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SBA Extends Safe Harbor Deadline to May 14, 2020 and Confirms that Foreign Affiliate Employees Must be Counted for Size Purposes

safe harbor

SBA Extends Safe Harbor Deadline to May 14, 2020 and Confirms that Foreign Affiliate Employees Must be Counted for Size Purposes

Late on May 5, 2020 the Small Business Administration (SBA) issued another round of Frequently Asked Questions (FAQs) that extended the Safe Harbor Deadline to return Paycheck Protection Program (PPP) loan funds from May 7, 2020 to May 14, 2020. Significantly, the SBA also confirmed that its rules regarding foreign affiliates are applied to PPP applicants in the same manner as its other programs. Loan applicants should closely review the most updated version of the SBA’s FAQs and talk to their counsel about the best way to proceed.

Safe Harbor Extended from May 7, 2020 to May 14, 2020

As discussed in a previously, on April 23, 2020 (20 days after applications could first be submitted for PPP loans), the SBA issued FAQ 31 that significantly increased the requirements surrounding an applicant’s certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In the strongly worded FAQ 31, the SBA stated that “[b]orrowers 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.” Unfortunately, as of the date of this alert, neither the Department of Treasury (Treasury) nor the SBA have issued any further guidance beyond the above sentence to confirm how applicants actually make this determination. On April 28, 2020, the SBA also confirmed that FAQ 31 equally applies to both public and private companies.

In addition to issuing FAQ 31, the SBA also issued an initial Safe Harbor Deadline of May 7, 2020 to return PPP loans. This May 7, 2020 Safe Harbor Deadline has now been extended to May 14, 2020. Under FAQ 43 that was issued on May 5, the SBA and Treasury are allowing borrowers to return PPP loan funds by May 14, 2020. For those borrowers that return funds by May 14, the SBA and Treasury have confirmed that they will deem the certification regarding “need” to have been made in good faith. The SBA also has confirmed that it intends to issue additional guidance on how it will review the “need” certification before May 14, 2020.

While the SBA’s recent guidance does not specifically reference any eligibility certifications outside of the “necessity” for the loan, a borrower knowing that it has a separate eligibility issue should seek counsel about addressing that issue before the extended deadline of May 14, 2020.

Frustration and confusion abound since the issuance of FAQ 31 and FAQ 37. There are several questions that Treasury has not adequately answered. Until further guidance is issued, applicants are faced with a difficult choice of keeping funds with the risk that the government may later hold the unclear guidance against them, or refuse the funds and accept the impacts that go along with that, including a possible reduction of employees.

Applicants across the country have been raising these complaints, and Treasury has at least initially responded by extending the deadline to May 14, 2020. We hope that Treasury will also soon issue additional FAQs or rules to confirm the parameters for which businesses can in good faith certify the need for a PPP loan.

Borrowers Must Count Employees of Foreign Affiliates When Determining Eligibility for a PPP Loan

The SBA also issued FAQ 44 on May 5, which confirms that borrowers must count both foreign and domestic affiliates when determining eligibility for PPP loans. FAQ 44 has significant impacts on businesses which applied for PPP loans without counting the employees of foreign affiliates.

As a reminder, SBA’s regulations confirm that “[c]oncerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.” 13 C.F.R. § 121.301(f) (February 5, 2020). The PPP Loan Affiliation Rules describe how the SBA determines affiliation for PPP loans.

SBA’s rules for determining size have long required participants in SBA’s programs to count both foreign and domestic affiliates. See 13 CFR §§ 121.103(a)(6), 104(a), 106(b)(1), and 301(f)(6) (confirming that both foreign and domestic affiliates should be considered for size purposes).

However, when the SBA issued the PPP Loan Affiliation Rules, it did not include the pre-March 11, 2020 version of 13 C.F.R. § 121.301(f)(6)1, which confirms that foreign affiliates should be counted. The PPP Loan Affiliation Rules do not reference Section (f)(6). The Interim Final Rule first issued on April 2, 2020 and SBA’s FAQ 3 also states that borrowers are eligible for a PPP loan “if the business has 500 or fewer employees whose principal place of residence is in the United States,” or meets other criteria.

The use of the term “principal place of residence in the United States” in the Interim Final Rule and SBA’s FAQs created confusion about whether employees of foreign affiliates actually needed to be counted for PPP loan eligibility. For those who have long worked with SBA’s rules, it seemed that not counting foreign affiliates would be a significant change from SBA’s past implementation of its regulations, but the clear language in the above sources made it reasonable to openly consider that question to determine if the SBA was handling the PPP loan program differently.

On May 5, the SBA confirmed that PPP loans are consistent with its other programs and borrowers must count foreign affiliates when considering size:

For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the
affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.

See FAQ 44.

Businesses which have already applied and know that foreign affiliates would cause them to exceed the relevant size standard should discuss this with their counsel to closely evaluate next steps on how to proceed. It would be wise to consider and address this before the May 14, 2020 Safe Harbor Deadline.

For specific guidance on this issue, please contact Josh Mullen, John  Scannapieco, or Jeff Wagner. For more information and general guidance on how to address other legal issues related to COVID-19, please visit the Coronavirus (COVID-19): What You Need to Know information page on our website.

reits

Impact of the Coronavirus Crisis in the American REITs

Victor Kuznetsov, Managing Director of Imperial Fund, examines how US real estate investment trusts are weathering the COVID-19 storm.

Real estate investment trusts (REITs) have always been, historically, a classic of dividend investment through the Buy & Hold formula, which has allowed both retail, institutional and investment fund investors to have periodic cash flows, which complement their pensions in some cases, and that they increase their profit accounts in others.

In general, the REITs were distributing a dividend that usually ranges from the most “modest” of Realty Income (O) of 1.5-2% per year to that of other mortgage REITs such as Annaly or Agnc, whose dividends they reach 8-9% per year.

Nevertheless, the health crisis is practically causing an economic emergency, in which almost all the REITs are seeing their prices decrease, anticipating the fall of the real estate market and the entry into the technical recession.

At Imperial Fund one of the fundamental aspects in this investment sector, which seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market, is diversification, which makes it possible to reduce both the beta (risk) of our portfolio, without jeopardizing the return on investment.

General and Sectoral Real Estate REITs

In these historical moments in which the coronavirus crisis is hitting strongly all investment portfolios, including those of institutional investors even though they use hedging instruments, the losses due to the drop in the price of the listing are being high, in view of the prospect of  business downturn and recession across the United States.

Observing the different sectoral types of REITs, and among the most penalized, and which have more possibilities to continue distributing a dividend without decreasing it and recovering in presumably a shorter period, we can distinguish:

Realty Income (O): It is the classic of investment in the field of REITs, it is considered an aristocrat of the dividend, and it distributes a monthly dividend, which in turn allows increasing the utility of compound interest. Its price has decreased from $84.92 to approximately $54, although we should not forget that in the 2008 crisis, its price dropped to $17.

Annaly Capital Management (NLY): It is the mortgage with the largest capitalization in the United States. Its price per share has decreased from $10.50 to $6.70. It is clearly being harmed by the global alarm situation, but that it is another diversified company that allows to systematically cover the risk.

Omega Healthcare Investors (OHI): It is another of the classic and most important REITs in the residential sector for the elderly. Its price has fallen from $45.22 to $17.50. The only explanation from the point of view of the fundamental analysis is that the market is picking up the loss of potential clients in their residence, because it is one of the most punished REITs, although obviously and in the worst case the replacement rate, in both the United States and England is clearly guaranteed.

The current situation should not provoke investors to believe that we are not able to think about the future, a future that, as has happened with previous crises, will always bring something positive, and will reward investors who trust in those companies that have adequate diversification, distribute a sustainable dividend, and are able to adapt to any situation that may arise.

At the present time, we may have entered a general downward curve on the stock market, and the aforementioned share price of REITs will drop further still, but they should be on the investment radar as a possibility in the future not far away.

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Imperial Fund is a mortgage investment fund formed in 2014 and headquartered in Hollywood, FL. Imperial seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market.

bear

The Bear is Back: A Global Pandemic

The U.S. stock market fell into a bear market on March 12, 2020, ending the bull market that began in 2009. The bull market had begun on March 9, 2009, and peaked on February 19, 2020. The S&P 500 rose 400% between 2009 and 2020, the Dow Jones Industrials rose 351% between 2009 and 2020 and the NASDAQ Composite rose 674% between 2009 and 2020. However, since February 19, 2020, we have seen dramatic declines in all three.

Figure 1. S&P 500, 2009 to 2020

The GFD US-100 Index provides coverage beginning in 1792. By our calculation, there have been twenty-four bull and bear markets since 1792 with four occurring in the 1800s, seventeen in the 1900s, and three in the 2000s. The worst bear market was in 1929-1932, led by an 89% decline in the Dow Jones Industrials. Two prior bear markets in this century both had declines of 50% in 2000-2002 and 2007-2009. By comparison, previous bear markets, such as those occurring in 1987 and 1990, only lasted a few months before a bounce-back.

What is interesting about this current bear is how quickly and how sharply it hit markets throughout the world in response to the spread of the Coronavirus. This was a quick, simultaneous financial pandemic in every nation of the world. In many countries, the 2020 bear market is simply a continuation of the bear market that began in 2018.

The extent of the bear market in 22 countries and for global indices is provided in Table 1 which uses data from the GFDatabase. The table shows the date of the market top, the value the index hit on that date, the change from the previous market low, the current value of the market, and how much each market has fallen since the top in 2018 or 2020. The only major market in the world which has not fallen into a bear market this year is the Chinese market, the country where the coronavirus originated. However, the Chinese market had already been in a state of decline since 2015.

Figure 2. Shanghai Stock Exchange “A” Shares Index, 2010 to 2020

So far, global markets have fallen by around 30-40%. The question is, how much more are the markets likely to fall?  Will this be a short-lived bear market as occurred in 1987 and 1990 or a more extended bear market as occurred in 2000-2002 and 2007-2009?

Figure 3. United States 10-year Bond Yield, 2010 to 2020

It should be noted that fixed-income markets have already hit their bottom in the United States. This occurred on March 9 when the 10-year bond fell below 0.5% as we had previously predicted in the blog “230 Years of Data Show Rates Will Soon Hit 0.50%.” Yields have slightly risen since then. Moreover, the Shanghai Index bottomed out on February 3, 2020, when the stock market reopened after the Chinese New Year and has not participated in the worldwide sell-off. Both of these indicate that this bear market will not continue for an extended period of time. We will update Table 1 on a regular basis so our readers can follow the changes in this COVID bear market.

Table 1.  COVID Bear Market Statistics for 22 Countries and 4 Regions

 

Country

Index

Market Top

Value

Change

Market  Low

Value

Change

Asia
Australia All-Ordinaries 2/20/2020 7255.2 133.16 3/23/2020 4564.1 -37.09
China Shanghai A Shares 6/12/2015 5410.86 165.15 12/27/2018 2600.05 -51.95
Hong Kong Hang Seng 1/26/2018 33154.12 80.98 3/23/2020 21696.13 -32.76
India BSE Sensex 1/14/2020 41952.63 82.79 3/23/2020 25981.24 -38.07
Japan TOPIX 1/23/2018 1911.31 59.77 3/16/2020 1236.34 -35.31
Singapore FTSE ST All-Share 1/24/2018 877.87 40.38 3/23/2020 540.6 -38.42
South Korea Korea SE Price Index 1/29/2018 2598.19 57.21 3/19/2020 1457.64 -43.90
Taiwan Taiwan Weighted 1/14/2020 12179.81 56.41 3/19/2020 8681.34 -28.72
Europe and Africa
Belgium All-Share 4/13/2015 13859.94 104.31 3/18/2020 7202.21 -48.04
France CAC All-Tradable 2/12/2020 4732.14 56.27 3/18/2020 2888.89 -38.95
Germany CDAX Composite 1/23/2018 625.19 50.07 3/18/2020 363.83 -41.80
Italy FTSE Italia All-Share 2/19/2020 27675.06 39.43 3/12/2020 16286.37 -41.15
Netherlands All-Share Index 2/12/2020 904.31 54.15 3/18/2020 574.88 -36.43
Norway OBX Price 9/25/2018 523.06 70.44 3/16/2020 329.67 -36.92
South Africa FTSE All-Share 1/25/2018 61684.8 246.26 3/19/2020 37963 -38.46
Spain Madrid General 4/13/2015 1203.82 99.78 3/16/2020 608.26 -49.47
Sweden OMX All-Share Price 2/19/2020 732.67 68.35 3/23/2020 478.95 -34.63
Switzerland SPI Price Index 2/19/2020 731.04 140.71 3/16/2020 548.52 -24.97
United Kingdom FTSE-100 5/22/2018 7534.4 99.27 3/23/2020 4993.89 -33.72
Americas
Brazil Bovespa 1/23/2020 119528 217.51 3/23/2020 63451.55 -46.91
Canada TSE-300 2/20/2020 17944.1 51.52 3/23/2020 11228.49 -37.43
Mexico Mexico IPC 7/25/2017 51713.38 206.16 3/23/2020 32936.6 -36.31
United States DJIA 2/12/2020 29551.42 351.37 3/23/2020 18576.04 -37.14
United States S&P 500 2/19/2020 3386.15 400.52 3/23/2020 2236.7 -33.95
United States NASDAQ 2/19/2020 9817.18 58.52 3/23/2020 6860.67 -30.12
Global
Emerging Markets MSCI Emerging Free 1/29/2018 1278.53 85.69 3/23/2020 758.204 -40.7
Europe MSCI Europe 1/25/2018 1926.57 47.52 3/23/2020 1152.698 -40.16
World MSCI World 2/12/2020 2434.95 35.63 3/23/2020 1602.105 -34.2
World MSCI EAFE 1/25/2018 2186.65 46.52 3/23/2020 1354.3 -38.07

 

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Dr. Bryan Taylor is President and Chief Economist for Global Financial Data. He received his Ph.D. from Claremont Graduate University in Economics writing about the economics of the arts. He has taught both economics and finance at numerous universities in southern California and in Switzerland. He began putting together the Global Financial Database in 1990, collecting and transcribing financial and economic data from historical archives around the world. Dr. Taylor has published numerous articles and blogs based upon the Global Financial Database, the US Stocks and the GFD Indices. Dr. Taylor’s research has uncovered previously unknown aspects of financial history. He has written two books on financial history.

pivot

How Businesses Can Pivot While Slowed Or Closed During Difficult Times

With businesses across the U.S. having closed temporarily or reduced services due to the coronavirus pandemic, company leaders are trying to find ways to stay afloat until the crisis passes – and figure out how to move forward into an uncertain future.   

Dr. Kyle Bogan,  a business consultant and speaker on workplace culture, says this unprecedented event has caused companies to learn how to pivot on the fly and consider changes that will not only allow them to survive the crisis, but thrive later on.

“Business owners are attempting to balance decreased demand with caring for and providing for their team, and protecting the future of the business they built,” Bogan says. “While there is a negative impact on revenue, many businesses will come out on the other side of this pandemic stronger as a business and stronger as a team.

Bogan suggests ways businesses can pivot during the pandemic that could help them short- and long-term:

Offer online services. “The critical element is to be creative and innovative to find new ways to deliver special services and products to your customers, and discounts where possible,” Bogan says. “They won’t forget that. Going as far as you can for them during an unprecedented time will make it likely they stay with you long after this is over.”

Expand how you inform and update customers. “Let your customers and audience know how and what the company is doing, how it’s adapting,” Bogan says. “Moreover, show you care how they’re doing. Offer links of advice on your website to help them deal with the many aspects of this crisis. If you’re authentic and honest, social media is a way to connect in a kind and helpful way, and that will add more substance to your brand’s image.”

Tighten connections with employees. Many companies are set up to work from home, and they aren’t as hobbled as others that are not. Bogan says consistent communication, enhanced by video conferencing, is vital to stay on top of business processes and to boost morale. “The entire team needs to be better informed and felt cared for and valued, and email alone isn’t sufficient,” Bogan says. “Owners and CEOs need to be transparent with teams about company situations. That builds trust. Send your team resources for anything that could help them during this difficult time. Encourage professional learning during downtime and get creative input from the team, giving them a stake in the future.”

Consider ways to make your culture stronger. Building stronger relationships can help build a better work culture, but that’s only one piece. Bogan says this is a good time for leaders to objectively look at their business culture and find ways to improve it. “The question is, do you want to be intentional about creating a team-first culture that represents you and your business, or do you want it to create itself without a clear vision?” Bogan says. “If you want to experience accelerated growth when this is over, creating a team-first culture is the path you must take. Financial success will follow. People are more willing to spend time and money with your brand if they can feel your team is happy.”

“Truly, we are all in this together – customers, business leaders, employees,” Bogan says. “That’s how a business should think and communicate now during the crisis and going forward.”

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Dr. Kyle Bogan (www.drkylebogan.com) is a general dentist and a speaker/consultant on workplace culture. He is the owner of North Orange Family Dentistry. Bogan earned a Fellowship in the Academy of General Dentistry and a Fellowship in the International College of Dentists. He is a member of the American Dental Association, the Ohio Dental Association, the International Dental Implant Association and the American Academy of General Dentistry. Bogan earned his Doctor of Dental Surgery degree from The Ohio State University, graduating Magna Cum Laude, and played sousaphone in the marching band.