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ARTICLES BY JAMES WAITE

A Newly Shortened PPP Forgiveness Application Offers a Ray of Hope for Small Businesses

A Newly Shortened Forgiveness Application Offers a Ray of Hope for Small Businesses. As many PPP loan participants know, the SBA’s application for loan forgiveness was extraordinarily (and many thought, unnecessarily) time-consuming and difficult to complete.

The new "EZ" loan forgiveness application is just three pages long and can be used by self-employed borrowers and businesses that didn't significantly cut worker wages or salaries after taking out PPP loans.

Click Here for the new Loan Forgiveness Application.

"These changes will result in a more efficient process and make it easier for businesses to realize full forgiveness of their PPP loan," the SBA and Treasury said in a formal statement.

The Paycheck Protection Program offers loans of up to $10 million each for payroll and overhead. PPP loans can be forgiven if borrowers show they spent their funds according to PPP guidelines and didn't significantly reduce workforces or wages.

The Consumer Bankers Association and the Bank Policy Institute have also called for Congress to enact automatic forgiveness of PPP loans up to $150,000. That threshold would cover nearly 86% of all PPP loans but just over a quarter of all loan dollars. The groups argued in a letter to lawmakers earlier this month that doing so would save tens of millions of hours in borrower paperwork while costing the government only a minimal additional amount.

At a Wednesday hearing, the House Small Business Committee was again urged to consider automatic forgiveness for smaller PPP loans, with one Texas banker testifying that obtaining PPP loan forgiveness remains too difficult a process for many. "Even under the simplified applications that were issued this morning, they're still quite onerous as far as documentation is concerned," Eduardo Sosa, senior vice president of Commerce National Bank in Austin, told the committee. "I think a standard automatic forgiveness at $150,000 would be called for."

Director of advocacy at the Center for Responsible Lending, Ashley Harrington, agreed, saying the new simplified application is still "incredibly burdensome for the really small businesses." "We advocate for streamlined automatic forgiveness under $100,000," Harrington said. "This will disproportionately serve the really small businesses. On average, these are businesses that will likely have 13 or fewer employees, the businesses that we really want to be able to survive and make it through this crisis."

Turning to the CARES Act: Understanding what is available to help your business (By: James Waite and Brian McQuinn)

Question: I’ve been hearing a lot about the Coronavirus Aid, Relief and Economic Security (CARES) Act stimulus package. I’ve applied for my Payroll Protection Program (PPP) loan, but what should I expect next? How much will be forgiven, and what steps do I need to take? Are there any other opportunities I should be looking into?

Answer: The CARES Act continues to evolve on a daily basis. Consequently, potential borrowers have been quick to submit loan applications in order to preserve their place in line for the funds allocated to PPP despite the fact that they are not yet certain what the exact terms of any loan or grant, or associated requirements for forgiveness of such loans, will ultimately prove to be. According to a survey released by the National Federation of Independent Business (NFIB) on April 10, 2020, approximately 70 percent of small businesses already have applied for a PPP loan/grant.

The CARES Act initially provided $349 billion of federal funding for PPP loans/grants to small businesses — generally, those with 500 or fewer employees and some others if they qualify as “small business concerns” for U.S. Small Business Administration (SBA) purposes — as well as certain qualified nonprofit organizations, veterans’ organizations and tribal business concerns.

You should consult with your banker, accountant and tax specialist for further information and clarification.

The program, however, ran out of money on April 16 and when this article was written, negotiations were ongoing related to the passage of additional PPP funding. Consequently, small businesses with a need for funding should apply for these loans as quickly as possible, as the Treasury Department and the SBA have indicated the loans will be approved on a first-come, first-served basis. However, make sure you only apply for one loan. Applying for multiple loans on the same basis with different institutions, even if accidentally, could be deemed fraud. Keep in mind that applying for these loans does not obligate you to accept them later if the loan proves not to be a good fit for your business.

Notably, self-employed individuals and independent contractors were not eligible to apply for PPP loans/grants until April 10. Four days later, the SBA issued a new interim final rule supplementing previously issued PPP guidance and providing specific information regarding calculation of maximum loan amounts for individuals with self-employment income who file a Form 1040, Schedule C, and requiring provision of the borrower’s 2019 Form 1040 Schedule C with its PPP loan application. The SBA, which has been struggling to keep up with the deluge of applications, is trying to dig out. Additional guidance should, therefore, be expected. Regardless, the keys for borrowers are understanding as much about the process as possible as quickly as possible, and applying that knowledge to maximize both loan and forgiveness amounts.

PPP loan terms. Beyond the obvious need to understand which loan(s) to apply for and when, knowing which loans are eligible for forgiveness and how to satisfy the forgiveness requirements is crucial. The SBA, the Treasury and banks throughout the country have been largely focused on processing and funding these loans up to now. As a result, they have not yet created a uniform mechanism for tracking eligibility, which suggests that much of the burden may ultimately fall on borrowers. This makes it imperative that borrowers understand which uses of PPP loan proceeds qualify for forgiveness, and then track and document the actual uses made of those funds.

Some of the highlights are as follows:

Eligibility. Small businesses — generally those with 500 or fewer employees — and nonprofit entities, sole proprietors, independent contractors and self-employed individuals who regularly carry on a trade or business are eligible if they provide a good faith certification that the uncertainty of current economic conditions make the loan request necessary for ongoing operations, and that the borrower will use loan proceeds to retain workers, maintain payroll, or make mortgage, lease and/or utility payments.

Loan amounts. Eligible borrowers may apply for PPP loans worth up to 250 percent of their average monthly payrolls for the preceding year — with alternate timeframes for businesses which were not operational in 2019, as well as seasonal employers — up to a maximum loan amount of $10 million.

Payroll costs. Payroll costs are calculated by totaling included payroll costs and subtracting excluded payroll costs.

Included payroll costs for employers:

  • Salaries, wages, commissions and other similar forms of compensation, including paid sick leave.
  • Payments of cash tips or equivalent(s).
  • Payments for vacation, parental, family, medical or sick leave.
  • Allowances for dismissals or separations.
  • Payments required for the provision of group health care benefits, including insurance premiums.
  • Payments of retirement benefits.
  • Payments of state or local taxes assessed on the compensation of employees. Included payroll costs for sole proprietors, independent contractors and self-employed individuals:
  • The SBA’s Interim Final Rule provides only limited information about payroll calculations for these parties. It does make it clear that they should be prepared to provide banks “documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, Form 1099- MISC, or income and expenses from a sole proprietorship.”

Excluded payroll costs include:

  • Compensation of an individual employee or owner in excess of an annual salary of $100,000, excluding benefits such as health care, 401(k) and state and local taxes, as prorated for the period from Feb. 15 to June 30, 2020.
  • The employer’s share of federal payroll taxes, not including the amounts imposed on an employee and required to be withheld by the employer, railroad retirement taxes and income taxes.
  • Any compensation of an employee whose principal place of residence is outside of the U.S.
  • Compensation to employees outside the U.S.
  • Compensation to 1099 independent contractors.
  • Qualified sick leave or family leave wages for which a credit is allowed under Sections 7001 or 7003 of the Families First Coronavirus Response Act (FFCRA).

The net must be divided by 12 to determine monthly obligations, then multiplied by 2.5 to determine the total eligible loan amount.

Rate and term. PPP loans are structured as private loans made by approved banks at a fixed rate of 1 percent with a maturity date two years from the origination date of the loan. Such loans are 100 percent guaranteed by the SBA.

Forgiveness. The full principal amount of each loan is eligible for forgiveness, provided that the borrower meets certain requirements. Under the current rules, if a PPP loan is forgiven, it will not later be taxed as income. It is unclear whether failure to comply with these obligations — for example, by using PPP loan proceeds for marketing — would constitute a default under the loan such that it might be accelerated and/or its interest rate increased, perhaps to the stated default rate. Consequently, the safest course of action is going to be to make certain the following requirements are fully complied with and that such compliance is thoroughly documented:

  • Reduction based on reduction in number of employees. An employer must maintain and return the same total number of full-time equivalent employees as that maintained by the employer prior to the outbreak. Note that this obligation does not require re-hiring the same employees in the same roles, only that the total headcount be restored. If not, the forgivable amount of the PPP loan will be reduced as follows:

    PPP Loan formula

  • Reduction relating to salary and wages. During the eight weeks following the date of loan origination, if an employer reduces by more than 25 percent the salary or wages of any employee making less than $100,000 annually, the total amount of forgiveness will be reduced by the amount of the decrease which exceeds 25 percent. As of the date this article was written, it had not yet been made clear how this reduction might apply to terminated employees.
  • 75 percent of loan proceeds must be used for payroll. In its Interim Final Rule, the SBA indicated that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” The Interim Final Rule indicates that the SBA will issue more guidance regarding forgiveness, but it does not indicate whether violating this requirement might reduce the forgivable amount, bar forgiveness, constitute a default or something else.

Again, it is imperative that PPP borrowers track and document their compliance with these requirements so they can demonstrate eligibility once procedures for seeking forgiveness have been issued.

Additional relief. A number of other options are available to small businesses, including:

  • Loan payments for existing and new borrowers. Under the SBA debt relief program, the SBA will pay the principal, interest and fees of currently outstanding SBA 7(a) (business capital), 504 (commercial real estate), and microloans (small loans of up to $50,000) for six months. The SBA also will pay the principal, interest, and fees of new 7(a), 504, and microloans issued prior to Sept. 27, 2020 for six months.
  • Automatic deferrals. For current SBA serviced disaster home and business loans in regular servicing status on March 1, 2020, the SBA is providing automatic deferments through Dec. 31, 2020. Interest will continue to accrue on such loans during the deferment period.
  • Economic Injury Disaster Loans (EIDLs). The CARES Act also created an EIDL program under the SBA’s existing Disaster Loan Assistance Program. Small businesses that have suffered substantial economic injury may apply for EIDL loans of up to $2 million. EIDL loans have a 30-year term and accrue interest at the rate of 3.75 percent for businesses and 2.75 percent for nonprofits. EIDL loans of more than $25,000 require granting a security interest in all business assets of the borrower as collateral. EIDL loans of more than $200,000 require a personal guarantee as well.
  • Economic injury loan advances. Small business owners in all states, Washington, D.C., and U.S. territories also are eligible to apply for an EIDL advance of up to $10,000, which functions as a grant. Eligible business owners can apply directly on the SBA website. EIDL advance funds will be subtracted from the forgiveness amount under any PPP loan. As of the date this article was written, we were not aware of anyone having received an EIDL advance.
  • Express bridge loans. The Express Bridge Loan Pilot Program allows small businesses that maintain existing business relationships with SBA Express Lenders to access up to $25,000 with reduced paperwork. These can be term loans or bridge loans to cover the gap while applying for a direct SBA EIDL. Small businesses can find Express Bridge Loan lenders by contacting their local SBA district offices.
  • Expanded SBA 7(a) loan program. Additional funds for small businesses are expected to be made available through a vastly expanded SBA 7(a) loan program, which waives loan guaranty fees and reduces credit risk for lenders.

Tax impacts. The CARES Act also creates several tax credits and incentives, including:

  • Employee retention tax credit. Provision of a tax credit of up to 50 percent of wages paid during the crisis for businesses that are either fully or partially forced to suspend operations during the crisis or see gross receipts fall by 50 percent from the previous year. The credit is capped at $5,000 per employee per fiscal quarter. There are additional obligations to be eligible for the tax credit for employers with an average of more than 100 full time employees in
  • Deferral of employer Social Security payroll tax. Delayed payment deadlines for employers’ Social Security payroll tax payment obligations, requiring the first half to be paid by the end of 2021 and the second half to be paid by the end of 2022.
  • Restoration of net operating loss carry-back provisions. Allowing net operating losses for 2018, 2019 and 2020 to be carried back for five years, and removing the limitation originating from the 2017 Tax Reform Act that net operating losses can only be used to offset 80 percent of taxable income.

In the near term, rental operators with a need for additional financing should look for opportunities to access cash being made available through loans and grants, particularly PPP loans and expanded SBA lending programs as additional stimulus funds may yet be made available. Looking further down the road, the likely expansion of SBA loan programs and perhaps additional COVID-19-related stimulus funding should motivate rental operators to delve deeper into tax, borrowing and funds allocation strategies, as those funds likely are to be made available on more attractive terms than in the past.

You can also view this article directly on Rental Management website by CLICKING HERE.

The bad, the ugly and the somewhat good: Dealing with the coronavirus

Question: keep hearing about new laws and lawsuits being filed against equipment lessors, and I’m particularly concerned about the coronavirus. I’d like to get your perspective on what’s happening and whether the coronavirus might be considered an “Act of God” that gives my customers the right to cancel their reservations and/or contracts. Thanks for any help you can provide.

Answer: This is the first part of a 3-Part series. In the first part, I will address your concerns regarding the coronavirus, and then move to other issues regarding new laws and lawsuits in Parts 2 and 3.

Unfortunately, yes, the coronavirus does appear to be having a profound impact on the economy both in the U.S. and throughout the world, resulting in a wave of cancellations and early terminations of contracts, including those for rentals and leases of equipment.

    1. The Bad: Though it’s too early to fully assess the macroeconomic impact of the coronavirus, as of the date this article is being written, the virus has spread to more than half of the United States, and as of yet, there appears to be no effective treatment or means of controlling the outbreak. Global supply chains have been interrupted, and demand is weakening. And as everyone knows by now, the equities markets have taken a severe beating, rolling recessions are being predicted, and industries from travel to trade shows (and sales) have witnessed steep declines in both demand and attendance.

      In response, the Federal Reserve has reduced interest rates to historic lows, the World Health Organization has declared a global “pandemic” and affected parties from pharmaceutical companies to local and national governments have been working feverishly to find an effective treatment, slow the spread of the virus and protect their economies.

    2. The Ugly: On a micro level, demand for equipment is slowing in many areas, and customers have increasingly been cancelling reservations or terminating existing rentals. Banks have begun calling notes, contracts are being cancelled and/or breached, lawsuits are being threatened, and if the apparent panic persists, we may well see a more pronounced slowdown or perhaps worse – though hopefully not the raft of defaults and bankruptcies we experienced in the “Great Recession” of 2008-2010, which saw more than 200,000 businesses close and over three million jobs lost in the U.S. according to Census statistics.

      Risks include:
      1. overall slowdowns in economic activity and resulting slumps in demand for all types of equipment;
      2. a cascade of additional cancellations and contract terminations;
      3. increases in slow / late / no-pays;
      4. customer / contractor bankruptcies;
      5. equipment seizures by bankruptcy trustees, particularly with respect to equipment on rental purchase options (“RPOs”) which haven’t been properly documented;
      6. equipment breakdowns resulting from funds-related maintenance delays;
      7. increased chargeback claims from customers;
      8. increased equipment theft;
      9. possible direct impacts on employees and employment relationships in the event of exposure; and
      10. the inevitable expansion of litigation.
Unfortunately, this means things could get a lot worse before they get better. Fortunately, however, for our clients, there is a bright(er) side.
  1. The (somewhat) Good: It is possible for rental operators to protect themselves contractually from much, though certainly not all, of the fallout from pandemics and other unforeseen problems (including cancellations and terminations), as well as the lawsuits that are sure to ensue. Doing so, however, requires incorporating some provisions that, up to now, routinely have been overlooked in most rental contracts and leases – largely because such provisions tend to be both obscure and somewhat mundane (by that, I mean, they tend to look like the “unnecessary legalese that nobody understands, and everyone thinks was just written by some lawyer trying to justify a bill”). That may be true in some cases, but there are also cases where it can literally save your business. See below.

    Following is a list of some of the issues and related contract provisions that, in my opinion, are likely to prove most meaningful to rental operators in the current environment:

    1. Acts of God: As you suggest, we’re hearing that many lessees are attempting to use the “Act of God” excuse in efforts to cancel or terminate their rental obligations. Opinions vary as to whether a global pandemic would qualify as an “Act of God,” but even if a judge or jury were to determine that it does, your customer / lessee is likely to be deemed liable for payment in full if your contract is properly written. If it isn’t, you may be unable to collect most or all of what you originally believed were valid receivables.

      “A ‘recession’ is when your neighbor loses his job. A ‘depression’ is when you lose yours.” Ronald Reagan.

    2. What Does “Properly Written” Mean?: As you might guess, there are only a few ways to “properly write” a contract, and there are innumerable ways to do so “improperly,” including: (i) providing unnecessary exemptions to the lessee’s obligations, such as express rights to cancel or terminate; (ii) failing to obligate the lessee for the entire term of the rental; (iii) failures to effectively waive “implied” warranties, rights and remedies (including the right to reject and/or cancel) under the Uniform Commercial Code and/or case law; (iv) failing to close “trap-doors” to the lessee’s obligations, such as implied cancellation and termination rights (for example, implied rights to terminate in the event of “impossibility,” “impracticability” or a breach of one or more of the above referenced implied warranties); (v) failing to eliminate contingencies to the lessee’s obligations; (vi) failing to eliminate claims for “reductions and setoffs” (equitable offsets from what the lessor is owed, based on claims from the lessee that the equipment was late, defective, damaged, etc.); and (vii) failing to eliminate extraneous negotiations and alleged agreements (think emails and texts as well as your advertising and website).

    3. Frustration of Purpose: Separately, if for example, an event were to be cancelled as a result of coronavirus concerns, a lessee might argue that the “purpose” of the contract had been “frustrated” (i.e., the cancellation rendered the rental company’s proper performance of its obligations worthless to the lessee), thereby excusing the lessee from its associated payment obligation. Depending on what your contract says, a lessee might be able to escape liability if some unanticipated intervening “force majeure” (literally “greater force”), perhaps including an epidemic, were to result in the cancellation of a project or event (for example, a basketball tournament).

      That assumes, however, that a court would be willing to countenance at least two arguments:

      1. that the actual “purpose” of the contract was “the successful completion of the lessee’s planned project or event” as opposed to, for example, “the successful completion of a rental” – the latter of which could arguably be completed regardless of the occurrence of a pandemic; and

      2. that the pandemic did, in fact, “frustrate” that purpose. One of the ways a rental contract or lease can help the lessor in this regard is to indicate that the customer/lessee “selected” the equipment without the lessor’s assistance. Assistance by the lessor in selecting the proper equipment for an event or project could easily suggest to a judge or jury that the lessor “knew” that the “real purpose” of the rental was “really” to successfully complete the lessee’s specific project or event. Conversely, if the contract states that the lessee independently “selected” the equipment without the lessor’s assistance, the lessor can then credibly argue that the true “purpose” of the contract was simply the completion of a rental (not the underlying project or event). In response, one might be tempted to argue: “But equipment lessors routinely help their lessees select the right equipment.” Perhaps, but: (A) there is almost no way such an acknowledgment could be helpful to you, as a lessor; (B) remember that one of the primary purposes of your rental contract should be to protect you and make sure you get paid; and (C) see discussion of the “four corners” rule below.

      Assuming a judge or jury might be inclined to find the lessee’s cancellation or termination justified in the case of a pandemic or other unforeseen catastrophe, the court would then also be faced with applying other rules of contract interpretation and enforcement, including: (a) “freedom of contract” (the right of parties to negotiate and execute legally binding contracts without government interference); (b) the rule that “parties will be held to the contracts they sign in the absence of fraud or unconscionability”; and (c) the “four corners rule” (that the parties’ agreements are deemed to exist within the “four corners” of the document they signed, ignoring other “side” or “implied” agreements unless a compelling reason exists to do otherwise).

      Consequently, in most instances, other than perhaps in the case of a government-mandated shutdown, one would expect the courts to apply extremely high bars for proving that “frustration of purpose” provides a valid reason for allowing lessees to escape their contract obligations. (Note: A government-mandated shutdown might render the lessor’s performance frustrated (worthless), but it still would not render either party’s performance “impossible” - a lessor could still provide the equipment, and the lessee could still pay the rent.) And, in fact, in most cases, courts do impose high bars for “frustration of purpose” arguments. Consequently, though an implied cancellation right based on a government-mandated shutdown might be found to exist in the case of an epidemic or natural disaster, a court would be much less likely to approve a cancellation by a private individual or entity (think the NBA or NCAA) merely as a result of a drop in attendance (essentially, just an effort to simply limit financial losses), but not necessarily as a result of government intervention. In either case, this is where your contract can make the difference between winning and losing. Eliminating contingencies, trap-doors, setoffs, prorations, counterclaims and extraneous agreements is crucial to protecting the lessor, particularly in these types of cases.

      That is where some often overlooked “legalese” can prove invaluable. Consider the following. If any of these should fail to appear in your rental agreement, now would be a good time to consider updating it to include them:

    4. Unconditional Duties: A statement that the customer’s duties under the rental agreement are “unconditional” arguably eliminates the customer’s ability to later imply that “one of the conditions to its performance was that economic conditions remain relatively constant” or that “no pandemics, natural disasters, changes in global economic circumstances, government interference or other events beyond our reasonable control will intervene and frustrate the purpose of, or render impracticable, your contract.” An “unconditional” duty is arguably just that – a duty that is not conditioned on any outside factors, whether or not capable of being anticipated.

    5. Allowances, Credits and Setoffs: Couple the foregoing “unconditional” duties with contract language that eliminates “prorations, reductions and setoffs” and also eliminates “allowances for period(s) of nonuse.” Such language expressly waives the customer’s claims (legal and moral) for reductions of the rent and other amounts owing under the contract.

    6. Make Prepayments Non-Refundable: Make all prepayments, including rent deposits, “non-refundable” unless otherwise agreed by you, the lessor. “Sunk” costs can dissuade parties from cancelling or terminating early, and in any event, can soften the financial blow of a large cancellation.

    7. Selection: As noted above, a provision indicating that the customer has “selected” the items to be rented without input from the rental operator can go a long way toward bolstering the argument that the rental operator had no knowledge of any particular “purpose” for which the equipment was to be used. Consequently, if the customer’s “purpose” in renting the items was not communicated to the rental operator, it arguably could not serve as justification for permitting the customer to escape liability, inasmuch as that “purpose” was never understood by both parties to serve as the basis for the contract (its sole “purpose” being simply the completion of a “rental”).

    8. One-Way “Acts of God / Force Majeure” Provisions: Remember that customer cancellations are only one side of the “Act of God / force majeure: issue. A lessor may also find itself in need of a right to cancel a contract in the event of an Act of God. Rather than relying on the hope that a court might deem the lessor’s performance “impossible” or “impracticable” or its contract purpose “frustrated,” better in my view to include a “one-way” “Act of God / force majeure” provision that explicitly enables the rental company to escape its performance obligations, but not the customer. Although that may seem unfair, or at least out of balance, at first glance, remember that the obligations of lessor and lessee under most rental agreements are entirely different; the lessor’s being to provide equipment - in perhaps impossible circumstances (think of requiring a delivery after a bridge collapse); whereas in most cases, the lessee’s obligations are limited to paying rent and refraining from exposing the equipment and others to injuries and damages. As a consequence, an ostensibly “reciprocal” force majeure clause could impact the parties very differently, and may result in either dangerously restricting the lessor’s ability to cancel, or unnecessarily broadening the lessee’s right to do so. One call for caution here is the possibility that a lessee might argue that a lessor’s one-way force majeure provision should be “judicially extended” to benefit the lessee on “equal” terms in spite of its one-way drafting. The above referenced positional differences, however, coupled with the fact that business-to-business contracts are generally enforced as signed, suggest that the danger of such “court-made” extensions is limited. And in any event, any such danger would be dwarfed by the potential benefits to the lessor of including a one-way provision in the rental contract in most cases.

    9. Default and Remedies: Events of default should be spelled out, and critically for these purposes, the lessor’s rights and remedies should explicitly include the right to collect all Rent for the scheduled term, as well as interest, attorneys’ fees, collection costs and other expenses incurred by the lessor in connection with the lessee’s breach. Obviously enough, one of the reasons for including such rights is the ability to ratchet up the potential claims faced by the customer if he/she/it risks being found guilty of having breached the contract by refusing to perform based on an invalid “Act of God / force majeure” claim.

    10. Litigation, Claims and Chargebacks:Litigation, Claims and Chargebacks: As money gets tighter, people tend to fight harder with respect to claims of all sizes. This is particularly true with respect to chargebacks and lawsuits that result from maintenance issues and equipment breakdowns. As I’ve mentioned in previous articles, this makes inclusion of indemnity, defense and hold harmless provisions, as well as a clause permitting the lessor to charge all amounts due and coming due under the Rental Contract to the customer’s debit or credit card critical. In light of the additional threat that others, including event vendors, employees and event attendees may now also file lawsuits, whether arising from cancellations or even from projects/events that were not cancelled but perhaps should have been, lessors should feel even more compelled to include such provisions. If a pandemic outbreak is tied back to a particular project or event, the repercussions for all parties, including the lessor(s) providing the equipment, could be enormous. If you haven’t had this portion of your contract reviewed by an attorney, I would urge you to do so immediately.

      Liens: Also, in those states where mechanics’ lien filings are available to equipment lessors, you will need to be prepared to file them. Doing so will undoubtedly be upsetting to property owner (whose titles will be “clouded” by your liens) and the upstream contractors (whom the property owners will promptly threaten to fire and/or sue), but in a severe downturn, threatening and/or filing mechanics’ liens may be your only means of recovery. Be aware that state statutes on this topic vary widely; some impose extremely short deadlines for filing and often have even shorter deadlines for delivering notices of “Intent to File a Lien” or the like to other interested parties, usually including the above referenced site owners and upstream contractors.

      Chargebacks: On a less strident note, this also makes the use of properly written Debit / Credit Card Charge Authorizations imperative as a means of limiting chargebacks, particularly those that may not merit the filing of a lawsuit in response. We expect chargebacks to proliferate in the coming months. If you aren’t using an Authorization that factors in the new Visa rules, provides a means of determining a specifically authorized charge amount, and waives setoffs, counterclaims and chargebacks, I would recommend doing so as soon as possible.

    11. RPOs (How to Not to Lose a Piece of Equipment to a Bankruptcy Trustee): This topic could merit an entirely separate article, but the critical knowledge for lessors is this: Rental Purchase Options create a real danger that a Bankruptcy Trustee in the estate of a bankrupt contractor (your RPO customer) might claim that the customer has an “implied ownership interest” in your equipment, allowing the trustee to seize, and keep, your equipment. Among other things, RPOs must expire before they create such ownership interests, state clearly that the rental company remains the owner of the equipment, and state that the lessee’s exercise of the option is “not reasonably certain.” If you haven’t written your RPO Agreement properly and/or timely filed a valid UCC-1 Financing Statement of public record, you could be rendered an “unperfected” creditor and lose your equipment. If this market swoon continues and contractors start going bankrupt as they did in the last downturn, RPO lessors could be faced with enormous unrecoverable losses. If you’ve done this in the past and aren’t sure, you may yet be able to take steps to mitigate your losses (you will not be able to eliminate them in most cases as the filing deadlines are extremely short). Contact an attorney familiar with such issues immediately.

    12. Venue: Finally, if you must sue, be sure your contract contains a venue provision setting venue for all lawsuits in as convenient a location as possible (unless you elect to waive it - for instance, if you need to file and/or foreclose on a lien in another County). Doing so properly can save you tremendous amounts of time and trouble, not to mention attorneys’ fees and travel costs.

The coronavirus presents a strange dichotomy in terms of its perceived danger. Some view it as existential threat; others see it as just another overhyped and overreacted-to media-driven nuisance. Whatever your view, one thing is clear: it is having a profound effect on the global economic environment, the financial markets and, critically, the equipment industry. As Franklin D. Roosevelt famously said: “We have nothing to fear but fear itself.” Unfortunately, “fear itself” may be enough to wreak havoc on the economy, at least in the near term. If so, those who survive will be those who prepare. As always, feel free to contact us at (866) 582-2586 or info@jameswaitelaw.com if we can help.

You can also view this article directly on Rental Management website by CLICKING HERE.
The CARES Act “Building the Plane While Flying It”

(By James Waite and Brian McQuinn)

Question: I’ve been hearing a lot about the CARES Act stimulus package. I’ve applied for my Payroll Protection Program loan, but what should I expect next? How much will be forgiven, and what steps do I need to take? Are there any other opportunities I should be looking into?

Answer: The Coronavirus Aid, Relief and Economic Security (CARES) Act continues to evolve on a daily basis. Consequently, potential borrowers have been quick to submit loan applications in order to preserve their place in line for the funds allocated to the Payroll Protection Program (“PPP”) despite the fact that they are not yet certain what the exact terms of any loan or grant, or associated requirements for forgiveness of such loans, will ultimately prove to be.

According to a survey released by the National Federation of Independent Businesses (NFIB) on April 10, 2020, approximately 70 percent of small businesses already have applied for a PPP loan/grant.

The CARES Act initially provided $349 billion of federal funding for PPP loans/grants to small businesses — generally, those with 500 or fewer employees and some others if they qualify as “small business concerns” for U.S. Small Business Administration (SBA) purposes — as well as certain qualified nonprofit organizations, veterans’ organizations and tribal business concerns.

You should consult with your banker, accountant and tax specialist for further information.

The program, however, ran out of money on April 16 and when this article was written, negotiations were ongoing related to the passage of additional PPP funding. Consequently, small businesses with a need for funding should apply for these loans as quickly as possible, as the Treasury Department and the SBA have indicated the loans will be approved on a first-come, first-served basis. However, make sure you only apply for one loan. Applying for multiple loans on the same basis with different institutions, even if accidentally, could be deemed fraud. Keep in mind that applying for these loans does not obligate you to accept them later if the loan proves not to be a good fit for your business.

Notably, self-employed individuals and independent contractors were not eligible to apply for PPP loans/grants until April 10. Four days later, the SBA issued a new interim final rule supplementing previously issued PPP guidance and providing specific information regarding calculation of maximum loan amounts for individuals with self-employment income who file a Form 1040, Schedule C, and requiring provision of the borrower’s 2019 Form 1040 Schedule C with its PPP loan application. The SBA, which has been struggling to keep up with the deluge of applications, is trying to dig out. Additional guidance should, therefore, be expected. Regardless, the keys for borrowers are understanding as much about the process as possible as quickly as possible, and applying that knowledge to maximize both loan and forgiveness amounts.

PPP loan terms. Beyond the obvious need to understand which loan(s) to apply for and when, knowing which loans are eligible for forgiveness and how to satisfy the forgiveness requirements is crucial. The SBA, the Treasury and banks throughout the country have been largely focused on processing and funding these loans up to now. As a result, they have not yet created a uniform mechanism for tracking eligibility, which suggests that much of the burden may ultimately fall on borrowers. This makes it imperative that borrowers understand which uses of PPP loan proceeds qualify for forgiveness, and then track and document the actual uses made of those funds.

Some of the highlights are as follows:

Eligibility. Small businesses — generally those with 500 or fewer employees — and nonprofit entities, sole proprietors, independent contractors and self-employed individuals who regularly carry on a trade or business are eligible if they provide a good faith certification that the uncertainty of current economic conditions make the loan request necessary for ongoing operations, and that the borrower will use loan proceeds to retain workers, maintain payroll, or make mortgage, lease, and/or utility payments.

Loan amounts. Eligible borrowers may apply for PPP loans worth up to 250 percent of their average monthly payrolls for the preceding year — with alternate timeframes for businesses which were not operational in 2019, as well as seasonal employers — up to a maximum loan amount of $10 million.

Payroll Costs. Payroll costs are calculated by totaling included payroll costs and subtracting excluded payroll costs:

Included payroll costs for employers:
  1. Salaries, wages, commissions and other similar forms of compensation, including paid sick leave.
  2. Payments of cash tips or equivalent(s).
  3. Payments for vacation, parental, family, medical or sick leave.
  4. Allowances for dismissals or separations.
  5. Payments required for the provision of group health care benefits, including insurance premiums.
  6. Payments of retirement benefits.
  7. Payments of state or local taxes assessed on the compensation of employees.
Included payroll costs for sole proprietors, independent contractors and self-employed individuals:

The SBA’s Interim Final Rule provides only limited information about payroll calculations for these parties. It does make it clear that they should be prepared to provide banks “documentation as is necessary to establish eligibility such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship.”

Excluded payroll costs include:
  1. Compensation of an individual employee or owner in excess of an annual salary of $100,000, excluding benefits such as health care, 401(k) and state and local taxes, as prorated for the period from Feb. 15, to June 30, 2020.
  2. The employer’s share of federal payroll taxes, not including the amounts imposed on an employee and required to be withheld by the employer, railroad retirement taxes and income taxes.
  3. Any compensation of an employee whose principal place of residence is outside of the U.S.
  4. Compensation to employees outside the U.S.
  5. Compensation to 1099 independent contractors.
  6. Qualified sick leave or family leave wages for which a credit is allowed under Sections 7001 or 7003 of the Families First Coronavirus Response Act (FFCRA).
  7. The net must be divided by 12 to determine monthly obligations, then multiplied by 2.5 to determine the total eligible loan amount.

Rate and term: PPP loans are structured as private loans made by approved banks at a fixed rate of 1 percent with a maturity date two years from the origination date of the loan. Such loans are 100 percent guaranteed by the SBA.

Forgiveness. The full principal amount of each loan is eligible for forgiveness, provided that the borrower meets certain requirements. Under the current rules, if a PPP loan is forgiven, it will not later be taxed as income. It is unclear whether failure to comply with these obligations — for example, by using PPP loan proceeds for marketing — would constitute a default under the loan such that it might be accelerated and/or its interest rate increased, perhaps to the stated default rate. Consequently, the safest course of action is going to be to make certain the following requirements are fully complied with and that such compliance is thoroughly documented:

Reduction based on reduction in number of employees. An employer must maintain and return the same total number of full-time equivalent employees as that maintained by the employer prior to the outbreak. Note that this obligation does not require re-hiring the same employees in the same roles, only that the total headcount be restored. If not, the forgivable amount of the PPP loan will be reduced as follows:

Principal × (Avg FTEs Per Month During 8 Weeks Following Date of Origination)/(Avg FTEs Per Month During Either: (a) Feb.15,2019 -June 30,2019,or (b) Jan.1,2020-Feb.29,2020)

Reduction relating to salary and wages. During the eight weeks following the date of loan origination, if an employer reduces by more than 25 percent the salary or wages of any employee making less than $100,000 annually, the total amount of forgiveness will be reduced by the amount of the decrease which exceeds 25 percent. As of the date this article was written, it had not yet been made clear how this reduction might apply to terminated employees.

75 percent of loan proceeds must be used for payroll. In its Interim Final Rule, the SBA indicated that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.” The Interim Final Rule indicates that the SBA will issue more guidance regarding forgiveness, but it does not indicate whether violating this requirement might reduce the forgivable amount, bar forgiveness, constitute a default or something else.

Again, it is imperative that PPP borrowers track and document their compliance with these requirements so they can demonstrate eligibility once procedures for seeking forgiveness have been issued.

Additional relief. A number of other options are available to small businesses, including:

  1. Loan payments for existing and new borrowers. Under the SBA debt relief program, the SBA will pay the principal, interest and fees of currently outstanding SBA 7(a) (business capital), 504 (commercial real estate), and microloans (small loans of up to $50,000) for six months. The SBA also will pay the principal, interest, and fees of new 7(a), 504, and microloans issued prior to Sept. 27, 2020 for six months.

  2. Automatic deferrals. For current SBA serviced disaster home and business loans in regular servicing status on March 1, 2020, the SBA is providing automatic deferments through Dec. 31, 2020. Interest will continue to accrue on such loans during the deferment period.

  3. Economic injury disaster loans (EIDLs). The CARES Act also created an EIDL program under the SBA’s existing Disaster Loan Assistance Program. Small businesses that have suffered substantial economic injury may apply for EIDL loans of up to $2 million. EIDL loans have a 30-year term and accrue interest at the rate of 3.75 percent for businesses and 2.75 percent for nonprofits. EIDL loans of more than $25,000 require granting a security interest in all business assets of the borrower as collateral. EIDL loans of more than $200,000 require a personal guarantee as well.

  4. Economic injury loan advances. Small business owners in all states, Washington D.C., and U.S. territories also are eligible to apply for an EIDL advance of up to $10,000, which functions as a grant. Eligible business owners can apply directly on the SBA website. EIDL advance funds will be subtracted from the forgiveness amount under any PPP loan. As of the date this article was written, we were not aware of anyone having received an EIDL advance.

  5. Express bridge loans. The Express Bridge Loan Pilot Program allows small businesses that maintain existing business relationships with SBA Express Lenders to access up to $25,000 with reduced paperwork. These can be term loans or bridge loans to cover the gap while applying for a direct SBA EIDL. Small businesses can find Express Bridge Loan lenders by contacting their local SBA district offices.

    Expanded SBA 7(a) loan program. Additional funds for small businesses are expected to be made available through a vastly expanded SBA 7(a) loan program, which waives loan guaranty fees and reduces credit risk for lenders.

Tax impacts. The CARES Act also creates several tax credits and incentives, including:

  1. Employee retention tax credit. Provision of a tax credit of up to 50 percent of wages paid during the crisis for businesses that are either fully or partially forced to suspend operations during the crisis or see gross receipts fall by 50 percent from the previous year. The credit is capped at $5,000 per employee per fiscal quarter. There are additional obligations to be eligible for the tax credit for employers with an average of more than 100 full time employees in 2019.

  2. Deferral of employer Social Security payroll tax. Delayed payment deadlines for employers’ Social Security payroll tax payment obligations, requiring the first half to be paid by the end of 2021 and the second half to be paid by the end of 2022.

  3. Restoration of net operating loss carry-back provisions. Allowing net operating losses for 2018, 2019 and 2020 to be carried back for five years, and removing the limitation originating from the 2017 Tax Reform Act that net operating losses can only be used to offset 80 percent of taxable income.

In the near term, rental operators with a need for additional financing should look for opportunities to access cash being made available through loans and grants, particularly PPP loans and expanded SBA lending programs as additional stimulus funds may yet be made available. Looking further down the road, the likely expansion of SBA loan programs and perhaps additional COVID-19-related stimulus funding should motivate rental operators to delve deeper into tax, borrowing and funds allocation strategies, as those funds likely are to be made available on more attractive terms than in the past.

You can view this article on Renal Pulse website by clicking here

Before you sign on the dotted line: Things to consider when negotiating equipment purchase and sales agreements

Question: I’m considering buying some equipment from a manufacturer with whom I haven’t dealt with before, and I’m anticipating they will be asking me to sign some sort of “standard” purchase and sales agreement. I’m wondering what should I be looking for? What should I negotiate?

Answer: Your apparent skepticism about what a “standard” agreement might consist of is well-founded.

Generally, over the years, I’ve found that the notion that some sort of “standard” agreement exists is a convenient and dangerous myth that, in most cases, just invites a buyer to sign an agreement without reading it.

There are, however, a few terms that should appear in every agreement to buy and sell equipment. As you might guess, there are many more that are included solely for the purposes of protecting the manufacturer or seller and limiting or eliminating claims for refunds and damages, even when such claims arguably are valid. After all, these agreements are virtually always written by the seller’s attorney.

The other side’s perspective. We understand and appreciate the reasons equipment sellers pursue these limitations with such vigor — they shoulder enormous potential liabilities and losses for manufacturing and design defects, negligence, provision of inadequate or incorrect instructions and/or warnings, delivery failures, delays, post-delivery breakdowns, defective third-party parts and supplies, warranty claims, recalls and a wide range of other issues. So, anything they can do to limit or avoid claims without alienating enough customers to materially impact their bottom lines makes legal and economic sense, to a point.

The buyer side’s perspective. These agreements can, and often do, push the boundaries of fairness. Ultimately, many cross the line from aggressive to unfair, and in some cases, even become predatory. When financing terms are added, the risk can grow exponentially. That, however, doesn’t mean you have to walk away. Despite the thunderous protestations of many a salesperson, I rarely come across sellers who are entirely unwilling to negotiate their sales and/or financing terms, perhaps in part because refusing to negotiate can yield subsequent claims that the agreement should be wholly or partially ignored as a “contract of adhesion,” which is a contract with respect to which a buyer in a relatively weaker negotiating position is told to “take it or leave it.” If the contract’s terms prove unreasonable, a court will generally have the power to deem it unenforceable.

The response from buyers. In recent years, larger and more sophisticated buyers have begun pushing back more effectively. Many, in fact, now require equipment sellers to sign these buyers’ own purchase contracts or addenda, which drastically modify the terms of the buyer-seller relationship, in part, because these buyers have greater negotiating leverage. Whatever the reasoning, buyers who negotiate their contracts generally succeed in getting at least some of the concessions they seek, and virtually always fare better when something goes wrong. Unfortunately, overcoming the natural inclination to passively accept the manufacturer’s terms without negotiating — or in many cases, even reviewing — their terms of sale usually involves getting burned at least once.

What are these terms, and what should be negotiated or left alone?

on the other hand, can be far less predictable as some include almost no protections for themselves, while others write documents that are so unreasonable as to make it difficult to imagine a judge or jury who would be willing to enforce them.

Because it usually is impossible for a buyer to predict which terms will or will not be deemed enforceable by a judge or jury, astute buyers should be prepared to negotiate all of them, or at least those that are obviously unfair.

The basics: As a starting point, let’s first look at some provisions that should be included in every contract for the purchase and sale of equipment:

    1. Offer: The seller’s offer to sell, or the buyer’s offer to buy, the equipment, setting forth in reasonable detail the following:
      1. Item Description(s): A reasonable description of each item being purchased, including year, make, model, part #, serial #, and other identifying information, as applicable.
      2. Price: The price(s) or other consideration to be paid for the equipment.
      3. Payment Terms: When, where and how, such as in what increments or installments payments are to be made.
      4. Title Transfer: A definitive statement indicating that good and marketable clear title is being, or upon payment will be, transferred to the buyer.
      5. Delivery: At a minimum, location and timing.
      6. Taxes: Any sales, use, excise or other applicable taxes.
      7. Warranty (if any): Any express written warranty(ies).
  • Acceptance: Acceptance of such offer by the recipient.
  • Consideration: Something of value given by either side in exchange for the other’s promises.
  • Intent: The intent of the parties to create a legally binding agreement.
Although any number of additional provisions can be, and usually are, included in the purchase and sale agreements signed by most buyers and sellers, an enforceable contract for the purchase and sale of equipment could theoretically be made just from the above, perhaps less if the parties are willing to risk having a court “imply” necessary terms.

The rest. So, why are so many additional terms included in most sellers’ contracts? Simple, the rest of the terms are almost exclusively protections for the sellers. One of the most effective means of protecting a seller is to shift liability to the buyer. It’s possible to do that in most cases because your purchase is considered a business-to-business (B-to-B) transaction. Although legislatures and courts tend to go to great lengths to protect individual consumers, often voiding contracts that violate consumer protection laws, most of them do little or nothing to protect businesses — even tiny businesses with few or no assets.

That places smaller companies at a huge disadvantage relative to often enormous manufacturers and other sellers who hire legions of attorneys who do nothing but write and negotiate contracts for a living. Ironically, those same sellers’ representatives are often the first to tell rental operators two things: “We never modify our contracts” and “Don’t get your attorney involved or he/she will mess up the deal.”

To attempt to give you, the rental operator, a fighting chance, following are a few suggestions regarding which terms to negotiate and how:

Price. Get the best deal you can but try to include “most-favored-nations” pricing in case you are part of a network of dealers, some of whom might be offered better pricing without your knowledge. “Most-favored-nations” pricing essentially means nobody gets a better deal than you do.

Payments and terms. Measure the first payment’s due date from the date you receive and accept the equipment, rather than the shipping date. Be extremely careful of leases, particularly those with automatic renewal terms. We are aware of cases in which finance lessors have included advance notice-of-buyout requirements in what appear to be “dollar-buyout” leases. If the required notice is not timely given, these leases automatically renew for the entire original term, meaning you pay twice for the same equipment.

Title. Upon transfer of title, the agreement should require the equipment to be free and clear of any and all liens, claims and security interests other than any security interest that might be retained by the seller in connection with seller-financing.

Warranties. In addition to any express warranties pertaining to repairs and/or replacements of defective items, include a warranty stating that, upon delivery to you, the equipment will conform to the order specifications and be complete, in new condition, of good material and workmanship, free of defects, merchantable, fully operational, fit for its intended use, operation and environment, and fully compliant with all applicable laws, rules and regulations, including without limitation, applicable emissions standards.

Warranty waivers. Warranty waivers should be deleted whenever possible, the argument being that they are inappropriate where new equipment is concerned. Sellers often will argue the point, some more vigorously than others, but buyers of new equipment should arguably be entitled to any and all warranties, rights and remedies that might be available, including those implied under the Uniform Commercial Code (UCC), so you don’t need to write them into your purchase and sale agreement; you just need to make certain they are not waived.

Products liability. The buyer should demand that the agreement include the agreement of the seller to indemnify the buyer with respect to third-party claims arising from defects, including any defects in the design and/or manufacture thereof.

Service and replacement parts. The buyer also should require that the agreement include the seller’s commitment to continue to provide parts and spares at their current list prices for an extended period, such as three years after delivery and, if possible, for a further extended period at most-favored-nations pricing.

Liability during transportation. Include free onboard (FOB) destination and, if possible, freight prepaid, delivered duty paid (DDP) or landed duty paid (LDP) rather than ex works (EXW) or FOB shipping point. Doing this means the seller will remain responsible, rather than the buyer, for shipping costs as well as damage to the equipment, until it reaches its destination.

Taxes. Include any and all federal, state, provincial and local taxes — other than sales, value added or similar turnover taxes or charges, which should be invoiced separately — in the purchase price and require the seller to identify any other taxes and provide reasonable documentation and assistance to you in your efforts to later recover any of the above referenced taxes.

Deemed acceptance/waivers of claims. Delete language that “deems the buyer to have accepted the equipment” after the expiration of some, often short, inspection and acceptance period. You may not have the time or the manpower to inspect and test all items immediately and defects sometimes manifest themselves well after delivery.

Defective/non-conforming equipment. Delete any language that waives the buyer’s right to reject defective or non-conforming goods. Make certain the buyer retains the right to either reduce the order or require the seller to replace the defective/non-conforming equipment with conforming equipment that meets the requirements of the contract; recover from the seller all of the buyer’s reasonable losses, costs, expenses and damages resulting from such defect(s) and/or nonconformity(ies); and pursue any and all other available rights and remedies.

Force majeure. Events beyond the reasonable control of either party can justify delays in performance, but they should not permit unlimited delivery delays. Thirty days is generally considered reasonable, depending on the circumstances.

Software and intellectual property. If any software code is incorporated into or included as part of the equipment, the buyer should demand a perpetual, paid-up, royalty-free, non-exclusive right and license to use such software for the purpose of operating the equipment. Separately, the buyer should require that the agreement include an obligation of the seller to indemnify, defend and hold harmless the buyer with respect to claims of infringement of the intellectual property rights of others, including patent, copyright, trademark, moral, industrial design and other proprietary rights as well as misuse or misappropriation of trade secrets.

Training. If training is required to safely and properly use, service and/or maintain the equipment, the buyer may want to include in the agreement the obligation of the seller to provide reasonable initial training at no, or reduced, cost.

Rights in the event of a breach by the seller. Among other rights and remedies, the buyer should have the right to terminate the contract in the event the seller breaches or threatens to breach its obligation to deliver the equipment on time and in compliance with the contract; fails to fully and timely perform any associated services; breaches any other obligation or warranty owing to the buyer; or becomes insolvent or bankrupt though the effectiveness of such bankruptcy clauses has been challenged successfully in the past.

These are just a few of the provisions that buyers should consider negotiating whenever they purchase equipment.

You can also view this article directly on Rental Management website by CLICKING HERE.

“We like to refer clients who need rental contracts to James Waite because he really knows the rental industry.”

Phil Kelling, President & CEO, ARA Insurance Services, Inc.
IMPORTANT NOTICE: We reserve the right to decline to provide services (including contract analyses) to any person or entity, at any time, for any reason or for no reason By receiving/accepting your document(s) and/or conducting any initial consultation(s), James R. Waite is not agreeing to act as your legal counsel or in any other representative capacity on your behalf, and he will not be deemed to have done so, unless and until he separately agrees to do so in writing. Mr. Waite reserves the right to decline or terminate representation of any client or prospective client for any reason or for no reason, in his sole discretion. We will collaborate with local legal counsel in your state as and when necessary in order to comply with applicable ethical rules. We retain the exclusive ownership of all intellectual property (including copyrights) in and to the documents we provide. Such documents are licensed (non-exclusively) to our clients solely for use in their rental businesses, and not for distribution to parties other than their customers. Willful copyright infringement can result in criminal penalties, including a fine of up to $250,000 per offense and imprisonment of up to five (5) years. We provide .pdf (not Word) documents. You are authorized to use such documents solely and exclusively for the purpose of documenting your own transactions. You agree to refrain from copying, distributing, posting online, or otherwise making such document(s) available for copying and/or distribution to, by or for the benefit of any unauthorized person(s) or entity(ies) (including other rental companies) for use in connection with any business other than your own rental and/or sales business.