As reported today, the Small Business Administration (SBA) released revised regulatory guidelines on April 24, 2020 that now permit size-eligible gaming entities to participate in the Paycheck Protection Program (PPP). As you are aware, businesses deriving more than one-third of gross annual revenue from legal gambling activities are generally ineligible for SBA business loans pursuant to 13 CFR 120.110(g). This section is no longer applicable for purposes of the PPP. Specifically, Part III.2.b. of the Third PPP Interim Final Rule (85 FR 21747, 21751) that expanded eligibility to 50 percent of gross annual revenue was revised and the new guidance within the Fourth PPP Interim Final Rule reads as follows:
Are businesses that receive revenue from legal gaming eligible for a PPP Loan?
- A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues, and 13 CFR 120.110(g) is inapplicable to PPP loans. Businesses that received illegal gaming revenue remain categorically ineligible. On further consideration, the administrator, in consultation with the secretary, believes this approach is more consistent with the policy aim of making PPP loans available to a broad segment of U.S. businesses.
We encourage you to review the materials in Taft’s COVID-19 Toolkit, which contains several helpful resources regarding the PPP, particularly SBA Part Three, SBA Part Six, SBA Part Eight and SBA Part Nine. Please consider the following information for purposes of making a preliminary determination regarding your eligibility to participate in the PPP.
What is a “size-eligible gaming entity”?
Size-eligibility refers to either (i) the number of employees or (ii) the average annual receipts of a business. For purposes of the PPP, a business needs to satisfy only one of the size-eligibility requirements. To determine if your company is a size-eligible gaming entity, the first factor to consider is (a) Does your business (and its affiliates) have 500 or fewer employees? If yes, you are likely eligible to participate in the PPP. If your business (including all affiliates) has more than 500 employees, you may still qualify. The second factor to consider is (b) Does your business otherwise qualify as a “small business concern” as defined by the SBA?
What do you mean by affiliates?
For purposes of determining if you are a size-eligible gaming entity, you must include the employees and/or annual receipts of all affiliates. Affiliation with another business is based on the power to control, regardless of whether such power is exercised. The power to control exists when an external party holds 50 percent or more ownership. It may also exist by contractual arrangement or when one or more parties own a large share compared to other parties. A minority shareholder may be deemed to control the business if the minority shareholder has the right to prevent a quorum or otherwise block action by the board of directors or shareholders. Affiliation also arises where the CEO or president of the borrower (or other officers, managing members or partners who control the management of the borrower) also controls the management of one or more other entities. There are additional affiliation considerations making the affiliation analysis complicated and very fact-specific. If you are concerned about this concept, please reach out to your Taft attorney to discuss.
Does our company qualify as a “small business concern”?
To make this determination, you must first determine your individual North American Industry Classification System (NAICS) Code. Terminal operators will generally have a NAICS Code of 713290 and therefore, if your company has more than 500 employees, to qualify under the PPP it must have annual receipts or “total income” of less than $35 million. For more information, please visit www.sba.gov/size and Section 121.104 of the CFR, which provides guidance on how to calculate annual receipts and can be accessed here.
Who is responsible for determining eligibility?
YOU! The borrower is wholly responsible for confirming it is eligible to participate in the PPP. Lenders are not required to make an independent determination regarding the borrower’s eligibility or the applicability of affiliation rules. Lenders are explicitly permitted to rely on the certifications made by the borrower and will be held harmless.
What certifications are required to be made?
In addition to certifying that the borrower is eligible, we recommend that you carefully review the application to confirm you are able and in good faith to make each of the required certifications. In particular, the SBA released additional guidance regarding the certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. Companies should be prepared to demonstrate to the SBA, upon request, the basis for its certification. For more information on the certifications that are required, please visit SBA Part Eight and SBA Part Nine.
How do I determine my payroll costs to calculate the maximum loan amount?
Payroll costs under the PPP include: (a) wages/salaries and tips (up to $100k/employee on an annualized basis; non-US employees excluded), (b) vacation, sickness, parental, family, or medical paid leave, (c) separation/dismissal payments, (d) health care plan costs, (e) retiree benefits, (f) state and local payroll taxes, and (g) employee portion of Federal payroll taxes (employer portion is not included). Payroll for independent contractors cannot be included in an employer’s calculation, nor can compensation related to Sections 7001 or 7003 of the Families First Coronavirus Response Act. The maximum loan amount is determined by multiplying the average monthly payroll costs of trailing twelve-month period ending prior to the date of the loan by 2.5. The calculation of payroll costs includes all costs identified above in the definition of payroll costs.
Should payments made to an independent contractor or sole proprietor be included in payroll costs?
No. Accordingly, commissions or other payments made to sales agents and other persons that are classified as independent contractors should not be included in the calculation of payroll costs.
What are the permitted purposes for which the loan can be used?
Payroll costs, mortgage interest (not principal), interest payment on auto loans (not principal) for a vehicle used to perform business, rent payments, utilities (electric, gas, water, gas for business vehicle, transportation, telephone and internet) and interest payments on pre-existing debt (not principal).
Is the loan forgivable?
Yes, but loan forgiveness will be fact intensive and dependent upon actions taken by the borrower during the eight-week period beginning on the date the borrower receives its PPP loan proceeds. The relevant facts include the use of the proceeds, reduction in employee count and any salary reductions of 25% or more for employees earning less than $100,000 annually. For additional information on how to qualify for loan forgiveness please see SBA Part Six and SBA Part Eight. 75 percent of the loan proceeds must be used on payroll costs, regardless if loan forgiveness is applied for.
Should the PPP Loan be disclosed to the IGB?
Yes. Terminal operators and other licensees that have an ongoing obligation to disclose loans and other similar agreements to the Illinois Gaming Board (IGB) should upload any PPP loan documents, including any promissory note or other loan agreement utilizing the Document Upload System in the ordinary course.
For further information on the PPP, we encourage you to contact a member of Taft’s SBA Task Force or your Taft attorney.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.