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COVID-19: Where Is the Independent Relationship Between a Lender and A Borrower Using Funds from the American Taxpayers?

COVID-19: Where Is the Independent Relationship Between a Lender and A Borrower Using Funds from the American Taxpayers?The Centers for Disease Control and Prevention (CDC) indicated that the above image shows the “transmission electron microscopic image of an isolate from the first U.S. case of COVID-19, formerly known as 2019-nCoV.  The spherical viral particles, colorized blue, contain cross-sections through the viral genome, seen as black dots.”  (Image produced by Hannah Bullock and Azaibi Tamin, provided courtesy of the CDC, 2020.)
Small businesses in Chester County, and throughout the United States, have been directly impacted by the virus that causes COVID-19.  

In a land where the Declaration of Independence is considered one of our nation’s founding documents, where is the independent relationship between a lender and a borrower using funds from the American taxpayers, including taxpayers in Chester County?

In late March, both houses of the United States Congress made the decision to extend financial aid to small businesses faced with difficulties because of the COVID-19 Pandemic.  This decision became law with the passage of the CARES Act – the “Coronavirus Aid, Relief, and Economic Security Act” – by strong bipartisan support in the House of Representatives and the Senate and with the signature of President Donald Trump on March 27, 2020.

One of the items included in the CARES Act was the Paycheck Protection Program (known by the acronym “PPP”).  This program allows small businesses to receive funding from the American taxpayers for specific types of business expenses, with a specific focus on providing funds so that businesses could retain or hire back employees that had been let go because of the pandemic.

The terms for businesses were outstanding by almost any measure.

A PPP loan include an interest rate of 1%, a term of two years, no pre-payment penalties, and deferral of up to six months for the first payment.  Loan amounts to a single business were capped at $10 million.

According to the United States Department of the Treasury:

“All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.  Businesses in certain industries can have more than 500 employees if they meet applicable [United States Small Business Administration] SBA employee-based size standards for those industries.   For this program, the SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries [listed in NAICS code 72]; or (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by the SBA.”

“This program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits [with payroll costs capped at $100,000 on an annualized basis for each employee],” the statement from the U.S. Treasury continued.  “Funds can also be used to pay interest on mortgages, rent, and utilities.”

Best of all, a PPP loan could be forgiven and turned into a grant to the participating business. Tax-free. (Well, at least for Federal tax purposes.  Likely, though not guaranteed, for State tax purposes in most states.)

“Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll),” according to the U.S. Treasury Department.  “Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.  Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.”

U.S. Treasury Department

The United States Department of The Treasury is responsible for the implementation of parts of the CARES Act.

In a statement, the U.S. Treasury details how a borrower will be able to convert a PPP loan into a grant where some or all of the loan proceeds are forgiven:

You can submit a request to the lender that is servicing the loan.  The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.  You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.  The lender must make a decision on the forgiveness within 60 days.

A variety of financial institutions – banks included – were empowered to grant these loans through the SBA.

In exchange for the financial institutions processing these loans, the SBA used funds from the American taxpayers – including taxpayers from Chester County – to pay fees to the participating financial institutions.  According to guidelines set by the SBA:

Processing fees will be based on the balance of the financing outstanding at the time of final disbursement. SBA will pay lenders fees for processing PPP loans in the following amounts: 

    • Five (5) percent for loans of not more than $350,000;
    • Three (3) percent for loans of more than $350,000 and less than $2,000,000; and
    • One (1) percent for loans of at least $2,000,000.

Lenders may not collect any fees from the applicant.

In addition to the lenders, “agents” can also be compensated.  “Agents,” according to the guidelines of the SBA can include such individuals as attorneys, accountants, and “Any other individual or entity representing an applicant by conducting business with the SBA,” among others.  According to guidelines set by the SBA:

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Agent fees will be paid out of lender fees. The lender will pay the agent. Agents may not collect any fees from the applicant. The total amount that an agent may collect from the lender for assistance in preparing an application for a PPP loan (including referral to the lender) may not exceed: 

    • One (1) percent for loans of not more than $350,000;
    • 0.50 percent for loans of more than $350,000 and less than $2 million; and
    • 0.25 percent for loans of at least $2 million.

That’s a summary of the background of the efforts by the U.S. Congress to help small businesses recover from the impact of the pandemic.

Research was undertaken on several of the largest PPP loans.

This news column looks at one PPP loan.  One PPP loan that might be of great interest to American taxpayers.

One PPP loan that involved two major Indiana-based businesses – one as a borrower, one as a lender.  Research showed that the relationship between these two entities is more extensive than simply one PPP loan of funds from American taxpayers – including Chester County taxpayers.

According to the Form 8-K filed with the United States Securities and Exchange Commission (SEC) on April 17, 2020, by Emmis Communications Corporation, a PPP loan in the amount of $4,753,000 was granted to Emmis Operating Company, a wholly-owned subsidiary of Emmis Communications Corporation by STAR Financial Bank.

Emmis Communications Corporation is headquartered in Indianapolis, while STAR Financial Bank is headquartered in Fort Wayne.

That loan of funds from the American taxpayers – including taxpayers in Chester County – is one of the largest granted by a lender through the PPP.

Both STAR Financial Bank and Emmis Communications Corporation were asked specific questions about this PPP loan as well as the business relationship between the two businesses.

The entire response from STAR Financial Bank:

“Thank you for contacting STAR. We do not disclose customer information, per our policies.”

The complete response from Emmis Communications Corporation:

“Thank you for your inquiry.  The PPP process directed applicants to work with its banking partner, which we did.  Emmis has been negatively affected by the pandemic like every other broadcaster and nearly every business.  Emmis is known for its people-first culture and we are proud to say we have avoided furloughs for our employees despite the sharp declines in our businesses.  The proceeds from the PPP loan enable us to continue to provide stability for our employees while we weather this storm together.”

Previous news articles, news releases, and documents filed with the SEC provide a more in-depth view of the relationship between these two Indiana-based businesses.

These documents indicate that STAR Financial Bank holds the mortgage on the headquarters of Emmis Communications Corporation and that “Emmis Operating Company [a wholly-owned subsidiary of Emmis Communications Corporation] and STAR Financial [Bank] entered into an amendment to the Mortgage, whereby Emmis placed $8 million into a restricted cash account with STAR [Financial Bank] to serve as additional collateral for the Mortgage.”

In addition, news articles in several Indiana publications as well as in news statements – with quotes from both businesses – indicate that STAR Financial Bank is a tenant in real estate owned by Emmis Communications Corporation.

A news statement from STAR Financial Bank dated May 8, 2019, noted that STAR Financial Bank was planning to open a new office at 40 Monument Circle in Downtown Indianapolis.  That address is the address of the headquarters of Emmis Communications Corporation.  The size of the office was detailed to be 12,500 square feet.

In a webpage dated January 29, 2020, on the website of the Indy Chamber, this local chamber of commerce included text that noted that STAR Financial Bank was inviting Indy Chamber members to visit the new office of STAR Financial Bank on Monument Circle.  This webpage includes two photographs of the new office.

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Additional information about the financial relationship between Emmis Communications Corporation and STAR Financial Bank is detailed in several filings with the SEC.

Small Business Administration

The Small Business Administration (SBA) is responsible for the Paycheck Protection Program (PPP).

The PPP Loan from STAR Financial Bank is detailed in the Form 8-K issued by Emmis Communications Corporation to the SEC on April 17, 2020:

On April 13, 2020, Emmis Operating Company (the “Borrower”), a wholly owned subsidiary of Emmis Communications Corporation (the “Company”), was granted a loan (the “Loan”) from STAR Financial Bank in the aggregate amount of $4.753 million, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

The Loan, which was in the form of a Promissory Note dated April 13, 2020 issued by the Borrower, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 13, 2020. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use as much of the Loan amount as possible for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.  A copy of the Promissory Note is attached hereto as Exhibit 10.1 and incorporated herein by reference [There was no “.” – period – at the end of this sentence.]

As noted above, the guidelines outlined by the SBA indicate that a lender processing a loan in an amount greater than $2 million, the lender would be entitled to be paid 1% of the loan amount.  Thus, using those SBA guidelines, STAR Financial Bank would have been paid $47,530 in a processing fee.  Whether that amount actually has been paid is unknown.

Whether STAR Financial Bank retained all of that processing fee or shared it with an agent or agents is also unknown;  if shared with an agent, using the guidelines of the SBA, STAR Financial Bank would have retained at least $35,647.50.  (As noted above, an agent cannot receive more than one-quarter of one percent for loans of at least $2 million, according to SBA guidelines.  It is not certain if more than one agent can be involved in the same loan and if additional agents for the same loan are paid from the same one-quarter of a percent or if additional amounts must be shared in some other manner.)

This PPP Loan, though, is not the only financial relationship between the two Indiana-based businesses.

The following text was included in a section of the Form 10-Q issued by Emmis Communications Corporation to the SEC on July 11, 2019:

$23 million mortgage by and between Emmis Operating Company and Emmis Indiana Broadcasting, L.P., as borrowers, and Star Financial Bank, as lender (the “Mortgage”).

 A copy of that mortgage loan agreement – dated April 12, 2019 – was included as an attachment to this 10-Q document.

That mortgage was referenced in another SEC filing by Emmis Communications Corporation.  From a section of the Form 10-Q issued to the SEC on January 9, 2020:

On April 12, 2019, we entered into a $23 million mortgage between Emmis Operating Company and Emmis Indiana Broadcasting, L.P., as borrowers, and Star Financial as lender (the “Mortgage”). The Mortgage expires April 12, 2029, and was originally secured by a perfected first priority security interest in the Company’s headquarters building in Indianapolis, Indiana, and approximately 70 acres of land owned by the Company in Whitestown, Indiana, which currently is used as a tower site for one of the Company’s radio stations. The Mortgage requires monthly principal and interest payments using a 25 year amortization period, with a balloon payment due at expiration and the original annual interest rate was 5.48%.

 Pursuant to the terms of the Mortgage, $10 million of combined proceeds from the Austin Partnership Transaction and the MediaCo Transaction were required to be used to repay Mortgage indebtedness. Accordingly, $6.5 million of the proceeds from the Austin Partnership Transaction were used to make a payment on October 4, 2019 and $3.5 million of the proceeds from the MediaCo Transaction were used to make a payment on November 29, 2019. As a result of these repayments, a loss on extinguishment of debt of $0.1 million was recognized in the quarter ended November 30, 2019, and the security interest in the 70 acres of land in Whitestown, Indiana was released by Star Financial.

 The Mortgage is carried net of an unamortized original issue discount of $0.1 million as of November 30, 2019. The original issue discount is being amortized as additional interest expense over the life of the Mortgage using the effective interest method.

 See Note 13 for discussion of the January 8, 2020 amendment to the Mortgage.

In another section of the same Form 10-Q issued by Emmis Communications Corporation to the SEC on January 9, 2020:

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On January 8, 2020, Emmis Operating Company and Star Financial entered into an amendment to the Mortgage, whereby Emmis placed $8 million into a restricted cash account with Star to serve as additional collateral for the Mortgage, and Star agreed to remove certain operating covenants included in the Mortgage, including no longer requiring that the Company maintain a fixed charge coverage ratio of at least 1.10:1.00. Additionally, Emmis Indiana Broadcasting, L.P. was removed as a borrower under the Mortgage.

While both businesses declined to provide any detailed answers about this specific PPP loan and the financial relationship between the two businesses – and are under no obligation or requirement to answer questions from a civic journalist – questions still remain.  A few include:

Will Emmis Communications Corporation utilize a portion of the PPP loan – as specifically allowed to do so under SBA guidelines – to make mortgage interest payments to STAR Financial Bank?

Up to 25% of loan proceeds through the PPP can be used to pay for such specific business expenses as mortgage interest payments.  Twenty-five percent of this specific loan of $4,753,000 would be $1,188,250.

The specific monthly mortgage payments due to STAR Financial Bank from Emmis Operating Company are not known.  The amount of interest paid within the individual monthly mortgage payments is also not known.

While the mortgage is listed in an SEC filing as a 10 year mortgage of $23,000,000, portions of that mortgage were paid off according to another SEC filing.  Also, while a schedule of specific mortgage payments was not disclosed in the SEC filings, one SEC filing indicated that “the mortgage requires monthly principal and interest payments using a 25 year amortization period, with a balloon payment due at expiration and the original annual interest rate was 5.48%.”

Will American taxpayers – including taxpayers in Chester County – pay the mortgage interest owed by this PPP borrower to this PPP lender?

Why did the Federal government authorize a financial system to be implemented where a lender of funds provided by American taxpayers is allowed to be:

  1. A current lender to the borrower;
  2. A current tenant of the borrower;
  3. Potentially, be paid substantial funds from the proceeds provided by the American taxpayers as mortgage interest payments;  and
  4. Serve in the role to verify that the loaned funds were spent properly – to the lender as mortgage holder – and, thus, can be transferred into tax-free income for the borrower?

In a land where the Declaration of Independence is considered one of our nation’s founding documents, where is the independent relationship between a lender and a borrower using funds from the American taxpayers – including taxpayers in Chester County – in the Paycheck Protection Program of the United States?

Note:  The freelance writer of this news column has personally applied for the Paycheck Protection Program (PPP).  As of the date of this news column, that application has not yet been processed.  Funds allocated in the initial PPP were already allocated to other small businesses and independent contractors.  If the PPP application does get approved in the future, funds loaned to the writer of this news column could not exceed $8,000.

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