UPDATE: Modrall Sperling COVID-19 Task Force
*This article is authored by Roberta Cooper Ramo with Nicole T. Russell, Haley B. Adams and other Modrall Sperling attorneys.
Latest change in business openings in New Mexico: per Governor Lujan Grisham’s most recent press release, available here, on May 16, most retailers and offices will be permitted to open at 25 percent of their maximum occupancy as determined by fire code.
When answers to Frequently Asked Questions were issued on April 23, 28 and May 5, 2020, the Treasury and the SBA raised major concerns for those who received Payment Protection Plan Loans. FAQ 31, updated by a new FAQ 43, provided a date, May 14, 2020, by which anyone could return their loans if they did not meet the vague requirements of “need” with no penalty. THAT DATE HAS NOW BEEN EXTENDED TO MAY 18, 2020 PER FAQ 47. But neither FAQ 31 nor 43 clarified the language that indicated penalties if the “need” certification was not met.
TODAY, a new FAQ 46 (available here) was issued, which clarifies that: (1) Loans of less than $2,000,000 will be extended safe harbor with respect to certification of need in the original loan, or any amended loan document which was approved and for which funds have been received; and (2) Loans of $2,000,000 or more will all be audited by the SBA. However, there is no requirement that the borrower had no other funds available from lines of credit, funds retained by the entity, or possible endowments at the time of the certification of need on the loan documents. Importantly, if after the audit the SBA determines that the borrower did not have an appropriate need at the time of the loan, the borrower can return the funds to the SBA upon that finding with no administrative, financial or criminal penalty. The safe harbor guidance assumes good faith representations; fraudulent behaviors could still incur penalties or sanctions.
Question 7 on the Modrall Covid-19 website has been updated to reflect important changes to health plan issues. Question 3 on the Modrall Covid-19 website will be updated soon.
In a very short period of time, the COVID-19 virus already has made a lasting imprint on the daily lives of individuals. But it is important to recognize that the complicated and impactful implications of the virus on businesses have only just begun. Modrall Sperling lawyers have mobilized to deal with client issues as they arise and strive to be a resource for our clients as they strategize the near and long term effects of the shutdown and stay at home orders.
During our consultations with clients over the last several weeks, a pattern of frequently arising questions has emerged. We endeavor to summarize those questions and the corresponding answers in this article, and we hope that this will serve as a resource to our clients as we face the coming weeks and months of recovery. Please note that the law, the regulations and judicial interpretations are in a constant state of flux. Before acting upon any of the information contained herein, please consult with one of our attorneys to ensure that there have not been changes that might affect your planned course of action.
1. What Federal Programs are aimed at helping business and individuals?
A. The CARES Act
The key federal program in place today is the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act (“CARES” or “CARES Act”). Its main purpose is to provide loans to businesses for specific expenses incurred during the period of February 15, 2020 through June 30, 2020. Some relief for individuals is also provided in the CARES legislation.
Although the Small Business Administration (SBA) issues CARES loans, the loans are serviced by banks authorized by the SBA. A list of authorized New Mexico Banks can be accessed here (SBA New Mexico Edition Resource Guide 2019-2020, page 30). Please be aware that some banks are imposing restrictions and choosing to work only with their existing business customers.
Though many businesses were unable to secure funding from the SBA in the initial round of funding, another round of funding—replenished with $310 billion— opened on Monday, April 27, and as of this writing is not yet exhausted. As of May 1, the second round of PPP lending has provided 10,001 loans to New Mexican businesses, totaling $758,792,852. Entities fortunate enough to secure funding will have received an SBA loan number. While most banks have been able to transfer the money to their approved borrowers quickly, the loan volume at some banks may have caused a delay. If you received an SBA loan number and have not yet been asked to sign a loan note, you should contact your bank to inquire.
There are stringent rules associated with an applicant’s ability to obtain forgiveness of the loan. The Rules for the CARES Act loans, especially the Paycheck Protection Program (“PPP”) portion, are quite specific and must be followed to have eligible amounts of the loan amount forgiven. The two PPP Interim Final Rules can be accessed here and here, and the Frequently Asked Questions (FAQs) can be accessed here. Please note that the FAQs clarified and in important ways enlarged definitions like “compensation” to include such things as payment of health insurance and many other benefits. The FAQs and SBA regulations need to be reviewed often as they are important in figuring out exactly what the rules are from day to day. You must be prepared to document that all monies expended from the funds that you received under PPP were used in allowable ways.
Importantly, it is incumbent upon the borrower to certify its own eligibility to receive a PPP loan. To this end, an applicant generally must (i) have fewer than 500 employees whose principal place of residence is in the United States or (ii) be a “small business” under the applicable NAICS code employee size standard to be eligible for a PPP loan. A business otherwise ineligible can qualify for the PPP as a small business concern if it meets the SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.
Loan forgiveness may be limited under the PPP as follows:
- No more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs (i.e., mortgage interest, rent and utilities)
- Proceeds from any advance up to $10,000 on an Economic Injury Disaster Loan will be deducted from the loan forgiveness amount
Loan forgiveness will be proportionately reduced if the business has reduced its number of full-time equivalent employees or has reduced the salary or wages of certain employees. It therefore follows that applicants should start keeping detailed records, asking for receipts, and maintaining organized document storage, beginning on day one of the covered period. The ‘covered period’ is eight weeks from the date the lender first makes the disbursement.
If you are uncertain of the status of your application, it is very important that you check with your bank and not assume that if your loan application is already in the hands of the bank that that application will work under any new funding act. Every item required to be documented must be complete for a bank to submit a loan application to the SBA.
A second source of federal help is the Economic Injury Disaster Loan Advance (EIDLA). SBA resources regarding this program can be found here. While the loans under PPP can be largely forgiven if certain criteria are met, the loans under the SBA Economic Injury Disaster Loan program are low interest loans that must be paid back. Those funds are also currently all expended and the amount to be allocated under the new bill under consideration in Congress is unknown.
B. The Main Street Lending Program
The Federal Reserve has announced that it will establish a Main Street Lending Program (Program) to support lending to small and medium-sized businesses in sound financial condition before the onset of COVID-19. The Program will operate through three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). Though the Program is not yet finalized, FAQs are available here.
2. Is there any guidance regarding loan forgiveness under the PPP?
Yes, although the SBA has yet to provide the more intensive required regulations governing forgiveness. Based on current guidance and interim rules, we know the following:
As a threshold matter, loan forgiveness will be based upon the business’ actions during the covered 8-week period. That period begins upon the lender’s disbursement of the loan. From there, forgiveness will be determined by certain costs incurred and payments made throughout the covered period. Payroll costs are the primary eligible cost, and include:
- Salary, wages, commission or similar compensation (limited to $100,000.00 compensation or less per employee)
- Payments for vacation, parental, family, medical or sick leave (this may be limited if the Employer got benefits under the Families First Corona Virus Response Act, FCRA)
- Allowance for dismissal or separation
- Payments for the provision of group health care benefits, including insurance premiums
- Payments for retirement benefits
- State or local payroll taxes
Since 75% of the loan amount must be used for payroll costs, Employers with multi-week or monthly pay periods may want to issues checks for a shorter period within the covered 8 weeks.
Per current guidance, no more than 25 percent of the loan forgiveness amount can be attributable to non-payroll costs. Those non-payroll costs eligible for forgiveness include:
- Interest payments on mortgages incurred in the ordinary course of business on real or personal property in existence as of Feb. 15, 2020
- Rent payments under leasing agreements in existence as of Feb. 15, 2020
- Utility payments for electricity, gas, water, transportation, telephone or internet for which service was in existence as of Feb. 15, 2020.
Current guidance sets forth three more limitations on PPP loan forgiveness. First, the proceeds from any advance up to $10,000 on an EIDL will be deducted from the loan forgiveness amount. Second, all payments must be made during the 8 week period from the time the loan proceeds were received. Third, the forgiveness amount will be proportionately reduced if the business has reduced its number of full-time equivalent (FTE) employees, or if the business has reduced the salary or wages of certain employees. The proportional reduction formulas are as follows:
Formula for reduction in FTE employees:
The loan forgiveness amount is subject to reduction by multiplying it by the following fraction:
- Numerator: average number of FTE employees per month employed by the borrower during the covered period
- Denominator (to be chosen by borrower):
- Average number of FTE employees per month employed by the borrower during the period beginning Feb. 15, 2019, and ending June 30, 2019
- Average number of FTE employees per month employed by the borrower during the period beginning Jan. 1, 2020, and ending Feb. 29, 2020
Formula for reduction in wages:
The loan forgiveness amount is subject to reduction by an aggregate dollar amount determined as follows:
- Identify all “covered employees”: those employees who did not receive during any single pay period in 2019 wages or salary at an annualized rate of pay of more than $100,000
- Compare each covered employee’s wages or salary during the covered period to his or her wages or salary during the first quarter of 2020
- For any covered employee whose wages or salary during the covered period decreased by more than 25 percent:
- Multiply the first quarter wages or salary by .75
- Subtract the product from the covered period wages or salary
- Add all amounts
NOTE: Reductions in the number of FTE employees, or reductions in salary or wages, that occurred between Feb. 15, 2020, and April 26, 2020, will not reduce the loan forgiveness amount if, by June 30, 2020, the borrower eliminates the reductions.
Finally, for loans or loan amounts not forgiven, terms of the loan will remain:
- A maturity date two years from the date of disbursement
- No payments during the first six months
- An annual interest rate of one percent
- No prepayment penalty
Ultimately it will be important for businesses to conduct their own calculations to determine if meeting all the required terms for loan forgiveness will be in their financial best interest, or if it will be more cost-effective in the long run to seek only partial forgiveness.
3. What else do PPP Applicants and Recipients Need to Know?
After several publicly-traded companies reportedly received PPP loans, the SBA and the Treasury Department on April 23 and on April 28, 2020 issued FAQ No. 31, which seems to add to the loan requirements. The FAQ, available here, effectively amends the certification to supplement the factors businesses are required to consider when making the certification. Notwithstanding the Question’s reference to “businesses owned by large companies,” the answer states that “all borrowers must assess their economic need under the standard established by the CARES Act and the PPP regulations at the time of the loan application.”
Though the Department of the Treasury’s recent Interim Final Rule—available here—extends “safe harbor with respect to certification concerning need for the PPP loan request,” and, in so doing, allows borrowers who may have been mistaken about the Certificate Requirement to return their loans, the FAQ and subsequent regulation may be confusing borrowers. Recognizing this confusion, the Department of the Treasury added FAQ No. 43, which extends the safe harbor provision to May 14, 2020. THAT DATE HAS NOW BEEN EXTENDED TO MAY 18, 2020 PER FAQ 47. That FAQ also provides that “the SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.” Absent further guidance from the SBA or Treasury, borrowers should, at a minimum, document in detail:
- the economic uncertainty necessitating the loan, including as many figures and contract obligations as possible;
- the absence of alternative sources of liquidity;
- requests already received to reduce charges;
- any limitations on the ability to use working capital;
- any inability to borrow additional funds;
- any business risks to using existing working capital or taking on new debt to fund current operations.
- any plan for reducing staff and payroll costs and the extent to which such plan is put on hold due to forgiveness expectations;
- A current threat assessment to your business in light of the current situation.
Finally, it is expected that the SBA will develop a list of recipients who will be asked to demonstrate the basis for their certification that the PPP loan was necessary, as well as the other elements of eligibility. On April 28, Secretary Mnuchin announced that the SBA would conduct a “full review” of all loans over $2 million before there is loan forgiveness. It is also possible that this list of recipients will be disclosed to the public, as the Associated Press accessed, combed through, and publicized regulatory filings following the first round of PPP loans. We will continue to update the Modrall Sperling website with federal guidance as it develops.
4. Is there a New Mexico Loan Program to aid businesses harmed by the COVID-19 shutdown?
Yes, the New Mexico Investment Council has established a New Mexico Recovery Fund managed by Sun Mountain Capital. That program and the rules for application may be found here. Note that these loans must be repaid under the terms of the program. These are the lawyers familiar with the program: Meg Meister and Robin James.
5. What New MexicoBusinesses are shut down?
In order to contain the spread of COVID-19, the Governor of New Mexico has ordered most non-essential businesses closed. The order and the list of businesses that are considered to be providing “essential services” can be found here. The Governor has since issued two renewals of the initial Stay-at-Home Order, the most recent of which extends the Order to May 15 and can be found here.
Governor Lujan Grisham has, however, loosened some business-related restrictions as of May 1. Per the Governor’s directive,
- Non-essential retailers may offer curb-side pickup;
- State parks will open on a modified basis without camping;
- Pet services, including grooming, boarding, and veterinarians may operate;
- Golf courses may open for golf only, without dining or retail;
- Gun stores may operate for background checks by appointment only;
Governor Lujan Grisham has, however, loosened some business-related restrictions as of May 1. Per the Governor’s directive,
- Malls, gyms, salons, theaters, casinos, bars and restaurants (except for takeout/delivery) remain closed; and
- The Stay-at-home Order remains in place, mass gatherings prohibited and a 14-day quarantine continues for out-of-state travelers.
On May 5, 2020, Department of Health Secretary Kunkel amended the state public health emergency order to add that:
- Beginning Wednesday, May 6, all large grocery and large retail spaces (those greater than 50,000 square feet in size) and all restaurants currently operating curbside and delivery service must ensure that all employees have at least cloth face coverings.
- All employees must wear their face coverings in the workplace at all times when in the presence of others.
- As of May 11, all essential businesses of any size currently operating under the public health order must also comply with the face covering requirement.
- In anticipation of a “Phase One Reopening” in mid-May, all employers are strongly encouraged to acquire face coverings for all employees over the next week so as to comply with the face covering requirements upon opening.
- Retailers will not be required to provide face coverings for customers but are encouraged to post signage encouraging customers to wear their own masks. Retailers at their own discretion may require customers to wear masks.
If you feel your business should meet the definition of essential business and are not clear whether it is covered or you need to ask to be included, you may send inquiries to email@example.com. These are the lawyers who have been working in this area: Marco Gonzales, Walter Stern, Lynn Slade, Stuart R. Butzier, Brian Nichols and Christina C. Sheehan.
In her April 23 Address, the Governor indicated that—although the current Stay-at-Home Order would be extended to May 15—some business restrictions would be eased. We will continue to update this page as information becomes available.
6. How has COVID-19 affected tax filings, tax matters and retirement plans?
The due date for filing individual income tax returns was automatically extended by the IRS and the State of New Mexico from April 15, 2020 to July 15, 2020.
The CARES Act has a number of very important exemptions or changes to rules concerning retirement plans of all kinds. These range from changes providing large loans and distributions from qualified plans for those qualifying for them to suspension of required minimum distributions. Other changes were made that might make a difference in your decisions about charitable gifts from IRA’s and certain estate planning matters. For Retirement Plan questions of all kinds, Karen Kahn is working on these matters. For other tax matters, including state taxes and estate tax questions the following lawyers are able to help: Vanessa Kaczmarek, Ian Bearden, Karen Kahn, Zack McCormick, Roberta Ramo, Marjorie RogersandNadine Shea. For State Gross Receipts Tax questions, please contact Zack McCormick or Ian Bearden.
7. Are there any health insurance or health plan issues? This is an important update as of May 13, 2020.
Certain protection of continuation of health benefits are covered by the CARES Act. However, many depend upon the hour requirements of the employer’s plan and there may be state insurance rulings that have changed. The DOL and the IRS have waived health plan claims deadlines for both employees and employers, including deadlines for paying COBRA premiums. On May 13th, the IRS issued Notices that permit Employers the option of: 1) extending the grace period for unused amounts from 2019 in Health FSAs and DCRAs to December 31, 2020; 2) prospectively permitting changes to health plan coverage and to Health FSAs and DCRA amounts without a qualifying status change (although Employers can limit the amount and the election change period); 3) permitting use of telehealth services without disqualifying HSA contributions, and 4) increasing the Health FSA carryover to $550 and permanently indexing the carryover dollar amount. Amendments are not required until 12/31/2021. Also important are the requirements of HIPAA when an employer finds that an employee has been diagnosed with COVID-19. Kevin Pierce is ready to answer HIPAA questions and Karen Kahn can help with health plan and cafeteria plan questions.
8. How does COVID-19 affect employers?
The U.S. Department of Labor (DOL) is requiring employers to post a notice of the Families First Coronavirus Response Act (FFCRA). The FFCRA became effective on April 1, 2020. The current poster applicable to non-federal employees (as of March 26, 2020) can be found here. The DOL has provided additional information regarding the FFCRA and related posters on the DOL website here.
Employers are required to inform employees of the rights afforded by the FFCRA. The DOL counsels that an employer may satisfy this requirement by emailing or direct mailing this notice to employees, or posting this notice on an employee information internal or external website. Several attorneys in our Employment Group can help with these kinds of issues.
9. How has COVID-19 impacted real estate leases?
Both residential and commercial leases are impacted by the COVID-19 shutdown.
For commercial leases, look first to the language of the lease.
Many tenants have stopped paying rent during the shutdown and both landlords and tenants are looking at their leases. The result is in part dependent upon the language of the leases. However, many leases do not address a virus in a clear way. Additionally, tenants who were recipients of PPP loans may be required to pay rent under certain terms of that loan. Other loans may not have a similar requirement. Landlords should be clear about following the notice provisions of the default clauses in their leases and tenants would be well advised to get in touch with their landlords directly. Any written communication of either the landlord or tenant should be reviewed by your attorney. Meg Meister, Roberta Ramoand Robin Jamesare working in this area.
For residential leases, the following information may be helpful:
The CARES Act contains a 120-day “moratorium” on landlords evicting tenants or imposing fees/fines due to a tenant failing to pay rent. The CARES Act eviction moratorium applies to “covered dwellings” and “covered properties”, which include any property that participates in a covered housing program including such as (among other programs) the Low Income Housing Tax Credit program (26 U.S.C. § 42) and programs pursuant to which the landlord’s mortgage is a HUD, VA, USDA or Fannie Mae or Freddie Mac loan. Additionally, before the enactment of the CARES Act, the New Mexico Supreme Court has issued an Order staying the execution of all writs of restitution under the Owner Resident Relations Act (even for landlords not covered by the CARES Act moratorium) for non-payment of rent, provided the resident “has demonstrated by a preponderance of the evidence a current inability to pay monthly rent established by the rental agreement.” The Order does not contain a termination date, and instead, “shall remain in effect until amended or withdrawn by future order of the Court.” Accordingly, it is feasible the Order could continue to apply even after the CARES Act moratorium expires.
10. What about creditors’ rights issues?
In addition to leases, COVID-19 has had a dramatic input effect on loans. Businesses that extend credit are being requested to forbear collection and the CARES Act has expanded certain bankruptcy relief. Moreover, the dramatic oil price reduction has hurt businesses and individuals within, and dependent on, the oil and gas industry for revenue. Creditors should understand their rights and the rights of their borrowers, including the revisions to the Bankruptcy Code under the CARES Act. Attorneys Paul Fish, Doug Vadnais, and Spencer Edelman can provide guidance on these issues.
11. Is it possible to execute new Estate Planning Documents during the shutdown?
Yes. Documents that only need be witnessed by a notary may, until June 20, 2020 be notarized by video (i.e. Zoom or FaceTime), if certain requirements are satisfied. Additionally, and especially important now is letting someone in your family know where your original wills, trusts, durable powers of attorney and health care directives are kept. If you have questions about creating or updating your estate planning documents, the attorneys in our Trusts and Estates Group can help.
12. What will the legal requirements be for reopening businesses and what employment issues are important in that context?
Note that essential businesses that are currently open must follow many requirements in the Governor’s original and renewed Order, including the number of people that can be in their business and other requirements.
As businesses reopen, they should review the guidelines from the CDC and New Mexico Department of Health. In addition, the Department of Labor and EEOC have issued guidance to help employers apply the sick leave and expanded Family Medical Leave Act and to avoid claims for discrimination, retaliation, and harassment in the workplace based on COVID-19, such as the ability for employers to take the temperatures of employees entering the workplace, limitations on disclosing the identity of a COVID-19 positive employee, and the duty to accommodate an employee’s request for accommodation based on a fear of contracting COVID-19. Modrall Sperling’s Employment Group is ready to navigate employers through these and other potential areas of exposure. These guidelines continue to change and you should consult with your attorney before you take action.
13. Risk management and related litigation.
The Long Term Care and Healthcare industries are facing regulatory and personal injury claims related to COVID-19. Our attorneys have handled regulatory and litigation matters for our clients in the Long Term Care and Healthcare industries, such as skilled nursing facilities and assisted living facilities, and hospitals, including regulatory proceedings, trials and appeals, and they are well-versed in recent COVID-19 developments. Should you be threatened with COVID-19 related litigation or regulatory enforcement matters, attorneys, Michelle A. Hernandez, Tomas J. Garcia, Tim L. Fields, Martha Brown, Susan BisongandJeremy Harrison can help you.
The most important advice of all: Stay safe, wash your hands, wear your masks and know that we all care about our whole community and are here now and in what we know will be a robust recovery for New Mexico.
 In a recent New Mexico bankruptcy decision here, the Bankruptcy Court deemed arbitrary and capricious the SBA’s “inexplicable and highhanded decision to rewrite the PPP’s eligibility requirements” regarding bankruptcy ineligibility only after publishing a First Rule that made no mention of bankruptcy whatsoever. This opinion has no weight outside this case, but highlights one Judge’s objection to adding requirements not stated in the PPP statute.