WEBINAR: CARES Act & Paycheck Protection Program

Mike:

(music).

Hey, everyone. Welcome to a very special SkyView Partners webinar. On this webinar, you're going to learn a little bit of a topic that's probably of great interest, and surely of great importance, to you and your business, and frankly, the wider financial advisor and REA community and the businesses that they serve, and their client base.

My name is Mike Langford and I'll be moderating today's webinar. Joining me today is Scott Wetzel, the CEO of SkyView Partners. By way of introduction, SkyView Partners focuses exclusively on the financing needs of independent and registered investment advisors. SkyView provides guidance and capital for practice succession, acquisition, merger and debt restructuring. And in today's climate, SkyView is here to help you navigate your financing needs in this time of great uncertainty.

Welcome, Scott. Great to have you!

Scott:

Thanks for having me on. And you might want to move that bag of Doritos on the couch behind you. Kidding, they're gone. You must have eaten them. I've eaten all mine.

No, thanks for having me. I know we're all stuck at home, so appreciate your time very much around a very important topic this morning.

Mike:

Yeah, exactly. We're going to be talking about the Paycheck Protection Program today. And I thought it'd be great to have you introduce a little bit of it. As I think people are maybe aware, it's part of the big CARES Act that was passed into law last week.

Scott:

Correct. As of last Friday, bill signed into law by President Trump late in the day that created the Paycheck Protection Program which is appealing to small businesses for multiple reasons. And importantly, the funds will be administered through the SBA, Small Business Administration, yet they'll actually be processed and funded via national regional community banks, credit unions and potentially some FinTech lenders as well.

Mike:

Okay. Yeah, exactly. And so for those of you who are unaware, what the CARES Act stands for, it's the Coronavirus Aid, Relief, and Economic Security Act, so CARES Act. Government loves acronyms. And of course, we have the Paycheck Protection Program. One of the things you and I were talking about that was really, really meaningful and think is going to be the primary focus here of this webinar, is that this is something that advisors and REA firms can do for their clients, is to get this information and make sure that their small business-owning clients have this information at the ready. So I guess that leads into the obvious question of, what businesses are going to be eligible to take advantage of the PPP.

Scott:

Really any business under 500 employees and that was in existence before February the 15th, 2020. That can be self-employed, independent contractors, LLC, C Corp, S Corp, you name it, are all eligible. Key determination for eligibility is just being under 500 employees and you had to be in existence as of February 15th.

Mike:

Okay, great. Great. Frankly, that's probably the majority of businesses in America, right? Most businesses have fewer than 500 employees and meet that type of criteria.

Scott:

Yeah. This program is applicable to, I don't know, what percentage of the US economy is comprised of businesses under 500, but I'd say, it's significant.

Mike:

Yeah. In my experience, most wealth management firms, their most valuable clients are the ones who own these types of businesses. Right? That's how they generated their wealth.

Scott:

Absolutely. And you know, our primary focus, and we work with the independent and registered investment advisor community who are also eligible for this funding, but really we're viewing it as a key distribution mechanism for getting information out about this program, more so than being applicants. Because as you're watching the news, reading the paper, if anyone reads the paper anymore, but reading anything online, you're seeing a lot... there's a lot of bad news out there. This is some very positive news. It's not being distributed widely by the media. And our hope is that every small business owner gets this information and gets the proceeds they need.

Mike:

Yeah. And this is a fantastic thing that you can do for your clients. Right? Bring them this actionable information that can make a meaningful impact on them and their business.

Scott:

Absolutely.

Mike:

So the logical question that comes, okay, there's this lending program available to me backed by the federal government, it's probably going to be very attractive terms, and we'll talk about that later. But the first question people have is, how much can I borrow?

Scott:

The amount is the lesser of two options, option A being a 2.5 times the average monthly payroll expenses. We believe this calculation is based off of 2019 payroll. I will place this disclaimer, caveat disclosure, out there from the onset. There's a lot information that we do not know yet, that there's not definitive guidance from the SBA or Treasury. A lot of these things are yet to be determined, but this is what we know as of this afternoon. The second test, being again, the lesser of, or $10 million maximum.

Mike:

Okay. That again, covers quite a wide range. Almost all businesses will be able to take advantage of 2.5 times. And then a lot of businesses are under $10 million in scale. So again, thinking through your client roster and your community there, think about the businesses that you know that meet these types of criteria and will be able to take advantage of this program.

Scott:

Correct. And really the key, and as we're going to now, is really the definition of what constitutes payroll expenses.

Mike:

Right, yeah. Let's go through that. So how does someone calculate their monthly payroll expenses? It's not just what everybody's salary is, I assume, it's going to be more.

Scott:

Correct. So what's included is everything in the left hand column, most notably salary, tips, equivalent. I've also included healthcare benefits as well as retirement benefits in that calculation. And we also have a more comprehensive list of everything @skyview.com for the pieces that we cover that may be applicable to each individual business. But what's also important is what's not included in that calculation or what phases out of that calculation. And most notably for employees making 100,000, they're excluded, but not entirely. I shouldn't say excluded, they're phased out for every dollar above $100,000. So employee making a quarter million, you can still only utilize 100,000 of that quarter million as it pertains to calculating the loan amount that you're eligible for.

Mike:

Okay. Yeah. Yeah. So basically, you're trying to avoid this being a top heavy program like a lot of other scenarios you see with taxation and so forth and retirement plan.

Scott:

Correct.

Mike:

Okay. Very, very cool. So this is something that, as an advisor, you're familiar with just these types of concepts, and that's definitely something you can help communicate to the business owners in your community.

We had heard a lot about this, and these are forgivable loans. You mentioned it at the outset and when people hear forgivable loans, that's not something they hear all too often in their lives. So it's important to go through that. Can a portion of the PPP loan be forgiven?

Scott:

Well, that's accurate. Up to 100% of the principal amount can be forgiven. However, it's really, really important that small business owners utilize the proceeds appropriately as guided by the Treasury Department and SBA around what they feel are forgivable use of proceeds.

Mike:

All right. Okay. So there's probably also some rules in there, as one might expect, how the loan proceeds can be utilized in the business once they're acquired in order for them to be eligible to be forgivable. Right? So what are some of those use cases?

Scott:

Obvious categories go to payroll, what we just discussed: healthcare, insurance, utilities, interest on any commercial real estate and rent or lease payments. We received some additional guidance, I believe it was late on Tuesday from Treasury and the SBA that not more than 25% from non-payroll costs, but the language is a bit ambiguous at this point. So let's stay tuned for that. If you're open to the idea, we'll have subsequent webinars around topics that we don't have clarity on today.

Mike:

Yeah. It's a smart idea. What really jumped out to me in looking at this, as I think through this, is the fact that you can use portions of the funding you receive basically for your infrastructure, so for the overhead of your lease or your mortgage payment. And it really makes sense when you think about, for many employees, they need a place to go to, to work. And if all of a sudden there is a cashflow shortage that the PPP program is going to help fill, that place of work needs to have the lights on as well.

Scott:

Well, you got to think about the ripple effects this could have on the commercial real estate industry, as many states, many employers are at home and working remotely, and maybe some small businesses desire to cancel lease agreements. This might help relieve that marketplace and discourage breaking lease agreements.

Mike:

Right. Yeah, yeah. Really, really smart.

I guess on the flip side of that, what would be something that would reduce a loan's forgivability, the amount that can be forgiven?

Scott:

And you can see in this provision, the concern being that a business would take the loan and then layoff their employees. Right? Therefore, you cannot decrease salary wages by more than 25%, except excluding, again, those making over $100,000 from 2019. However, for employers that are out there, restaurants, whomever may have had mass layoffs at the onset of the crisis, they do have really a recapture clause that you can bring those employees back onto your payroll and be eligible for forgiveness of the loan amount.

Mike:

That's great. That's a really strong incentive to make sure we get people back to work.

So now for the big question, and I think this is, this is an area where... you're pretty, frankly, a little animated about it. I was really interested in talking to you about this yesterday, because this is like nothing you'd ever seen before as somebody who's been in the industry for quite some time. So let's go through the rates, terms and conditions a bit, because I think they're going to be fairly surprising and interesting to people.

Scott:

Well, we've certainly never seen rates, terms and conditions similar to these. It's arguable, this is structured as a loan, but probably converts more to a grant over time. But I guess it is still a loan. However, it's set right now. And a lot of these provisions or terms have changed over the course of last week. But currently, this is where we're at. It's on a two year term, your loan payments are deferred for six months. There is no personal guarantee. There's absolutely no collateral required for this. This is an unsecured obligation that is set at a 1% fixed interest rate. I will tell you that number has changed three times in the last four days. So if this ends up pulling out at 4%, do not be terribly surprised.

I think this would be much more receptive to the banking community at a higher rate than 1%. That's really my biggest concern. This is really, really good legislation. There's just one piece that concerns me, it's the 1% rate. No prepayment fees. And there's no SBA guarantee fee that typically comes with any obligation to secure through the SBA. Keeping in mind that, in essence, the SBA is creating or tasking the banks and lenders throughout the country as really their origination and processing and underwriting machine for this. Therefore, it is possible we could see variations from these rates, terms and conditions based on your lender of choice.

Mike:

Okay. Now you mentioned that the 1% rate is something that, it concerns you, or, you find potentially challenging for the program. So talk a little bit about why that is.

Scott:

Where my concern comes in around the 1% rate is that, again, this will potentially sit on banks' balance sheet for two years. At 1%, that is not attractive paper. At the beginning of the week, this program came out at 4% bank receptivity was exceptionally high, now backing back to 1%, they actually went to 50 base points. Banks were not thrilled about that level. And now we're seeing that at 1% today. So we are uncertain today as of what each bank will be doing with the PPP program, as it applies to their borrowers and also for potential borrowers that are not current clients of the bank. 1% is not attractive paper.

Mike:

Yeah. Yeah. It's interesting. Again, as you mentioned, it's probably going to evolve a little bit over time, but this is the best information we have as of now. So I guess the followup to that is, if that is something that is attractive to a small business owner, when can they start getting the ball rolling?

Scott:

Well, technically today. That being said, last I heard that JP Morgan, one of the largest banks in the country was not prepared to start processing these loans. And then a couple of sites I've checked today, actually one of them has crashed. It's not the bank's fault. I mean, they've had so little time to prepare for this and get ready for this, that they're doing everything they possibly can to get ready. But technically, the first disbursement date is today for small businesses and sole props and on the 10th for independent contractors, self-employed. But again, we've got some steps here that you can take that, that you're going to need to take, prior to application or you need with that application anyways, for when your bank is prepared to start processing these loans.

Mike:

Okay. The thing that I find myself thinking about is, if this is something that's interesting to you start getting the process rolling sooner rather than later, because the line is likely to build and the infrastructure is not necessarily there to figure this type of product out just yet at most of the lenders.

Scott:

Yeah. And I'd add that probably the most important thing that you can do is be absolutely prepared when you show up, or not show up, but when you deliver the content of the required to your lender. That if you have all the boxes checked, the SBA form filled out, you're going to go to the front of the list really quick.

Mike:

Yeah, well, and that brings us to our next topic. Right? What can they do to get that process rolling here? And you've put together a really smart list here.

Scott:

Again, we do not have definitive guidance on what this list will look like. However, this is what we believe will be required, but again, could vary by lender. So if I'm a small business owner who was going to seek a PPP loan, this is what you can start gathering today, and gathering it in a format that's easy to deliver to the bank. And they probably all have a different mechanism, probably a secure VDR or a cloud-based system to submit these documents. But just pulling them all together, having total clarity, have the SBA form filled out in its entirety and signed is absolutely what you can be doing today. So when banks open their doors, you show up with a perfectly packaged PPP loan application, all documents ready to go, you'll get funded quickly. People who call their bankers and ask a lot of questions go to the back of the line. I don't know, but presumptively, they're going to process people that are prepared.

Mike:

It's the old, was that the Boy Scout motto from when we were young kids was, "Be Prepared." Be ready to go.

Scott:

Yep, absolutely. So the Boy Scouts probably get funded before anybody.

Mike:

A big face full of legal here, but there's some certification requirements involved in this. And you've got one bolded here that says, "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant." So let's talk about that a little bit more about why that piece is so important here.

Scott:

What's really important about this legislation about this program as well, is that really, you did not need to substantiate hardship at this point. You don't need to show financials for February and March that had been adversely impacted by the coronavirus. You just need to, it's essentially, you're self-certifying, and in a way, almost approving your own loan that you believe that this loan is necessary to support your business, and that you have enough uncertainty about your business today and/or in four, six, 12 months, that you believe that these proceeds are required to keep your business going.

Mike:

Yeah. Yeah. You and I were talking the other day and I made this comment that in a up market, rising tide lifts all ships all boats there. And I said, "This market, we really just want to make sure that all boats stay afloat." And it really feels like that's what this program is designed for. Right? Making sure that small business owners get money into the system, make sure they keep people employed. And that has the effect of helping other businesses stay employed. And you mentioned, one of the ripple effects of making sure that commercial real estate companies are able to stay in business because their clients, or their tenants, are still paying-

Scott:

Their retirement, yeah, a lot of things.

Mike:

Yeah, yeah. So really, really interesting. So what are some additional considerations of the program that people should keep in mind?

Scott:

And for this slide that we have the least amount of clarity around, this is some topics that have been explored by many experts that they believe will be applicable. Yet we, again, do not have a definitive guidance. Check back with us again. We continue to update skyview.com. I literally feel like we're having updates by the hour as we're receiving information around this program. So keep checking back. We have an FAQ page that will update this, but per our understanding today, it may impact most notably the acceptance or your eligibility for the employee retention credit. And if that is the case, you definitely need to work with your CPA and determine which assistance program is most beneficial to those businesses in need. And for a lot of other potential, I'd say guidelines, post-closing, but at this point we do not have definitive guidance.

So again, check back, it's going to be really, really important that before you close on your PPP loan, that we know what that list looks like. So again, I wouldn't be in a terrible hurry to get to your bank and get it funded today, because then you might make yourself ineligible for something else, but be ready today.

Mike:

Yeah. Yeah. That's really, really solid advice.

Well, Scott, I want to thank you very much for taking the time out of your very busy day. It's a busy time for SkyView, obviously, but this is particularly meaningful information for the advisor and REA community, as we mentioned at the beginning, because they're going to be dealing with a lot of small business clients who have some concerns and oftentimes they're the most trusted advisor. Right? So you want to be talking or ask questions about this. It's a really smart idea. As you mentioned, if people have questions, they can certainly swing by skyview.com and there is that FAQ page there for the CARES Act and the PPP specifically.

Thank you very much, Scott. I really appreciate it. And hopefully we'll help a lot of people with this webinar.

Scott:

Thank you for having me on. I really appreciate your time very much.

Mike:

All right. Thank you.