    • $7.4 billion will be given to airports to use for any lawful purpose; the money will be awarded to airports using the following formulas:
    • Half of this amount ($3.7 billion) will be distributed among all commercial airports based on each airport sponsor's 2018 enplanements as a percentage of 2018 total enplanements across all commercial airports 
    • Half of this amount ($3.7 billion) will be distributed among all commercial airports by reviewing each airport sponsor's FY 2018 debt service as a percentage of the combined debt service of all commercial airports, as well as each sponsor's ratio of unrestricted reserves to their debt service
    • $2 billion will be given to airports to use for any lawful purpose and will be distributed through the AIP entitlement formula
    • $100 million will be apportioned directly among general aviation airports to use for any lawful purpose

    The CARES Act's supplemental appropriation also applies two restrictions to airports receiving the funds. First, any airport development projects using CARES Act funds must comply with the prevailing wage requirements already codified in 49 U.S.C. § 47112. Second, any airport receiving CARES Act funds must continue to employ through Dec. 31, 2020, at least 90 percent of the number of individuals it employed on March 27, 2020.30 However, the DOT may waive this second restriction if it determines that the employment requirement is either causing economic hardship, or reducing aviation safety or security.31

    Finally, in a separate supplemental appropriation, the CARES Act provides $100 million to the Transportation Security Administration (TSA) to clean and sanitize security checkpoints and airport common areas, pay overtime and travel costs of TSA employees, and obtain explosive detection materials.32

    The Holland & Knight Aviation Team is continually monitoring the impact of COVID-19 on the aviation sector. Our attorneys can assist with questions concerning eligibility for relief programs and changes in the regulatory landscape.

    DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.


    Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


    Notes

    1 FAA Notice of Limited Waiver of the Minimum Slot Usage Requirements, 85 Fed. Reg 15019-20 (Mar. 16, 2020) (waiving minimum slot usage requirements for all carriers at JFK, LGA, and DCA through May 31, 2020).

    2 These mechanisms appear in Title IV of the CARES Act, known as the “Coronavirus Economic Stabilization Act”, which appropriates $500 billion to provide aviation and other businesses, states, and municipalities access to liquidity in order to remain solvent during the COVID-19 crisis.

    3 Procedures and Minimum Requirements for Loans to Air Carrier and Eligible Businesses and National Security Businesses under Division A, Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020) and Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020).

    4 Maintenance stations certified under 14 CFR Part 145 are also eligible.

    5 § 4003(b)(1) and (2). All references are to sections within the CARES Act unless otherwise specified.

    6 § 4003(c)(2)(A), (B), (C), and (I).

    7 "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.

    8 § 4004(a). These employees are capped at their 2019 compensation levels until this restriction expires.  A more restrictive formula applies to employees whose total compensation exceeded $3 million in 2019.

    9 § 4005.

    10 DOT Order 2020-3-10 (March 31, 2020).

    11 § 4112(a).

    12 This figure will be determined using the data reported to DOT pursuant to 14 CFR Part 241.  (§ 4113(a)(1)).

    13 Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020)

    14 Id, p. 5.

    15 "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.

    16 § 4114(b).

    17 DOT Order 2020-3-10 (March 31, 2020).

    18 § 4113(b).

    19 § 4113(c).

    20 § 4007.

    21 § 4112(a)(3).

    22 § 4111(3).  In practice, these are functions airlines usually employ third-party service providers to perform because it is more cost effective than hiring their own employees to perform them.

    23 This figure will be determined using sworn financial statements from the contractor.  (§ 4113(a)(3)).

    24 § 4113(a) and (b)(2).

    25 Guidelines and Application Procedures for Payroll Support to Air Carriers and Contractors under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economic Security Act (March 30, 2020).

    26 Id, p. 5.

    27 "Total compensation" includes salary, bonuses, awards of stock, and other financial benefits received.

    28 § 4116(a). These employees are capped at their 2019 compensation levels until March 24, 2022. A more restrictive formula applies to whose total compensation exceeded $3 million in 2019.

    29 CARES Act, Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations, Federal Aviation Administration, Grants-In-Aid for Airports, H.R. 748-316.

    30 Id at H.R. 748-317. Adjustments are made for voluntary employee separations and retirements.

    31 Id at H.R. 748-317. 

    32 CARES Act, Division B – Emergency Appropriations for Coronavirus Health Response and Agency Operations, Federal Aviation Administration, Grants-In-Aid for Airports, H.R. 748-316.

    This article was originally published by Holland & Knight on April 1, 2020.

  • Tracey Cheek posted an article
    OVERVIEW: Cares Act - How Your Company Can Benefit From New Cares Act see more

    NAFA member, Aerlex Law Group, discusses the CARES Act and how your company can benefit from it.

    We are all being inundated with emails and information concerning the new laws being enacted by both the United States government and individual states in response to the current Covid-19 pandemic. We at Aerlex Law Group want to help organize the onslaught of information you are receiving by breaking the new laws down into separate articles that we hope will help you navigate the programs that may best assist you, your business and your employees. To date, we have written articles on (1) the new requirement regarding posting the available benefits under the Families First Coronavirus Response Act (“FFCRA”), and (2) the steps the Federal Aviation Administration has taken in response to the Covid-19 crisis. This article specifically addresses the new Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) recently adopted by Congress and signed into law by the President.

    The CARES Act includes a variety of measures to address the crisis now facing the country’s health care system, but also provides emergency aid that impacts employers, the latter of which will be the focus of this article.

    PAYCHECK PROTECTION PROGRAM

    The Section 7(a) loan program has long been the Small Business Administration’s (“SBA”) primary program for providing financial assistance to small businesses. The terms and conditions of a Section 7(a) loan, including material terms such as the loan amount and guaranty percentage, vary by the type of loan. These loans are issued by commercial lenders, who administer the loans with varying degrees of involvement by the SBA.

    The CARES Act created the Paycheck Protection Program (“PPP”), which expands Section 7(a) loans by providing federally guaranteed loans to certain eligible businesses and entities. Eligible businesses and entities with fewer than 500 employees, select types of businesses with fewer than 1,500 employees, Section 501(c)(3) non-profits with fewer than 500 workers, and some Section 501(c)(19) veteran organizations can apply for loans under this program for the period between February 15, 2020 and June 30, 2020. Starting April 10, independent contractors and self-employed individuals can apply. The CARES Act has authorized the distribution of $349 billion through the PPP 7(a) loan program.

    By maintaining employees on their payroll through the duration of the crisis, the small businesses referred to above can qualify for PPP loan forgiveness. The act has also been made retroactive February 15th to encourage small businesses to rehire employees that have recently been laid off.

    For businesses and entities operating between February 15, 2019 and June 30, 2019, the PPP offers loans of up to $10 million with a maximum 4% interest rate. (For businesses and entities not operating between February 15, 2019 and June 30, 2019, the maximum loan amount is equal to 250% of their average monthly payroll costs between January 1, 2020 and February 29, 2020.) The total amount of the loan will be the lesser of the $10 million maximum and 2.5 times the borrower’s average monthly payroll for the past 12 months (excluding compensation over $100,000). During the period of February 15, 2020 through June 30, 2020 (the “Covered Period”), the SBA will guarantee 100% of issued PPP loans. Loan proceeds may be used by small businesses to cover payroll costs (excluding individual employee compensation over $100,000), group health care benefits, mortgage interest payments, rent, utilities, and interest on other debt incurred prior to the Covered Period.

    • Collateral and Fee Waivers: Collateral requirements, borrower and lender fees, prepayment penalties, personal guarantee requirements, and certain other traditional SBA loan requirements are waived.
    • Options Deferment: Deferment of principal, interest, and fees for a period of between six months and one year is available.
    • Increased Lender Pool and Flexibility: The SBA is delegating to lenders the authority to make determinations on borrower eligibility and creditworthiness without going through traditional SBA channels. Furthermore, the SBA Administrator and the Secretary of the U.S. Department of the Treasury have the authority to add additional lenders to the PPP.
    • Loan Limitations. Loan proceeds may not be used for employee salaries in excess of $100,000 or for certain taxes or other employee payments covered under other recent COVID-19 federal legislation. Additionally, borrowers are not eligible to apply for both Economic Injury Disaster Loans and new SBA loans at the same time.

    LOAN FORGIVENESS

    A borrower is eligible for loan forgiveness and cancellation of indebtedness during the Covered Period for all payments made in any of the previously noted categories during an eight-week period beginning on the date the loan is funded. The loan forgiveness amount is subject to reduction if an employer lessens its number of full-time employees or decreases the pay of certain employees beyond 25% of that employee’s prior year compensation. However, employers that rehire employees who have already been let go (thus eliminating any reduction in the number of full-time equivalent employees) by June 30, 2020 will not be subject to reductions in any loan forgiveness amount.

    Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan with a maximum interest rate of 4% for a maximum of ten years.

    HOW TO APPLY

    Borrowers will submit an application to a lender that will originate the loan, and the lender must issue a decision on the application within 60 days, although this time is expected to be much shorter. (Many lenders already issue SBA loans and many of those lenders are SBA priority lenders who may move the process faster.) Lenders will process loan forgiveness applications directly and the SBA will purchase the forgiven loan from the lender within 90 days of forgiveness.

    The application can be found here on the United States Treasury site, along with details for borrowers and lenders. The Treasury urged those in need of funding to apply quickly, noting that the program has a cap and demand is likely to be high.

    For questions about the CARES ACT, please send an email to Doug Stuart at dstuart@aerlex.com or Steve Hofer at shofer@aerlex.com or call 310-392-5200.

    This article was originally published by Aerlex Law Group on 4/2/20.

  • Tracey Cheek posted an article
    CARES Act Provisions to Benefit General Aviation see more

    NAFA member, GKG Law, shares CARES Act provisions for General Aviation.

    On March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill. The House of Representatives is expected to approve the legislation, and President Trump has indicated he will quickly sign the bill into law. In addition to general loan programs for small and mid-size businesses that are made available, the CARES Act contains provisions that will benefit general aviation specifically. The business aviation community should take note of the following provisions included in the CARES Act:

    • Relief from the 7.5% air transportation federal excise tax for general aviation commercial operations (including flights operated under FAR Part 135), and from the commercial fuel tax through December 31, 2020 (This will not apply to amounts paid for transportation on or before the date of enactment of the CARES Act.);
       
    • Loans and grants to passenger and cargo air carriers, including 
      • $25 billion in direct loans and loan guarantees for FAR Part 135 Operators providing passenger operations and an additional $25 billion for wages, salaries and benefits for employees;
      • $4 billion in direct loans and loan guarantees for FAR Part 135 Operators providing air cargo operations and an additional $4 billion for wages, salaries and benefits for employees;
         
    • $25 billion in loans and loan guarantees for Part 145 maintenance facilities;
       
    • $10 billion for airport grants, with $100 million specifically allocated to general aviation airports.

    Note that companies receiving loan and loan guarantees under the CARES Act will be subject to certain requirements, such as maintaining March 24, 2020 employment levels to the extent practicable through the end of September and limits on employment level cuts, limits on executives’ compensation and stock buybacks, and the Department of Transportation would have authority until March 1, 2022 to order any carrier accepting federal assistance to maintain certain air routes.

    Please do not hesitate to contact a member of our Business Aviation team with your CARES Act questions or concerns in the days to come.

    This article was originally published by GKG Law on March 26, 2020.

  • Tracey Cheek posted an article
    Congress Passes CARES Act: Overview of the Relief Available to Small and Other Business Concerns see more

    NAFA member, Greenberg Traurig, LLP, shares the latest update on the CARES Act Interim Final Rule.

    On April 2, 2020, the Department of Treasury and the Small Business Administration (SBA) posted the Interim Final Rule implementing Sections 1102 and 1106 of the CARES Act in advance of its publication in the Federal Register.  On April 3, 2020, SBA also released an overhauled Paycheck Protection Program loan application form.

    The new Interim Final Rule and SBA Form 2483 reflect significant developments since the promulgation of the CARES Act and our prior guidance.  Updates based on these developments are included below in red text for ease of reference. 

    In the midst of a global pandemic and the highest unemployment rates the United States has seen since 1933, President Trump signed into law the $2 trillion Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), providing economic relief to businesses, States and municipalities, and individuals affected by COVID-19. While the scope of the CARES Act is wide-ranging, this alert is limited to providing a high-level overview of the relief available for qualifying business concerns (generally small businesses with certain limited exceptions).  We will publish additional alerts as the SBA issues implementing regulations over the next 15 days. 

    Which businesses will be eligible for relief under the CARES Act? 

    Under Title I of the CARES Act (“Keeping American Workers Employed and Paid”), qualifying businesses that have suffered significant disruption as a result of COVID-19 will be able to receive no-fee “small business interruption loans.” Qualifying small businesses include “any business concern, nonprofit organization, veteran’s organization, religious organizations or Tribal business” that have:

    • 500 employees or fewer, whether employed on a full-time, part-time, or other basis; or
       
    • meet the SBA’s industry-based “size standard” requirements for the applicable North American Industry Classification System (NAICS) code, which are based either on number of employees or annual receipts, if larger than 500 employees, in which the concern operates.[1]

    The Interim Final Rule clarifies that only concerns that “either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC,” are eligible for PPP loans, and that “no eligible borrower may receive more than one PPP loan.”

    SBA Form 2483 indicates that applicants will not be eligible to receive loans if the Applicants or their owners: are presently or are proposed for suspension or debarment, presently involved in any bankruptcy, delinquent or in default on any direct or guaranteed loan by a Federal agency, or subject to formal criminal charges or probation; or that have within the past 5 years been convicted of any felony or placed on parole or probation.

    What are the exceptions to the “500 employees” rule? How do the SBA’s affiliation rules come into play?

    The updated SBA Form 2483 requires applicants to certify that the “Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the [SBA] implementing the Paycheck Protection Program.”  The Interim Final Rule states that “SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to the PPP loans.” 

    To determine an applicant’s receipts or number of employees, each applicant can generally expect that it must aggregate all employees on an affiliate basis, including subsidiaries and, in the context of private equity-backed and venture capital-backed businesses, portfolio companies. Exceptions are made in the legislation for:

    • independently owned franchises,[2] who are approved by the SBA, and hospitality businesses that fall within NAICS code 72, “Accommodation and Food Services,” and each of location with 500 or fewer employees; and
       
    • any business receiving financial assistance from a Small Business Investment Company (“SBIC”).

    What about independent contractor or gig economy workers? 

    Yes, sole proprietors, independent contractors, gig economy workers, and self-employed individuals are all eligible for the Paycheck Protection Program.

    The Interim Final Rule clarifies “independent contractors” do not count as employees “for purposes of a borrower’s PPP loan calculation,” or “PPP loan forgiveness,” because “independent contractors have the ability to apply for a PPP loan.”

    Who will provide and administer the loans?

    Loans will be administered pursuant to SBA’s section 7(a) loan program, as modified by the CARES Act. Loans will be made and serviced by existing banks and lenders enrolled in the SBA 7(a) program, as well as any other lenders determined by the SBA “to have the necessary qualifications to process, close, disburse and service loans made with the guarantee of the Administration.” 

    What is the maximum loan size? 

    The CARES Act sets the maximum loan amount under the Paycheck Protection Program as 250 percent of average monthly payroll costs, up to a total of $10 million.  The amount is intended to cover eight weeks of payroll expenses and any additional amounts for making payments towards debt obligations.  This eight-week period may be applied to any time frame between February 15, 2020 and June 30, 2020.  Seasonal business expenses will be measured using a 12-week period beginning February 15, 2019, or March 1, 2019, whichever the seasonal employer chooses.

    The Interim Final Rule clarifies that the maximum loan amount should be calculated based on the applicant’s “[a]ggregate payroll costs . . . from the last twelve months for employees whose principal place of residence is the United States,” less “any compensation paid to an employee in excess of an annual salary of $100,000.” 

    The Interim Final Rule further clarifies that the “outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any ‘advance’ under an EIDL COVID 19 loan,” may be included in the maximum loan amount for PPP loans.

    The terms of the loan may differ on a case-by-case basis.  However, the maximum terms of the loan can be up to ten years with an interest rate capped at 4% per annum and there shall be no prepayment penalties. The SBA will also reimburse lenders for origination or underwriting fees in an amount of: (i) 5% for loans of not more than $350,000, (ii) 3% for loans of more than $350,000 and less than $2 million and (iii) 1% for loans equal to or greater than $2 million. The SBA will issue additional regulations and guidance with respect to other terms and conditions of the program.

    The Interim Final rule clarifies that the interest rate “will be 100 basis points or one percent,” and that the “maturity is two years,” for PPP loans.  The Interim Final Rule further clarifies that “there will be no up-front guarantee fee payable to the SBA by the Borrower,” and that “Agent fees will be paid by the lender out of the fees the lender receives from SBA.”

    Any other restrictions on loan terms?

    Yes, the CARES Act limits the use of Paycheck Protection Program loans to: (1) payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person; (2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (3) employee salaries, commissions, or similar compensations; (4) payments of interest on any mortgage obligation that existed on February 15, 2020 (which shall not include any prepayment of or payment of principal on a mortgage obligation); (5) rent payments (including rent under a lease agreement); (6) interest on any other debt obligations that were incurred before February 15, 2020; and (7) utility payments, including electricity, gas, water,  transportation, and phone and Internet access for service incurred in the ordinary course of business prior to February 15, 2020, in each case, paid during the eight-week period commencing on the date of origination of the loan.

    The Interim Final Rule clarifies that “Payroll costs” shall not include “Federal employment taxes imposed or withheld,” “including the employee’s and employer’s share of FICA (Federal Insurance Contribution Act) and Railroad Retirement Act taxes,” “income taxes required to be withheld from employees,” and “qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.”

    In addition, the Interim Final Rule further clarifies that if a borrower uses “PPP funds for unauthorized purposes, SBA will direct [the borrower] to repay those amounts,” and that borrowers that “knowingly” misuse the funds “will be subject to additional liability such as charges of fraud.”

    Will interest payments be deferred for any period?

    Yes, loan payments (including principal, interest and fees) will be deferred for at least six months and up to one year starting at the origination of the loan.

    The Interim Final Rule clarifies the deferment period will be for 6 months “following the date of the disbursement of the loan,” and that while borrowers will not have to make any interest payments during the deferment period, “interest will continue to accrue on PPP loans during this six-month deferment.”

    What portion of the loans will be eligible for forgiveness?  

    The loan will be eligible for forgiveness to the extent that the loan proceeds have been used for the following costs incurred and payments made during the eight-week period after the loan is made: (1) payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person; (2) group healthcare benefits and insurance premiums; (3) mortgage interest (but not on any prepayment of or payment of principal on a covered mortgage obligation); (4) rent payments and leases in existence prior to February 15, 2020, and; (5) certain utility payments, including electricity, gas, water,  transportation, and phone and Internet access for service incurred in the ordinary course of business prior to February 15, 2020, in each case, paid during the eight-week period commencing on the date of origination of the loan.  The Paycheck Protection Program can be used for other business-related expenses, like inventory, but that portion will not be forgiven.

    The Interim Final Rule clarifies that the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest, and that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.”

    The Interim Final Rule states that “SBA will issue additional guidance on loan forgiveness.”

    A borrower will be required to submit a detailed application in support of loan forgiveness directly to the lender (see chart here). The lender will make a determination on the application within 60 days of receipt of the application; the loan is forgiven at the end of the 8-week period after the borrower takes the loan.  Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness.   The SBA will reimburse the lender directly for the principal amount of any forgiven debt, plus interest accrued through the date of repayment. SBA will issue additional implementation guidance and regulations regarding the loan forgiveness process within 30 days after enactment of the CARES Act.

    Forgiven amounts will not constitute cancellation of indebtedness income for federal tax purposes.

    The Interim Final Rule clarifies that a “lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.  The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.”

    What portions of the loan will not be eligible for forgiveness?

    The purpose of the Paycheck Protection Program is to help businesses retain employees, at their current base pay. If all employees are retained at their current salary, the entirety of the loan will be forgiven. If employees are laid off, the forgiveness will be reduced by the percent decrease in the number of employees.  If the borrower reduces the salary or wages of an employee no more than $100,000 per year by more than 25%, loan forgiveness will be reduced by the same amount.  If borrowers make staff or covered salary reductions between February 15, 2020 and April 26, 2020, the loan can still be forgiven for the full amount of payroll costs if those reductions are eliminated by June 30, 2020.  

    Is the borrower responsible for interest on the forgiven loan amount? 

    No, if the full principal of the Paycheck Protection Program loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by the borrower and the lender.

    What can the loans be used for?  Are there any restrictions?  

    Payroll, rent, mortgage payments, utilities, sick leave, insurance benefits and healthcare premiums are among the permitted uses.  Proceeds of loans may also be used to make interest payments on other debt obligations that were incurred prior to February 15, 2020.  However, loan proceeds may not be used to make any payment or prepayment of principal of existing debt obligations (e.g., mortgages).

    SBA Form 2483 requires applicants to certify that PPP loan “funds will be used to retain workers, maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule.”

    Will these loans be secured? Where would these loans rank in security and priority as compared to any pre-existing third-party debt instruments?

    No, the loans will be unsecured and will not take precedence over existing debt instruments in terms of payment priority. The loans will also not require collateral or personal guarantees from owners of borrowers.  There will be no recourse to owners or borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose. The SBA has also waived prepayment penalties and has waived the guaranty fee and annual fee applicable to other 7(a) loans.

    What is the deadline to apply to the program?

    June 30, 2020.

    The Interim Final Rule clarifies that the PPP loans will be available on a “first-come, first-served” basis through June 30, 2020, or “until funds made available for this purpose are exhausted.”

    Will these loans trade on the secondary market?

    Yes.

    In addition, the Interim Final Rule clarifies that a “PPP loan may be sold on the secondary market after the loan is fully disbursed,” and that a “lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period.”

    Are the small business interruption loans the same as the small business “disaster” loans I have read about?

    No, the “disaster” loans are relief in addition to the small business interruption loans. Under existing authority, the SBA will also provide smaller “Economic Injury Disaster Loans” (EIDLs) in an amount up to $2 million to businesses with not more than 500 employees, and agricultural cooperatives, that meet the SBA’s industry-specific business size limitations in declared disaster areas (a growing list of states) and have suffered substantial economic damage as a result of COVID-19 for the period of January 31, 2020 to December 31, 2020.  Most private non-profit organizations, of any size, will also be eligible EIDL Loans.

    Can I get a Paycheck Protection Act loan if I received an EIDL Loan?

    Yes, if an EIDL loan was obtained related to COVID-19 between January 31, 2020 and the date at which the Paycheck Protection Program becomes available, borrowers will be able to refinance the EIDL into the Paycheck Protection Program for loan forgiveness purposes. However, borrowers may not take out an EIDL and a Paycheck Protection Program for the same purposes. Remaining portions of the EIDL, for purposes other than those laid out in loan forgiveness terms for a Paycheck Protection Program loan, would remain a loan. If a borrower took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under Paycheck Protection Program.

    The Interim Final Rule clarifies that borrowers that “received an SBA EIDL loan made between January 31, 2020 and April 3, 2020,” may “apply for a PPP loan.”  If the EIDL loan was not used for payroll costs, the EIDL loan will not effect the borrower’s eligibility for a PPP loan.  However, if the borrower’s EIDL loan was used for payroll costs, the borrower’s “PPP loan must be used to refinance [the] EIDL loan.” 

    Did the Care Act relax other EIDL Program Requirements?

    Yes, the CARES Act also: (1) waives any requirement for a personal guarantee for loans that are less than $200,000; (2) replaces the requirement that eligible businesses be in business for the 1-year period before the disaster with a requirement that businesses must have been in operation on January 31, 2020, and; (3) waives requirement that applicants are unable to obtain credit elsewhere.

    The Interim Final Rule clarifies that no collateral or personal guarantees by borrowers are required for PPP loans.

    What about advances?  

    The CARES Act also allows businesses, that self-certify as eligible, to apply for an EIDL advance/ grant, in an amount up to $10,000, to be provided within 3 days after receipt of the application.  Advances can be applied to any allowable purpose under the section 7(b) program, including: (1) providing paid sick leave to employees unable to work due to the direct effect of COVID–19; (2) maintaining payroll to retain employees during business disruptions or substantial slowdowns; (3) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (4) making rent or mortgage payments, and; (5) repaying obligations that cannot be met due to revenue losses.  If an applicant that receives an advance is subsequently denied an EIDL loan, the advance does not need to be repaid.  If an applicant receives an advance under the EIDL program and “transfers into, or is approved for, the loan program under” the 7(a) program, “the advance amount shall be reduced from the loan forgiveness amount for a loan for payroll costs made under such section 7(a).  The CARES Act designates $10 billion for these immediate EIDL grants. 

    What about tax credits?

    Certain employers will be eligible for a payroll tax credit in each applicable quarter in an amount equal to 50% of the first $10,000 of qualified wages paid to employees (including health benefits) between March 13, 2020 and December 31, 2020. However, this credit is not available to employers who participate in the Paycheck Protection Program. This credit will be available to employers whose business (i) was fully or partially suspended due to a government shutdown order or (ii) experienced a decline of gross receipts of at least 50% vs. the same calendar quarter in the prior year (until such time as gross receipts for a quarter are greater than 80% vs. the same calendar quarter in the prior year). For businesses with greater than 100 full-time employees, the tax credit is only available to the extent wages are paid to employees who are unable to work as a result of a government shutdown order. For businesses with fewer than 100 full-time employees, the tax credit is available for all employees, even if the employee works from home during the business closure. This relief is set forth in Title II (Section 2301) rather than Title I of the CARES Act. Because this 50% tax credit FOR wages paid is not available to employers who participate in the Paycheck Protection Program, an employer would need to choose between taking this credit or obtaining a loan under the Paycheck Protection Program.

    Where can I apply for the Paycheck Protection Program?

    Businesses can apply for the Paycheck Protection Program at any lending institution that is approved to participate in the program through the existing SBA 7(a) lending program and additional lenders approved by the Department of Treasury. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks. You do not have to visit any government institution to apply for the program. You can call your bank or find SBA-approved lenders in your area through SBA’s online Lender Match tool.[3]

    The Interim Final Rule clarifies that (i) “[a]ny federally insured depository institution or any federally insured credit union,” (ii) certain “Farm Credit System institution[s],” and (iii) certain “depository or non-depository financing” providers meeting specifically enumerated requirements “will be automatically qualified” to issue PPP loans unless currently designated as in Troubled Condition or subject to a formal enforcement action by their primary federal regulator. 

    National CARES Act Infographic

    For a detailed overview of the loan options available under the CARES Act, see our chart.

    For more information and updates on the developing situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.

    *Special thanks to Steven M. FelsensteinBarbara A. JonesPeter LiebermanMichael J. SchaengoldScott SchipmaBrittany E. AllisonBrett CastellatDanielle K. Muenzfeld,  and Caroline E. Thee‡ for their assistance with this Alert.

    ‡Admitted in Indiana. Not admitted in Illinois.


    [1] Small business size standards vary by industry and are generally based on the number of employees or the amount of annual receipts the business has.  Small business size regulations can be found in Title 13 Part 121 of the Electronic Code of Federal Regulations (eCFR). 

    [2] Eligible franchises van be found through the SBA’s Franchise Directory

    [3] https://www.sba.gov/funding-programs/loans/lender-match.

    ATTACHMENTS

    This article was originally published by Greenberg Traurig, LLP, on April 3, 2020.

  • Tracey Cheek posted an article
    COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs - What You Need to Know see more

    NAFA member, Greenberg Traurig, LLP, shares what your business needs to know about the COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs.

    As the Coronavirus Disease 2019 (COVID-19) pandemic continues in the United States, the U.S. Congress and the U.S. federal financial regulatory agencies – the Federal Reserve, U.S. Department of the Treasury, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, and the Consumer Financial Protection Bureau (collectively, the Financial Agencies) – have introduced a number of financial stimulus programs or provided guidance designed to stabilize the U.S. economy and provide relief to U.S. debtors, both corporate and individual.

    Each of the stimulus programs is outlined below.

    Title IV of the CARES Act

    On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Title IV of the CARES Act titled, “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy,” includes several financial stimulus programs for U.S. businesses, other than programs earmarked by Title I of the CARES Act for small businesses.[1]Some of the key financial stimulus programs of the CARES Act include: U.S. Department of the Treasury Direct Support (Including Legislative Authority to Establish Facilities)

    The CARES Act authorizes the U.S. Department of the Treasury (Treasury) to make up to $500 billion of emergency loans, loan guarantees, or investments to be allocated as follows:

    • Up to $25 billion in loans and guarantees will be allocated for passenger air carriers;
    • Up to $4 billion in loans and guarantees will be allocated for cargo air carriers;
    • Up to $17 billion in loans and guarantees will be allocated for businesses critical to maintaining national security (the foregoing, Specific Industry Assistance); and
    • Up to $454 billion for loans, loan guarantees, and investments will be allocated to facilities established by the Federal Reserve to support lending to eligible businesses, states,[2] and municipalities ((b)(4) Assistance).

    Midsized Business Lending Program

    The CARES Act authorizes Treasury to endeavor to implement a program or facility of (b)(4) Assistance to provide funds to banks and other lenders to make direct loans to non-profit organizations and businesses between 500 and 10,000 employees. Loan interest cannot exceed 2% per year and no principal or interest payments will be due for the first six months (or such longer period as determined by Treasury). To qualify, the eligible borrower must self-certify in good faith to Treasury, among other things, that:

    • the loan is necessary to support the borrower’s ongoing operations because of the uncertainty of the economic conditions as of the date of the loan application;
    • the borrower will retain at least 90% of its workforce at full compensation and benefits until September 30, 2020;
    • the borrower intends to restore (x) at least 90% of the workforce of the borrower as it existed as of February 1, 2020 and (y) all compensation and benefits to the workers of the borrower no later than four months after the termination of the public health emergency declared by the U.S. Secretary of Health and Human Services;
    • the borrower is domiciled in the United States with “significant operations and employees” in the United States;
    • the borrower is not a debtor in bankruptcy proceedings;
    • the recipient is created or organized in the United States or under the laws of the United States and has significant operations in, and a majority of its employees are located in, the United States;
    • the borrower will not pay dividends with respect to its business or repurchase an equity security listed on a national securities exchange of itself or its parent company unless required by existing contractual arrangements;
    • the borrower will not outsource or offshore jobs for a period of time ending two years after repayment of the loan;
    • the recipient will not abrogate existing collective bargaining agreements during the term of the loan and for two years thereafter; and
    • the borrower will remain neutral in any union-organizing effort.

    Main Street Lending Program 

    The CARES Act does not limit the discretion of the Federal Reserve to establish a “Main Street Lending Program” or other similar program or facility that supports lending to small- and mid-sized businesses on terms consistent with the authority given to the Federal Reserve by Section 13(3) of the Federal Reserve Act.

    State and Municipal Borrower Lending Program

    The CARES Act directs Treasury to endeavor to implement a program or facility that provides liquidity to the financial system by lending to states[3] and municipalities.

    Conditions on Specific Industry Assistance Programs

    The Act directs Treasury to publish procedures for applications and minimum requirements for Specific Industry Assistance not more than 10 days after the date of enactment of the CARES Act (i.e., by April 6, 2020). Loans and guarantees under this program are conditioned on Treasury determining that:

    • the borrower is an eligible business for which credit is not otherwise reasonably available at the time of the transaction;
    • the intended obligation by the borrower is prudently incurred;
    • the loan or guarantee is sufficiently secured or made at a rate that reflects the risk of the loan or guarantee and, to the extent practicable, is not less than the interest rate based on market conditions for comparable obligations prior to the COVID-19 outbreak;
    • the duration of the loan or guarantee is as short as practicable and not longer than five years;
    • neither the borrower nor its affiliates may purchase an equity security that is listed on a national securities exchange of the borrower or its parent, except pursuant to existing contractual obligations for 12 months after the loan or guarantee is no longer outstanding;
    • the borrower cannot pay dividends or make other capital distributions on its common stock for 12 months after the loan or guarantee is no longer outstanding;
    • the borrower must maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case cannot reduce its employment levels by more than 10% from the levels on such date;
    • the borrower must certify that it is created or organized in the United States or under the laws of the United States and has significant operations in, and a majority of employees based in, the United States;
    • the borrower must have incurred or is expected to incur covered losses, as defined in the CARES Act, such that the continued operations of the business are jeopardized, as determined by Treasury;
    • the borrower must comply with the limitations on certain employee compensation set forth below; and
    • if the business has securities that are traded on a national securities exchange, Treasury must receive a warrant or other equity interest in the eligible business or, in the case of any other eligible business, Treasury can receive, in its discretion, a warrant or equity interest in the business or a senior debt instrument issued by the eligible business. The terms and conditions of these instruments will be set by Treasury and must meet the requirements set forth in the CARES Act.

    Conditions on (b)(4) Assistance Programs

    Recipients of direct loans from lenders under (b)(4) Assistance programs must agree:

    • not to purchase an equity security that is listed on a national securities exchange of the borrower or its parent, except pursuant to existing contractual obligations for 12 months after the direct loan is no longer outstanding;
    • not to pay dividends or make other capital distributions on its common stock for 12 months after the direct loan is no longer outstanding, unless waived by Treasury upon a determination that a waiver is necessary to protect the interests of the Federal Government; and
    • to comply with the limitations on certain employee compensation set forth below.

    Employee Compensation Limitations on Specific Industry Assistance and (b)(4) Assistance

    The CARES Act places limitations on compensation of certain employees of eligible businesses receiving Specific Industry Assistance and (b)(4) Assistance. These limits require the eligible business to agree to cap all employee compensation (including salary, stock, bonuses, and other financial benefits) for a period ending one year after the loan is repaid. For employees receiving more than $425,000 per year: (i) these employees cannot receive more compensation than they received in 2019; and (ii) severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees receiving more than $3 million per year cannot receive total compensation more than the sum of (i) $3 million plus (ii) 50% of the excess over $3 million.

    Public Reporting Requirement

    The CARES Act requires Treasury to publish on its website a plain language description about each loan and loan guarantee within 72 hours of the transaction, including the date of application, date of application approval, and identity of the counterparty. Additionally, Treasury and the Federal Reserve must report to the relevant congressional committees on transactions and the authorization of new facilities, respectively. In other words, Title IV-authorized financing transactions will not be confidential.

    Continuation of Certain Air Service or Air Carrier Borrowers

    The CARES Act requires the U.S. Secretary of Transportation to require, to the extent feasible, that loan or loan guarantee recipient air carriers maintain their scheduled air transportation until March 1, 2022, taking into consideration the air transportation needs of small and remote communities and the need to maintain well-functioning health care and pharmaceutical supply chains.

    Unlimited Deposit Insurance Coverage on Transactional Deposit Accounts Through December 31, 2020

    The CARES Act amends Section 1105 of the Dodd-Frank Act of 2010 and authorizes the Federal Deposit Insurance Corporation (FDIC) to guarantee, through December 31, 2020, the obligations of solvent insured depository institutions and their affiliates, including noninterest-bearing demand deposit accounts, without limit. This provision effectively resurrects the Transaction Account Guarantee Program of the FDIC, which the FDIC launched in October 2008 at the start of the Great Recession. The CARES Act would also give the National Credit Union Administration (NCUA) authority to increase share insurance coverage on noninterest-bearing demand deposit accounts at federally insured credit unions through December 31, 2020.

    Temporary Capital Ratio Reduction for Community Banks

    The CARES Act authorizes federal banking regulators to issue an interim rule that reduces the community bank leverage capital ratio from 9% to 8% and obligates regulators to provide a reasonable grace period for a qualifying community bank that falls out of compliance to regain compliance with the ratio requirements.

    Temporary Relief from Troubled Debt Restructurings

    The CARES Act temporarily relieves insured depository institutions from categorizing loan modifications related to the COVID-19 disease as troubled debt restructurings for purposes of compliance with the requirements of the Federal Deposit Insurance Act of 1933, as amended (12 U.S.C. §§ 1811 et seq.), until such time and under such circumstances as the appropriate federal banking agency or the NCUA determines appropriate. This provision in Title IV provides statutory endorsement to the short-term loan modification guidance published by the Financial Agencies on March 23, 2020, as discussed more fully in the next section of this Alert.

    Temporary Lending Limit Waiver

    The CARES Act will allow the Office of the Comptroller of the Currency (OCC) to temporarily waive the applicable loan limits for loans to non-bank financial companies (as defined in the Dodd-Frank Act) until the earlier of the: (i) the date on which the designated national emergency period terminates; and (ii) December 31, 2020.

    Temporary Relief from Current Expected Credit Losses (CECL) 

    The CARES Act temporarily relieves insured depository institutions, bank holding companies, and any affiliates from complying with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (Measurement of Credit Losses on Financial Instruments), including the CECL methodology for estimating allowances for credit losses, until the earlier of: (i) the date on which the designated national emergency period terminates, and (ii) Dec. 31, 2020.

    Non-Applicability of Restrictions on Exchange Stabilization Fund (ESF) During National Emergency 

    The CARES Act temporarily suspends the restrictions of the Emergency Economic Stabilization Act of 2008 on Treasury’s use of the ESF from the date of the enactment of this Act until Dec. 31, 2020. Any guarantee that is established under this provision will be limited to a guarantee of the total value of a shareholder’s account in a participating fund as of the close of business on the day before the announcement of the guarantee. The guarantee must also terminate by Dec. 31, 2020.

    Temporary Credit Union Provisions

    The CARES Act broadens the definition of the kinds of credit unions to beyond only those serving “natural persons” and the eligibility requirements for those institutions to receive assistance from the Central Liquidity Facility of the NCUA. Specifically, a credit union may access liquidity if the value of such obligation does not exceed 16 times the subscribed capital stock and surplus of the facility itself. The present restriction is 12 times the capital stock and surplus. These restrictions expire Dec. 31, 2020.

    Inspector General for Pandemic Recovery

    Similar to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) created by Congress at the start of the Great Recession, the CARES Act establishes within Treasury an Office of the Special Inspector General for Pandemic Recovery, appointed by the President and confirmed by the Senate. The Office will function for five years and has been granted a $25 million budget. The Special Inspector General is tasked with conducting, supervising, and coordinating audits and investigations of the making; purchase, management, and sale of loans; loan guarantees; and other investments made by the Treasury Secretary. The Special Inspector General must file quarterly reports with Congress that provide the details of all loans, loan guarantees, and other investments.

    Credit Protection During COVID-19

    The CARES Act amends the Fair Credit Reporting Act’s duties of furnishers of information to consumer reporting agencies. It specifically applies to the reporting obligations of creditors that provide an “accommodation” to a consumer on a credit obligation or account during the covered period of the COVID-19 pandemic. The covered period began on Jan. 31, 2020 and ends 120 days after the later of (a) enactment of the CARES Act (i.e., July 26, 2020) or (b) termination of the President’s COVID-19 outbreak national emergency proclamation.

    Foreclosure Moratorium and Consumer Right to Request Forbearance

    The CARES Act permits a borrower “experiencing a financial hardship” due to the COVID-19 emergency to request forbearance of a “federally backed mortgage loan,” regardless of delinquency status. The section applies to qualifying 1- to 4-family residential real property including individual condo and coop units. The borrower can receive two 180-day forbearances. The section also includes a moratorium on the initiation or moving forward on judicial or non-judicial foreclosures for not less than 60 days beginning March 18, 2020 (i.e., May 27, 2020).

    Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans 

    The CARES Act permits a borrower “experiencing a financial hardship” due to the COVID-19 to request forbearance of a federally backed multi-family loan (5 or more units) if the loan was current as of Feb. 1, 2020. The borrower may submit an oral or written request to its servicer for forbearance of up to three 30-day periods. A borrower receiving forbearance may not evict or initiate eviction of a tenant solely for nonpayment of rent or other charges nor assess any late fees or other penalties for a tenant’s late payment of rent. Upon expiration of the applicable period of forbearance, the borrower must provide a tenant with a 30-day notice to vacate.

    Temporary Moratorium on Eviction Filings

    The CARES Act imposes a moratorium on lessors to initiate legal action to recover possession of a “covered dwelling” for nonpayment of rent or other charges for the 120-day period from enactment (i.e., until July 26, 2020). A covered dwelling is property (a) participating in certain Violence against Women Act housing programs or the rural voucher program, or (b) has a federally backed mortgage loan or federally backed multifamily mortgage loan. During the moratorium period, a covered dwelling lessor cannot impose any fees, penalties, or other charges to a tenant related to nonpayment of rent. Additionally, upon expiration of the moratorium period, the lessor of a covered dwelling must provide a tenant with at least 30-days notice to vacate.

    Federal Reserve Stimulus Programs 

    Independent of the Title IV programs discussed above, the Federal Reserve has implemented or are implementing various measures designed to provide liquidity and stability to financial institutions and certain sectors of the capital markets.[4] These initiatives include the following[5]:

    The Money Market Mutual Fund Liquidity Facility (MMLF) 

    The MMLF is intended to provide liquidity to Money Market Mutual Funds (Funds). The Federal Reserve Bank of Boston will lend to eligible borrowers, taking as collateral certain types of assets purchased by the borrower from Funds. Eligible borrowers are all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks. The applicable Funds must identify as a Prime, Single State, or Other Tax-Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP. Borrowings under the MMLF will mature at the lesser of 12 months and the maturity date of the pledged collateral. Collateral that is eligible for pledge to the MMLF must be one of the following types:

    • U.S. Treasuries & Fully Guaranteed Agencies.
    • Securities issued by U.S. Government Sponsored Entities.
    • Asset-backed commercial paper, unsecured commercial paper, or a negotiable certificate of deposit that is issued by a U.S. issuer, and that has a short-term rating at the time purchased from the Fund or pledged to the Reserve Bank in the top rating category (e.g., not lower than A1, F1, or P1, as applicable) from at least two major nationally recognized statistical rating organizations (NRSRO) or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO;
    • U.S. municipal short-term debt (excluding variable rate demand notes) that:
      • Has a maturity that does not exceed 12 months; and
      • At the time purchased from the Fund or pledged to the Reserve Bank:
        • Is rated in the top short-term rating category (e.g., rated SP1, MIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO: or
        • If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO.
    • Variable rate demand notes that:
      • Have a demand feature that allows holders to tender the note at their option within 12 months; and
      • At the time purchased from the Fund or pledged to the Reserve Bank:

    Interest rates under the MMLF depend on the type of pledged collateral. If the loan is:

    • Secured by U.S. Treasuries & Fully Guaranteed Agencies or Securities issued by U.S. Government Sponsored Entities, the interest rate is equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made; and
    • Secured by U.S. municipal short-term debt, including variable rate demand notes, the interest rate is equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 25 bps.

    All other advances will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 100 bps. Collateral will be valued on either an amortized cost or fair value basis. For asset-backed commercial paper, unsecured commercial paper, negotiable certificates of deposit, and U.S. municipal short-term debt, including variable rate demand notes, the valuation will be amortized cost. Loans under the MMLF will be in a principal amount equal to the value of the collateral pledged to secure the advance. Loans made under the MMLF are made without recourse to the Borrower.

    Regarding the regulatory capital treatment of loans under the MMLF, on March 19, 2020, the Federal Reserve, the OCC and the FDIC issued an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the program on risk-based and leveraged capital ratios.

    The Commercial Paper Funding Facility (CPFF) 

    The CPFF, established by the Federal Reserve Bank of New York under Section 13(3) of the Federal Reserve Act, will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. A special purpose vehicle (SPV) formed for purposes of creating the CPFF will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed’s primary dealers. Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.

    Eligible issues: Except as provided in the next sentence, the SPV will only purchase U.S. dollar-denominated commercial paper (including asset-backed commercial paper (ABCP) that is rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (NRSRO) or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs, in each case subject to review by the Federal Reserve. An issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is subsequently downgraded, will be able to make a one-time sale of commercial paper to the SPV so long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, in each case subject to review by the Federal Reserve. The SPV will not purchase asset-backed commercial paper (ABCP) from issuers that were inactive prior to the creation of the CPFF. An issuer will be deemed inactive if it did not issue ABCP to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020.

    Program limits per issuer: The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit. For an issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, the maximum amount of the issuer’s commercial paper that the SPV will purchase is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded.

    Interest Rates and Facility Fees: For commercial paper rated A1/P1/F1, pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 200 basis points. At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

    Termination date: The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.

    The Term Asset-Backed Securities Loan Facility (TALF) 

    The TALF is a credit facility authorized under section 13(3) of the Federal Reserve Act intended to help meet the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally. The loans under TALF will have a term of three years; will be nonrecourse to the borrower; and will be fully secured by eligible ABS.

    Eligibility: Eligible borrowers under the TALF include all U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer. A U.S. company is defined as a U.S. business entity organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank.

    Collateral: Eligible collateral under TALF includes U.S. dollar denominated cash (that is, not synthetic) ABS that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all the credit exposures underlying eligible ABS must have been originated by a U.S. company. Eligible ABS must be issued on or after March 23, 2020. In addition, eligible collateral must be ABS where the underlying credit exposures are one of the following:

    • Auto loans and leases;
    • Student loans; credit card receivables (both consumer and corporate); equipment loans; floorplan loans; insurance premium finance loans; certain small business loans that are guaranteed by the Small Business Administration; or eligible servicing advance receivables.

    Eligible collateral will not include ABS that bear interest payments that step up or step down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS. To be eligible collateral, all or substantially all the underlying credit exposures must be newly issued.

    Other key TALF terms include:

    Collateral Valuation: The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS. The haircut schedule will be published in the detailed terms and conditions and will be roughly in line with the haircut schedule used for the TALF Facility established in 2008.

    Interest Rates and Facility Fees: For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 basis points over the 2-year London Inter-bank Offered Rate (LIBOR) swap rate for securities with a weighted average life less than two years, or 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. The interest rate for other eligible ABS will be set forth in the detailed terms and conditions. Borrowers will be assessed an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.

    Maturity: Each loan provided under this facility will have a maturity of three years.

    Prepayment: Loans made under the TALF will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed.

    Termination: No new credit extensions will be made after Sept. 30, 2020, unless the TALF is extended by the Board of Governors of the Federal Reserve System.

    Primary Market Corporate Credit Facility (PMCCF)

    The PMCCF will serve as a funding backstop for corporate debt issued by eligible issuers and will be established under Section 13(3) of the Federal Reserve Act by the Federal Reserve Bank of New York. The PMCCF Facility will purchase eligible corporate bonds directly from eligible issuers and will make eligible loans to eligible issuers. Eligible corporate bonds and loans must meet each of the following criteria at the time of bond purchase or loan origination by the Facility:

    • Issued by an eligible issuer.
    • Issuer is rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and
    • Have a maturity of four years or less.

    Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation, including the CARES Act.

    Limits: The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020:

    • 140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO;
    • 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO;
    • 120 percent for eligible assets/eligible issuers with an A/A rating from a major NRSRO; or
    • 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO.

    Bonds and loans under the PMCCF Facility are callable by the eligible issuer at any time at par.

    Interest Rates, Fees and PIK Provisions: The PMCCF Facility will purchase bonds and make loans that have interest rates informed by market conditions. At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. A borrower that makes a PIK election may not pay dividends or make stock buybacks during the period it is not paying interest. The commitment fee will be set at 100 bps.

    Termination: The PMCCF Facility will cease purchasing eligible corporate bonds or extending loans on Sept. 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System.

    The Secondary Market Corporate Credit Facility (SMCCF) 

    Under the SMCCF, the Federal Reserve Bank of New York will establish, under Section 13(3) of the Federal Reserve Act, an SPV to purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (ETFs) in the secondary market.

    Eligible Individual Corporate Bonds: The SMCFF may purchase corporate bonds that meet each of the following criteria at the time of purchase:

    • Issued by an eligible issuer.
    • Rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve.
    • Have a remaining maturity of five years or less.

    Eligible ETFs: The SMCCF may also purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.

    Eligible issuers for direct purchases of individual corporate bonds on the secondary market are U.S. businesses with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation, including the CARES Act. The maximum amount of bonds that the SMCCF will purchase from any eligible issuer will be capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020. The facility will not purchase more than 20% of the assets of any particular ETF as of March 22, 2020. The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

    Termination: The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than Sept. 30, 2020, unless the Facility is extended by the Federal Reserve.

    Actions Taken by the Financial Agencies to Encourage Lending and Facilitate Loan Modifications

    In addition to the financial stimulus programs found in Title IV of the CARES Act and those launched (and in some cases re-launched) by Treasury and the Federal Reserve, the Financial Agencies have taken several piecemeal actions since the start of the crisis to encourage new lending and facilitate short-term loan modifications. These actions include:

    • Meeting the Financial Needs of Affected Borrowers. On March 9, 2020, the Federal Reserve, FDIC, OCC, NCUA and state bank regulators issued a statement “encouraging” financial institutions to meet the financial services needs of their customers and members in areas affected by COVID-19.
    • Community Reinvestment Act Favorable Consideration. On March 19, 2020, the Federal Reserve, FDIC, and OCC issued a joint statement on Community Reinvestment Act (CRA) consideration for activities in response to COVID-19, stating that for CRA purposes, the agencies will favorably consider retail banking and lending activities that meet the needs of affected low- and moderate-income individuals, small businesses, and small farms, consistent with safe and sound banking practices and applicable laws, including consumer protection laws. The CRA joint statement noted such activities could include offering short-term, unsecured credit products.
    • Short-Term Loan Modifications. On March 23, 2020, the OCC, FDIC, NCUA, Federal Reserve, the Consumer Financial Protection Bureau and the State Conference of Bank Supervisors issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The Guidance does two key things:
    1. Short-term loan modifications (for loans of all types) granted to borrowers that have become financially distressed as a result of economic conditions created by COVID-19 will not result in a loan being classified a troubled debt restructuring (TDR). According to U.S. GAAP, a restructuring of a loan or other credit constitutes a TDR if the lender/creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

      The banking agencies have confirmed with staff of the Financial Accounting Standards Board that short-term (e.g., six months or less) loan modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief, are not TDRs. Modification actions can include payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
       
    2. Furthermore, bank regulators will not criticize bankers for granting short-term loan modification relief, if the action taken is done in good faith. The explicit statement in the Guidance that bankers will not be criticized by their regulators removes a significant impediment to bankers providing short-term loan modification relief – an impediment that chilled bankers in the months and years following the 2008/2009 Financial Crisis from providing such relief.
    • Small-Dollar Loans to Consumers and Small Businesses. On March 26, 2020, the Federal Reserve, FDIC, OCC, NCUA and CFPB issued a joint statement “encouraging” banks, savings associations and credit unions to offer responsible small-dollar loans to consumers and small businesses in response to COVID-19. According to the agencies, “[s]uch loans can be offered through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.”

    For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019 or GT’s Economic Stimulus Team.


    [1] Programs to be implemented by the Small Business Administration pursuant to Title I of the CARES Act are addressed in a separate Alert.

    [2] This includes U.S. territories or possessions and Indian Tribes.

    [3] For purposes of the CARES Act, “state” includes U.S. territories and possessions and Indian Tribes.

    [4] This Alert does not address the independent efforts of various state legislative and state regulatory authorities to provide relief to individual and corporate borrowers whose personal finances or businesses have been adversely affected by COVID-19. For instance, on March 21, 2020, New York Governor Andrew Cuomo signed an Executive Order, No. 202.9, Continuing Temporary Suspension and Modification of Laws Relating to Disaster Emergency (the Executive Order). It modifies Section 39(2) of the New York Banking Law to provide that it is an unsafe and unsound business practice for any New York-licensed bank not to grant a 90-day forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic. On March 24, 2020, the New York Department of Financial Services (NYDFS) adopted regulations pursuant to the Executive Order requiring NYDFS-regulated institutions to make applications for forbearance of any payment due on a New York residential mortgage available to any New York resident and who demonstrates financial hardship as a result of the COVID-19 pandemic.

    [5] Of the five programs discussed in this section, MMLF, CPFF, TALF, PMCCF and SMCCF, only MMLF has published regulations. The others exist as term sheets, dated March 23, 2020, on the Federal Reserve’s website, which can be found here: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm.

    ATTACHMENTS

    This article was originally published by Greenberg Traurig, LLP, on March 28, 2020.

  • Tracey Cheek posted an article
    CARES Act Impact on Federal Income Tax Deductions see more

    NAFA member, GKG Law, shares the most recent update on the CARES Act impact on Federal Income Tax Deductions.

    On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill passed by Congress. Our previous alert discussed CARES Act provisions that will benefit general aviation. However, the bill also contains several provisions impacting federal income tax deductions. Below are some provisions that may prove particularly helpful to business aircraft owners and operators:

    • Modifications to the Use of Business Losses: 
      • The 2017 Tax Cuts and Jobs Act (TCJA) created limits on the ability for taxpayers to use Net Operating Losses (NOLs). The TCJA eliminated the ability of taxpayers to “carry back” losses to offset income taxes from prior years, and in general limited the “carry forward” use of NOLs to 80% of a taxpayer’s current-year taxable income. The CARES Act allows taxpayers to carry back NOLs from 2018, 2019, and 2020 tax years up to five years. The CARES Act also temporarily allows NOLs to offset up to 100% of current-year taxable income, by removing the limitation that prevents taxpayers from offsetting in excess of 80% of a taxpayer’s current taxable income. Aircraft owners often generate net operating losses in connection with the use and depreciation of their aircraft, so the ability to further utilize these losses could prove helpful to reducing an aircraft owner’s otherwise taxable income.
      • The CARES Act also modifies the excess business loss limitation applicable to noncorporate taxpayers, which limited the ability to offset business losses against other income to $250,000 ($500,000 for married taxpayers filing jointly), by temporarily allowing those business losses to offset up to 100% of other taxable income for the taxpayer’s 2018, 2019, and 2020 tax years. Since aircraft owners often have income from many different sources, this modification may be helpful in allowing aircraft-related losses to be used as an offset against the taxpayer’s income from other sources without the limits in the TCJA.
         
    • Modifications to Limitations on Business Interest Expense Deductions: The amount of business interest expenses that a taxpayer is allowed to deduct is generally limited to 30% of the taxpayer’s adjusted taxable income. The CARES Act increases this limit to 50% for 2019 and 2020 tax years. Aircraft owners frequently finance the purchase of their aircraft, so this provision could allow those owners to deduct additional business interest expenses that would have been nondeductible under the prior rules.

    The tax provisions discussed above are complex in application and often require a holistic look at a taxpayer’s particular facts and circumstances to determine their potential benefit.
     
    Please do not hesitate to contact a member of our Business Aviation team with questions regarding the CARES Act as it relates to your business needs and decisions.

    This article was originally published by GKG Law on March 31, 2020.

  • Tracey Cheek posted an article
    Key Provisions for General Aviation Businesses in the CARES Act see more

    NAFA members, Edward Kammerer and Thomas Richardson with Greenberg Traurig, LLP., share key provisions for the general aviation businesses in the CARES Act.

    On March 27, 2020, the $2 trillion stimulus bill known as the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law.  While the CARES Act sets aside $250 billion of direct payments to individuals and families and $377 billion in small business loans, it also contains provisions that directly support general aviation. The general aviation community should be aware of the following elements within the CARES Act:
     

    1.   Temporary suspension through the end of the year of federal excise taxes for commercial operations, including the 7.5% FET applicable to Part 135 charter flights.
     
    2.   The suspension of the tax on aviation fuel until January 1, 2021.
     
    3.   A series of extensions allowing Part 135 charter operators to temporarily postpone certain training requirements related to crew safety concerns.
     
    4.   Allowing up to an additional three months to complete recurrent and upgrade training and qualification activities.
     
    5.   Relief allowing airmen whose medical certificates expire between March 31 and June 30 to continue to fly in order to reduce stress on the nation’s healthcare system.
     
    6.   $25 billion in direct lending and loan guarantees for passenger air carriers[1], including Part 135 charter operators, and Part 145 repair stations.
     
    7.   $4 billion in direct lending and loan guarantees and $4 billion in grants for cargo air carriers, including Part 135 operators that conduct cargo charter operations.
     
    8.   $3 billion in grants for aviation industry contractors.
     
    9.   Congress further allocated an additional $25 billion in grants for passenger air carriers and $4 Billion in grants for cargo air carriers that are for continued payment of wages to employees.
     
    10.   $10 billion in grants allocated for airports, a significant portion of which was designated for improvement of General Aviation airports. These loans and grants come with restrictions and eligibility requirements. Loan and grant recipients are subject to employee retention requirements and restrictions on executive compensation, stock buybacks and dividends.


    Because much of the General Aviation Community is comprised of small businesses[2], the GA Community should be aware of those provisions of the CARES Act that are generally available to small businesses:
     

    1.   $350 billion in funds available for loans through a “Paycheck Protection Program.”[3]  Loans will have no fees and are available in amounts up to 250% of an employer’s average monthly payroll, up to $10 million. Payment of principal and interest can be deferred up to a year.  Up to eight weeks of average payroll and other costs may be forgiven if the business retains its employees at current salary levels.
     
    2.   $10 billion is available for an advance up to $10,000 in SBA Economic Injury Disaster Loans that may be used for expenses, including payroll and other operating expenses that would otherwise have been met had the COVID-19 pandemic not occurred.  The principal amount of these loans can be up to $2 million, with an interest rate of up to 3.75%.  Payment of principal and interest can be deferred up to a year. 
     
    3.   An additional $17 billion is provided to cover six months loan payments for existing SBA borrowers. This relief is also available to new borrowers that take out an SBA loan within six months of the signing of the CARES Act into law.

     

    For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.


    [1] CARES Act relies on 40 U.S. Code §40102(a)(2) to define “air carrier” as “a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation.”

    [2] Under the CARES Act, this is includes a small business, 501(c)(3) nonprofits, 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher. Sole-proprietors and independent contractors may also avail themselves of this relief.

    [3] Section 7(A) of the Small Business Act, 15 U.S.C. 636(a).

    This article was originally published by Greenberg Traurig, LLP. on March 30, 2020.

  • Tracey Cheek posted an article
    Coronavirus Aid, Relief, and Economic Security (CARES) Act Provisions to Benefit General Aviation see more

    NAFA member, GKG Law, shares the latest on the CARES Act.

    On March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus bill. The House of Representatives is expected to approve the legislation, and President Trump has indicated he will quickly sign the bill into law. In addition to general loan programs for small and mid-size businesses that are made available, the CARES Act contains provisions that will benefit general aviation specifically. The business aviation community should take note of the following provisions included in the CARES Act:

    • Relief from the 7.5% air transportation federal excise tax for general aviation commercial operations (including flights operated under FAR Part 135), and from the commercial fuel tax through December 31, 2020 (This will not apply to amounts paid for transportation on or before the date of enactment of the CARES Act.);
       
    • Loans and grants to passenger and cargo air carriers, including 
      • $25 billion in direct loans and loan guarantees for FAR Part 135 Operators providing passenger operations and an additional $25 billion for wages, salaries and benefits for employees;
      • $4 billion in direct loans and loan guarantees for FAR Part 135 Operators providing air cargo operations and an additional $4 billion for wages, salaries and benefits for employees;
         
    • $25 billion in loans and loan guarantees for Part 145 maintenance facilities;
       
    • $10 billion for airport grants, with $100 million specifically allocated to general aviation airports.

    Note that companies receiving loan and loan guarantees under the CARES Act will be subject to certain requirements, such as maintaining March 24, 2020 employment levels to the extent practicable through the end of September and limits on employment level cuts, limits on executives’ compensation and stock buybacks, and the Department of Transportation would have authority until March 1, 2022 to order any carrier accepting federal assistance to maintain certain air routes.

    Please do not hesitate to contact a member of our Business Aviation team with your CARES Act questions or concerns in the days to come.

    This article was originally published by GKG Law on March 26, 2020.