Episode 237

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Agency owners are scrambling to take advantage of the CARES Act, and in particular the Paycheck Protection Program (PPP) loans but there’s a lot we don’t know because there’s a lot that is not set in stone.  

There is a total lack of clarity around this how the PPP works – from application all the way through repayment and potential forgiveness. The 800-page act says one thing and the SBA says another. As I describe it in my conversation with guest Stephen Katz, we are repairing the plane while we’re flying it.

Stephen is the chair of the business practice of Peckar & Abramson, a law firm in New York City with offices in 10 US cities and affiliates in 14 countries across the globe.  I asked Stephen to joins us because of his decades of experience working with the SBA and other government programs designed to serve businesses. He’s spent the better part of a month interacting directly with the SBA, Treasury Department and his legal peers to try to wrap their arms around the CARES Act and specifically the PPP loan.

I knew he‘d provide some answers so that we agency owners can plan for the future and protect what they have now. It is important to know what you’re getting into. And as details get locked down, we’ll have Stephen back to help us navigate this murky waters.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev or PPC work at wholesale prices.  Check out their special offer (10 free hours!) for podcast listeners here.

Agency Owners

What You Will Learn in This Episode:

  • How Stephen developed expertise in  business law
  • The economic impact of 9/11 vs. COVID-19
  • Everything agency owners should be aware of as they apply for the PPP
  • What we know about the loan forgiveness provision of the PPP loan so far
  • How to prove you are using the proceeds of your loan appropriately
  • Everything you need  to know about EIDL loans
  • Why bigger banks have been hesitant to fund CARES Act  loans

The Golden Nuggets:

“This is the advice I’d give to all the businesses out there: Be a little conservative and err on the side of caution. That’s rarely a recipe for disaster.” @katzbike Click To Tweet “The PPP is a lifeline designed to keep businesses open that are otherwise going to close. The certifications are not to be taken lightly from a legal or a moral perspective.” @katzbike Click To Tweet “The PPP is intended to help agency owners keep the same headcount at full pay. That is the heart of the act and that is how you should try to understand its nuances.” @katzbike Click To Tweet “Don’t assume that, based on what you know today, your loan is going to be forgiven. Things change all the time and new regulations are being introduced frequently.” @katzbike Click To Tweet “Untamed panic is causing agency owners to rush to the front of the line for the PPP without fully understanding what they’re getting themselves into.” @katzbike Click To Tweet

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Speaker 1:

Welcome to the Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money and keep more of what you make. The Build a Better Agency Podcast, presented by White Label IQ, is packed with insights on how small to midsize agencies survive and thrive in today’s market. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody. Drew McLellan here with another episode of Build a Better Agency. I am recording this on April 13th, so the Monday after Easter, and many of you in the US are scrambling to apply for one of the loans inside the Care Act. Predominately, most of you are pursuing the Paycheck Protection Program. And the reality is that there’s a whole lot we don’t know about those loans yet. There are things that have not been decided, there are things where the original law said something and the SBA came out and said something in contradiction to it. Exactly what is going to be forgiven and what’s not is still a little up for grabs. And so I decided that we needed to have a guest who could help us understand all of that.

Before I introduce my guest and we get into it, I just want to remind you one of the things that we do … We have all these amazing guests who have courses and they’ve written books and they’ve done all kinds of remarkable things, and we ask them after their interview if they would like to share some of the things that they’ve created with all of you and then we give them away. So every week, we give away something from one of our guests or it may be something that we have at AMI, it might be my new book, Sell with Authority, sometimes we give away a seat at one our workshops. So, there’s always something cool that we’re giving away.

And all you have to do to be in the drawing for one of those cool things is go to agencymanagementinstitute.com/podcastgiveaway. You just need to fill out a little form, I think we ask you your name and your email address and I don’t think we ask for much else than that. And then you are in the drawing until you win something. And so if you’ve already done it, don’t worry if you haven’t won yet. I’m sure it’s going to be your turn very, very soon. And if not, then head over there and sign up so you can win some free stuff. Nothing wrong with that.

All right, let me tell you a little bit about our guest. So our guest’s name is Stephen Katz, he is an attorney with the firm, Peckar and Abramson out in New York City, and he specializes in business law. So, as you might imagine, super busy right now with his clients and just trying to keep track of what’s happening with the Care Act. And as he and I were talking about before we hit the record button, normally, an attorney has years to study something and they have precedent after precedent that they can go back to and look at to really understand the nuance of a law. And, of course, we have about a week and a half worth of nuance that we can study with the Care Act. So Stephen has devoted pretty much all of his waking hours to learning about this law, interacting with the SBA and The Treasury Department around this law so that he can advise his clients on how they should approach taking advantage of some of the things that are available here in the States.

And I apologize, this is a very US-centric episode. I try not to do that very often, but this one is super US-centric. So, anyway, I asked Stephen if he would come on the show and just explain to us sort of what we know and what we don’t know yet, and some of the ambiguity and some of the places where he’s seen clients misunderstand how these loans work, so we can hopefully avoid some of that confusion. So I am super grateful that he is here. It’s late at night in New York right now, when we are recording this, because it was the only time that he could make it work. And so he’s very graciously carved out some time to be with us and I cannot tell you how happy I am to bring him to you so that we can all get smarter about the Care Act and the loans within it. All right, let’s get right to it.

Stephen, welcome to the podcast. Thank you so much for coming on. And for the listeners, we are recording this at eight o’clock at night so we can sneak it in for this week’s episode, so I appreciate you making the time.

Stephen Katz:

It’s my pleasure and hopefully, I can help and give some good information for your listeners to help them out.

Drew McLellan:

So give everybody a little sense of your background and how you came to be in a position where you have this expertise that you and I are going to dig into in a minute.

Stephen Katz:

Sure. I’m the Chairman of the Corporate Department at a law firm called Peckar and Abramson. We have a little bit over 100 attorneys with offices across the country. First and foremost, I’m a business lawyer. I’ve been an entrepreneur myself and I really feel and know the needs of my clients, who especially are entrepreneurs and business owners. So when something like this hit, which was maybe akin to, I guess, in my career when I was an entrepreneur, we had September 11th happen.

Drew McLellan:

Right.

Stephen Katz:

Something very unprecedented and feeling that oh, my gosh, are we going to have a business? What do I do? Who do I need to talk to? So I think that experience, at least, as an entrepreneur going through that, I think, has informed a little bit about how I’ve approached this crisis, which I think is, frankly, much greater in terms of scope and magnitude. And, really, the way I came to be expert at this was, frankly, thinking and putting my entrepreneur hat on and saying oh, my gosh, if something like this happens, what would I need and what would I think about to survive as a business?

And then I immediately just immersed myself in the CARES Act and, in particular, knowing that your first thing you may look at is your existing loans and what could you do on your own credit facilities? If that’s not available, well, where do you go to one in an emergency? Disaster type loans. And then third, when the CARES Act was passed and these Payment Protection Program loans came out, I delved into that quite extensively and there’s a lot there. It’s a good concept, but the implementation has been bumpy at best.

Drew McLellan:

Yeah, it’s been sort of a train wreck.

Stephen Katz:

That’s putting it mildly.

Drew McLellan:

Yeah. And sort of for context of this, I mean, for most of the things that you have studied and guided clients on, you’ve had years to learn and you’ve had, what, a week and a half to become a CARES Act expert because none of us had heard of the CARES Act before a couple weeks ago?

Stephen Katz:

Yeah. That’s absolutely correct. And typically, I’ll deal with something … For example, let’s say I’m dealing with crowdfunding or an SEC regulation, a private company may need to raise some capital, do a private placement. I have the ability to rely on years of SEC no-action letters. When they’ll put out a new rule, for example, of crowdfunding, there’s a 90 day comment period when brilliant people come up with what if this, what if that? This seems ambiguous. Here, you have the sort of Payment Protection Plan, let’s say, portion of the act, you’ve got 45 pages of an 880 page bill that was written in all of a week. Yes, there are going to be ambiguities, we’ve seen the ambiguities. The questions just abound.

I’d say, if anything, this is so different in terms of … I’d say a lot of the solutions, really, here are … In a way, it’s the pinnacle of crowdsourcing and sharing of information amongst professionals and business owners and different people and trying to come to consensus and saying does this make sense? And if it didn’t make sense, having strong agencies and groups go and talk to the SBA and talk to the legislation and say, “Did you really mean this?” Or in some instances, we have cases where the act said one thing and then the SBA put out a regulation that seemed to completely contradict the act. And then it meant letter-writing and calling people and doing things to where they actually then said, “Yes, you’re right. We didn’t really mean what we said and it should go back to what it was in the first place.”

So there has been, on a daily basis, literally, multiple times a day, when they say, “It’s going this way, so we zig this way and then another interpretation comes out and we zag that way,” and it’s just been a lot of back and forth. And literally, it takes someone like me, what I’ve literally done is I’m checking hourly. Are there updates? What are the regs? What are people saying? What are the great minds who are interpreting this thing doing and saying? It’s really become, virtually, a full-time job trying to stay on top of this and every single change. Just on a daily basis, multiple times a day, different questions come up, different interpretations. It’s just been completely unprecedented.

Drew McLellan:

Yeah, it’s crazy. And one of the things that I am certainly observing amongst the agency owners that I work with is that the fear level, the panic level feels very different than 9/11 or the recession, and I think you’re right, I think it’s because it’s so compounded. 9/11, there were certain industries that were impacted, but there were a lot of industries and businesses that just went on like normal.

Stephen Katz:

Yeah.

Drew McLellan:

And even with the recession, everybody was hurt a little, but everybody wasn’t decimated. And it seems like, in the circumstance we’re in today, commerce has just stopped for the most part, unless you own a grocery store or a pharmacy or some other essential business, which there aren’t that many.

Stephen Katz:

Right.

Drew McLellan:

That commerce has just sort of halted, at least for a moment. And so I feel like there’s this sense of panic. So I have some agencies who are doing just fine. Their clients are still producing marketing materials, the agency is busy, but those people were as quick to get to the front of the line for the PPP loan as somebody who lost 50 percent of their revenue, because everyone is expecting another shoe to drop at some point in time. And so you have this sort of untamed panic that is making everyone run, right now anyway, to the Paycheck Protection Program-

Stephen Katz:

Yeah.

Drew McLellan:

Without probably really understanding all the … Certainly without understanding all the nuances because, as you say, the nuances change. But what are some of the things business owners should be thinking about when it comes to the Paycheck Protection Program that maybe has slipped under their radar screen as they have scurried to apply?

Stephen Katz:

Sure. There are definitely a lot of nuances to it. And as I said before, one of the things that business owners do need to be aware of, in particular, is on the forgiveness portion of the Paycheck Protection Program. And let me maybe take a step back so I can, I guess, maybe clarify the way it’s intended and the way it’s supposed to work.

Drew McLellan:

Great.

Stephen Katz:

First of all, this act was really geared toward trying to keep America’s employees employed and working. It was an incentive for business owners to keep their people on at at least close to, if not full pay and will also keep their headcounts the same. That’s really the heart and the intent of the act and I think when viewing it, you have to sort of think about it that way.

Drew McLellan:

Yeah. It feels to me like we’re sort of acting like the unemployment department for the government, right?

Stephen Katz:

Yeah, we are.

Drew McLellan:

Yeah. Yeah.

Stephen Katz:

Instead of the public works back in the New Deal era, we’re giving money to private businesses, to your agency owners, and saying, “Hey, look, keep your people on for these eight weeks and if you dedicate this money to payroll, pretty much, at least 75 percent of it, if you dedicate it to payroll and then rent and utilities and a couple other things, we’re going to forgive that loan. We’re going to let you keep that money.”

Drew McLellan:

Yeah.

Stephen Katz:

So what they need to be aware of, though, is the forgiveness provisions. While the act does provide for forgiveness and we have some indication of how it will work, the final regulations regarding loan forgiveness are not out yet. So, I can rest assured, given the history now of this, that I’ve been living with this thing since March 31st, I believe, when it came out, is things are going to change, there are going to be nuances, there are a lot of questions still to be answered. And just don’t assume, based upon what you know today, 100 percent, your loan is going to be forgiven. You really do need to be mindful that there are other regs coming out, there are frequently asked questions that Treasury answers and that will color the nuances.

And I’ll give you sort of one example. There was nothing in the act that says … For example, suppose an agency … An agency owner may also own the property that the agency rents. Now rent is under the CARES Act on the PPP program, rent is a forgivable use of the loan proceeds. However, there’s nothing in the act that says well, what if rent is owned by an affiliate? The owner of the agency may own the real property. Well, now there’s questions out there that get to be answered in the regulations, but the way the wind seems to be blowing now is you’re not going to get full forgiveness on rent if you’re paying that rent to an affiliate, but what you may get is the mortgage interest that the landlord, that the affiliate, pays. It might be limited in that regard.

One of the things that also threw everybody for a loop, and this, I think, was after April 3rd, when everyone could start applying for loans on April 7th, I believe it was, an announcement comes out from SBA that says oh, by the way, 75 percent of the loan proceeds have to be used for payroll costs. Now, there was an understanding that we thought it was 75 percent of the loan forgiveness. If you’re asking for, let’s say, 100 dollars to be forgiven, 75 of those 100 dollars needs to be for payroll costs. But no, the SBA seems to have gone further and they said actually, 75 percent of the use of proceeds of the loan itself has to be used for payroll costs, and that remains to be seen exactly how that all is going to play out and work. Frankly, applications were submitted before people really even knew all the rules.

Drew McLellan:

Right. So on the if I own the building question, what you’re saying is if I, an agency owner, have a separate LLC that owns the building that my agency lives in and I obviously pay rent to that separate LLC, what you’re saying is there’s question about whether or not that rent will be included in the forgivable part of the loan.

Stephen Katz:

Yes, in the forgivable part of the loan right now. And we’re concerned, perhaps it’s not … You may not even be able to use it at all. It may be an improper use of proceeds. It may be just as limited to that portion of rent that would be equal to the interest on the mortgage of the landlord.

Drew McLellan:

So let’s say, again, I’m an agency owner, I own my building. Because when I signed the loan documents and I’ve already been funded because, as you know, some businesses have already been funded. I’ve been funded, so I think I understand the rules, I use some of that money to pay the rent. What would happen to me or the loan when I go back in eight weeks to say to the bank, “Yep, I followed the rules,” and they go, “Actually, Drew, you didn’t,” what would be the consequence of that?

Stephen Katz:

Well, at worst case, they could say you knowingly took this improperly. I don’t think that will happen. And I think-

Drew McLellan:

Right.

Stephen Katz:

In one of the frequently asked questions, and this is sort of an analogous situation, the SBA came out with the form of application for the loan … And this is yet another example of how things are changing so quickly. The SBA came out with the form of the application for the loan that many, many people submitted. Couple of days later, they changed the form of the application. So, people then started asking, “Well, wait a minute, I’ve already submitted the old form of application. What do I do?” And the SBA did, in a guidance, say that we will let you slide if you did things at that time based … Did the application based upon what the current guidance was at that time. So hopefully, at best, people could take the position and say well, I did this because this was what the guidance said.

And as a practical matter, since loans are really, at this point, just starting to dribble out, not being funded, I’d say the practical advice is don’t start spending on rent to your affiliated companies until you know for sure that that’s going to be okay. I think, if anything in this, and this is the advice I would give to all the agencies out there, is be a little conservative and err on the side of caution right now till we know for sure what the rules are. And, again, there are a lot of very specific questions and personally, it’s been a real frustration for me because a lot of times, I have to tell people and clients, “Look, that’s a great question. I understand it, we get it and the consensus is that 50 percent will say it’s one thing and the other 50 percent will say another thing, and the one that matters and the one that counts, the SBA, Department of Treasury, haven’t answered yet.”

So those are ones where I say hold it back and let’s assume the worst and we’ll work backwards from there so we can stay safe, keep you away from fines and penalties because there is real concern … Let’s say people will generally have the best of intentions, but this is going to be an area where I think is going to be rife with fraud as well.

Drew McLellan:

Yeah.

Stephen Katz:

Banks have had to seriously relax their underwriting policies to get … And they’re being pressured incredibly, absolutely incredibly, to push this through. So there’ll be sort of a swinging of the pendulum in terms of ferreting out bad actors and then those who just did things with the best of intentions, but just didn’t … People make mistakes and it happens, and I think with something like this, mistakes are going to be rampant. And not even mistakes, just good faith positions that are then, again, upended by some statement, regulation, policy that comes out that’s … We’re literally, again, ironing this thing out as it’s live.

Drew McLellan:

Right. So to your point about right now, the understanding is that 75 percent of the value of the loan has to be used for the purposes listed, right?

Stephen Katz:

Well, actually, that’s a good question and there’s an enigma within that riddle of a question. Of course there is. And the question, of course, is this, is it 75 percent of the full amount of the loan or is it 75 percent of the proceeds of the loan that you use?

Drew McLellan:

Ah.

Stephen Katz:

But then, also, there’s another question that says well, what happens if I don’t use all of the loan?

Drew McLellan:

Right. And-

Stephen Katz:

So-

Drew McLellan:

Right now, what do we think happens if we don’t use all of the loan?

Stephen Katz:

What would happen then is then, most likely, if you didn’t use the loan in the eight week period, because it’s not going to be forgiven, and if you don’t use the loan … You’re supposed to use the loan in the eight week period after your funding date.

Drew McLellan:

Right.

Stephen Katz:

If you don’t use the loan proceeds within that time, [inaudible 00:20:37] is you give the money back because it won’t be an allowable use of proceeds outside of that eight week period. So as a practical matter, you’re giving that money back. If you didn’t use it, theoretically, you didn’t need it.

Drew McLellan:

Yeah.

Stephen Katz:

Again, this is an emergency type situation, it’s not a windfall and people shouldn’t be kidding themselves about that because I’ll … Maybe I’ll be pedantic for one second here, but there’s some pretty serious certifications here. And because the banks are not really vetting this the same way, this is one where they’re going to say we’re going to give our clients an up rope to hang themselves. You’re self-certifying. You fill out that loan application, there are about … I think I counted eight different certifications that you give, that you calculated your payroll costs correctly, that …

But, first and foremost, I believe it’s the first certification, the economic uncertainty because of the COVID virus is adversely affecting my business. So if you’re thriving now, from a legal perspective, and this is going to be a windfall, this is not meant for you. From a legal perspective, and I’ll take off the cloak and the lawyer robes for a moment and say, maybe from a moral perspective too, that’s not the … This is a loan, this is a program, this is a lifeline to keep businesses open that are otherwise going to close or otherwise literally put people on the street. And, again, not to be too pedantic, but that’s what it is. And then, again, for those of you certifying, you don’t want to be that one that they make the test case out of. They audit and they say, “Look, your revenue’s went up and you certified”-

Drew McLellan:

That you were in trouble. Right. So what other things about the PPP are people not maybe aware of or they’re not thinking about? It seems to me like record-keeping and being able to prove to the bank that you used the proceeds of the loan appropriately is going to be critical to having the loan be forgiven and not getting into a fine or penalty situation.

Stephen Katz:

Yes. And, again, the banks were going to kind of regulate this and we’ll get more on this, but you’re going to need meticulous record-keeping to get that loan forgiven. Just think about it like this. While the loan, even if it doesn’t get forgiven, is only one percent interest and you have to pay it back, but from a bank perspective, they may not make it as easy as you want it to be.

Drew McLellan:

Right. Right.

Stephen Katz:

It’s basically saying all right, we gave you this money, they chase the SBA for it or whatnot, but the record-keeping is going to be very, very important. As much as there was a rush to get the loans, and there is a rush to get the loans … And bear in mind, there’s a finite amount of dollars, this is not an unlimited amount. So one thing people should know is if you’re thinking about getting the loan, apply for the loan.

Drew McLellan:

Right. Absolutely.

Stephen Katz:

This is not the time to sort of vacillate about it. Again, err on the side of caution that it’ll get through, that what you’re asking for is not going to be questioned so you can get the application in and approved. I advise my clients don’t be penny … In terms of overdoing it and trying to ask for too much because if you do, on the backend, on the forgiveness side, you might really get squeezed.

But kind of going back to that point, so that you do really have to be careful about what you’re asking for, what you’re applying for. And, again, on the forgiveness side, the record-keeping is going to require pretty meticulous record-keeping. I’m hearing that keeping copies of checks and pay stubs and W-2 … You’re going to have to justify every dollar that you spent was spent on an allowable cost. So, keeping meticulous records. In some instances, we’re seeing a number of agencies, other clients that I’m talking to, they’re actually keeping that … When they get funded, they’re going to keep that money in a separate account.

Drew McLellan:

Yeah, I’ve he