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The CARES Act: Considerations for Auto Dealerships During COVID-19 Pandemic

Arent Fox’s Automotive group and Business Loan Task Force are holding a webinar for automobile dealers and trade organizations seeking to navigate the CARES Act business loan program that was just enacted by Congress.

Please RSVP to join us on Wednesday, April 1 at 12:00 Noon ET for this important webinar. More details here.

Our Task Force has a summary of different options available to auto dealerships to help deal with the fallout of the COVID-19 pandemic.

CARES Act

Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included the Paycheck Protection Program (PPP) for small businesses. The PPP provides short-term cash flow assistance to small businesses, including auto dealerships, to help these businesses and their employees deal with the immediate economic impact of the COVID-19 pandemic. Loans are made by lenders certified by the Small Business Administration (SBA) and guaranteed by the federal government. The SBA will administer the PPP. For more information on the CARES Act and the Paycheck Protection Program, overall, please see the alert linked here.

Normally SBA Affiliation Rules would bar franchised car and truck dealer networks, with over 500 employees, from being considered small businesses. The CARES Act amended the SBA Affiliation Rules to exempt “any business concern operating as a franchise that is assigned a franchise identifier code by the SBA.” Original Equipment Manufacturers (OEMs) can obtain a franchise identified code from the SBA and many OEMs already have (e.g., Chrysler, Dodge, Jeep, Ram, Kia, Ford, Lincoln, Mazda, Mitsubishi, Subaru, and Volvo). The practical effect of this change allows dealers of these OEMs, with under 500 employees, to apply for loans under the PPP. For dealer groups that manage and/or have common ownership among franchises, each franchisee that is a separate legal entity with less than 500 employees should qualify for a PPP loan.

For this reason, many other OEMs are racing to get franchise identifier codes from the SBA. To obtain a franchise identifier code, OEMs must submit an application to the SBA at franchise@sba.gov. Required application materials include an OEM’s franchise sales and services agreement, franchise disclosure document (if applicable), and other documents the OEM requires a franchisee to sign. The SBA will also require each OEM to execute an SBA Addendum to their standard franchise agreement. SBA maintains an SBA Franchise Directory listing franchises that have been reviewed by the SBA and have been issued franchise identifier codes. The current directory may be found here.

Dealerships should check with their OEMs to see if they have already applied for franchise identifier codes with the SBA. This designation is key for auto dealers to qualify for loans under the PPP. If an auto dealer is eligible to get a PPP loan, to get the full benefit of loan forgiveness under the PPP, a dealer must keep their employees and pay them at least 75% percent of their prior compensation. Funds could be available to dealerships in the near future (this timeline is subject to the implementing regulations, which are to be issued by the SBA and the Treasury Department in the coming week(s)). PPP loans must be made during the period prior to June 30, 2020.

For larger businesses that do not qualify for the PPP administered by the SBA, they may be able to apply for medium-size business loans, pursuant to a facility run by the Federal Reserve. This program may be available to dealerships that do not get “adequate” relief from the PPP (what qualifies as “adequate” relief under the PPP will be determined by Treasury Department regulations, yet to be issued).

Mitigation Strategies

During this difficult period, dealerships must consider a variety of business strategies in the near term to mitigate the loss in revenue due to the COVID-19 outbreak. Some of these strategies are outlined below:

Workforce Changes

To reduce near term payroll constraints, dealerships should consider reducing dealer compensation (or pausing it for the near term), reducing hours for employees where possible and reducing salaries for high paid employees or key management. If the dealership is forced to consider layoffs, encourage the former employees to seek the more generous unemployment benefits offered by the CARES Act and document the cut in hours (as noted above, to qualify for the full loan forgiveness under the PPP and some other assistance under the CARES Act, many of these employees may need to be brought back onto the payroll at full salary).

Facilities Management

Dealerships should communicate with their landlords about reducing rent payments or seeking forbearance where permissible. If companies obtain a PPP loan, the amount of rent paid from a PPP loan during the first 8 weeks is forgiven. Additionally, dealerships must continue to abide by local regulations even in the midst of stay at home or shelter in place orders. This means if a dealership is located in a state where sales can be made by appointment only, keeping the doors open in defiance of an order can lead to fines or enforcement actions. Social distancing should continue to be practiced in all departments of the dealership per CDC recommendations.

Accounts Payable

Dealerships should review all checks written and any credit card payments that were due in February, that qualify as expenses and cancel or reduce those expenses where possible. Work with vendors on applicable notice periods for cancellations. In the near term, ceasing all orders on new vehicles should be considered as well as returning all excess parts if that can result in additional cash flow. Additionally in certain circumstances, dealerships may consider holding off on sending out accounts payable checks in April (especially with large company vendors that may be offering forbearance in the near term).

For vehicles purchased in the last 30 days, some auctions have return policies that allow the vehicles to be returned (this can be considered if the dealership has excess inventory). Dealerships should also consider ceasing payments of any curtailments or pay-downs on floor planned inventory. If the dealership has a large amount of cash liquidity on deposit with their lender, it can consider reducing the cash liquidity by paying down floor plan and taking some of these funds and placing them with another financial institution. For any dealer trades, consider only accepting cashier’s checks or floorplan transfers if both of the dealerships are with the same lender.

Obtaining Additional Financing

In addition to the PPP outlined above, dealerships should start the process of obtaining other SBA loan products from a local, SBA-certified lender. Also, under the CARES Act, Economic Injury Disaster Loans (EIDLs) from the SBA, are available to eligible entities, such as dealerships who have suffered economic injury as a result of COVID-19. Although EIDL’s do not feature forgiveness, Congress expanded EIDL eligibility requirements and loosened some of the regular EIDL requirements for the COVID-19 disaster. Also, dealerships that apply for a COVID-19 EIDL Loan, may request an advance prior to approval of up to $10,000.

Contacts

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