By Matthew Daus, Esq.
Editor's note: this article was written before money ran out for the SBA program. At press time, Congress is working on passing a bill to increase the amount of money in the PPP program.
The public health impact on society and the economic impact of the novel coronavirus (“COVID-19”) on most businesses and on the entire transportation industry has been nothing short of catastrophic, putting it mildly. This new normal is beyond surreal, and our world in general, and the mobility world, will never be the same again. In just days, business dropped to a stand-still and most transportation companies have ceased operations, laid off employees, deactivated drivers, received account and event cancellations or bill collection deferment requests, and are struggling to manage cash flow and to reduce costs to a trickle to live to fight another day.
Some carriers saw commuter service reduced by more than 90 percent, tour companies suspended services, many routes and service lines have either been suspended or cut back dramatically. The “safe-distance” recommendation requirements were a hit to bus ridership, routes became immediately unsustainable from “hot zones,” and all routes had reduced ridership. One bright spot to note is that some school districts will pay bus operators a percentage of the contract even though the schools are closed. Bus companies were initially struggling for ways to hold onto their drivers until business returns by furloughing workers so they would not file for unemployment or find jobs with Amazon to provide package delivery.
In general, COVID-19 reactions, facts, and policies at are constantly changing by the hour. Since this is the first time in modern history that anything like this has happened, many bus and motorcoach companies and their vendors, clients, and suppliers did not have contingency plans in place – and everyone is making it up as they go along. To fill this information gap, the Transportation Practice Group that I chair at the law firm of Windels Marx put together a comprehensive presentation including the following disciplines: labor and employment, tax, contracts, finance, civil rights, torts and insurance, regulatory and legislative. The webinar, held on March 20, is entitled “Emergency Webinar on COVID-19 Transportation Industry Risk Mitigation & Resiliency.
- COVID-19 Resource Guide for Transportation Companies
- FAQs by Transportation Companies About COVID-19
- COVID-19 Risk Management Checklist for Transportation Companies
The most important and urgent issues within the last few weeks are the federal, state, and local emergency grants and loans that have been made available. Below is a brief description of the federal loan and grant programs available to many bus companies, which provide immediate cash relief to retain payroll, pay expenses and try to get through the next few months. In addition, many states and localities are developing their own programs. As a courtesy to bus and motor coach operators, my law firm is providing free advice on answering grant and loan questions and has developed a COVID-19 Transportation Law hotline to answer questions around the country – 212-237-1106; or email your requests and email@example.com">questions to firstname.lastname@example.org and we will respond promptly. Also, we have recently released FAQs for the CARES Act Payroll Protection Program (“PPP”) and a Checklist/Worksheet/Calculator to help bus companies apply for this loan:
- PPP Frequently Asked Questions (FAQs) for Transportation Providers
- Paycheck Protection Program (PPP) Document Checklist & Worksheets
CARES Act Payroll Protection Program
The “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act”—the $2 trillion federal stimulus package that was passed on March 27—includes provisions that could deliver critical relief to bus companies impacted by the COVID-19 pandemic—including fully forgivable loans and emergency grants—if they can find a lender. The CARES Act includes $349 billion to fund the Payroll Protection Program, which provides forgivable low-interest loans for businesses with fewer than 500 employees, including sole proprietorships, independent contractors, and self-employed persons who have been impacted by the COVID-19 pandemic. The PPP loan is designed to provide a direct incentive for small businesses to keep their workers on payroll by providing the businesses with funds to maintain payroll for up to eight weeks and to pay interest on mortgages, rent, and utilities.
The U.S. Treasury said the loan funds will be issued on the same day the loan application is approved, yet that does not seem to be case so far. The PPP loans are available directly from private lenders, which will be paid fees by the U.S. Small Business Administration (“SBA”) for processing the loans and which may not collect any fees from the applicant. The processing fees are based on the balance of the financing outstanding at the time of final disbursement: 5 percent for loans less than $350,000; 3 percent for loans of $350,000–$2,000,000; and 1 percent for loans of at least $2,000,000.
Due to the overwhelming volume of applicants and background check requirements placed on lenders, many lenders are restricting applicants to those with whom they have pre-existing business relationships, such as a business checking account or lending history.
While the SBA is requiring only limited underwriting on these loans, lenders still must verify that a borrower was in operation on February 15 and had employees. The lenders must also verify the dollar amount of average monthly payroll costs and follow applicable Bank Secrecy Act requirements. Lending to existing clients can expedite the application process. Businesses that have not needed to borrow money in the recent past may have difficulty locating a lender at this time.
Another reason for the lag in roll out is that the SBA issued proposed rules for the program the night before the first day lenders could start accepting applications. The proposed rules, released late on April 2, made significant changes to earlier guidance issued by the Treasury Department. Namely, increasing the interest rate from 0.50 percent to 1 percent, and requiring that no more than 25 percent of the proceeds be used for non-payroll costs if the borrower wants the loan fully forgiven.
Those who secured a loan have eight weeks to use it for their payroll costs, interest on mortgage obligations incurred before February 15, rent under lease agreements in force before February 15, and utilities, for which service began before February 15. If they do, and employee and compensation levels are maintained or restored during that time, then they will have the total loan forgiven.
All PPP loans have an interest rate of 1 percent (fixed rate) and a term of two years. However, up to 100 percent of the loan is forgivable. Borrowers will not be responsible for any loan payment if they use the loan only to cover payroll costs, interest on mortgage obligations, rent, and utilities in the eight-week period after the loan is made and maintain employee and compensation levels during that time. As a requirement for forgiveness, at least 75 percent of the forgiven amount must be used for payroll costs.
Payroll costs consist of compensation paid to employees, including:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit; and
- State and local taxes assessed on compensation.
CARES Act Loans for Independent Contractors – Including Bus Drivers
The SBA also made clear in its proposed rules that independent contractors have the ability to apply for a PPP loan on their own and will not be included in another borrower’s PPP loan calculation or loan forgiveness. The CARES Act arguably allowed businesses to use loan proceeds to pay their independent contractors, but that loophole—which could have allowed for double-dipping—was closed by the SBA rules. For a sole proprietor or independent contractor, payroll costs include wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis. While initially bus companies were concerned about losing drivers to package delivery services, the passage of the CARES Act’s PPP and the additional unemployment insurance made available by Congress essentially solves that problem, as most bus drivers will earn more compensation under the PPP or through unemployment than before the COVID-19 pandemic started.
CARES Act Loan Forgiveness & Payment Deferral
Forgiveness is also based on maintaining or quickly rehiring full-time employees and maintaining salary levels. The forgiveness amount will be reduced if full-time headcount declines or if salaries and wages decrease by more than 25 percent for any employee that made less than $100,000 in 2019. However, there is a cure period. Borrowers will have until June 30, to restore full-time employment and salary levels for any changes made between February 15, and April 26. Because there is a funding cap, the U.S. Treasury is encouraging businesses to apply as quickly possible. Loans can be for up to 2.5 times the average monthly payroll costs (described above) from the previous twelve months, plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31- April 3 capped at $10 million.
CARES Act Extension of SBA Economic Injury Disaster Loans (EIDL)
The CARES Act also extended the eligibility for SBA Economic Injury Disaster Loans to any business fewer than 500 employees, sole proprietors, and independent contractors, among others. Within three days of applying, EIDL applicants may receive a $10,000 advance that does not have to be repaid if it is used for maintaining payroll, paid leave, increased costs due to supply chain disruption, mortgage, utility, or lease payments, or repaying obligations that cannot be met due to revenue losses.
EIDLs provide up to $2 million at 3.75 percent interest, plus principal and interest deferment for up to 4 years, and a maximum term of 30 years. Unlike the PPP loans, this loan is processed directly through the SBA. SBA approval is based on an applicant’s credit score. No personal guarantee is required for EIDLs under $200,000, but loans over $200,000 must be guaranteed by any owner having a 20 percent or greater interest in the applicant.
Emergency EIDL grants will be made through December 31. However, like PPP loans, funding is limited. Applicants who received an SBA EIDL from January 31-April 3, can apply for a PPP loan. Businesses may receive an EIDL and a PPP loan, as long as the EIDL is not being used to pay for the same expenses as the PPP loan.
Daus is partner and chairman, Windels Marx Transportation Practice Group, as well as president, International Association of Transportation Regulators; and Transportation Technology chair, City University of New York, Transportation Research Center at The City College of New York. You can contact Matthew at email@example.com.