On February 5, 2021, the SBA published on its website a series of FAQs clarifying key aspects of the program, updating information published by the SBA on January 27, 2021. We summarize below the key aspects of the FAQs as updated.
Eligibility
As set forth in the Economic Aid Act, eligible Grant recipients include live-venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators and talent representatives. Such recipients may be owned privately or by state or local governments. The FAQs, however, clarify that:
- A governmentally-owned applicant must solely operate as an eligible type of applicant and not in part as a non-eligible applicant. For example, a city parks and recreation department that operates a bandstand in a public square, but also runs various nature parks, does not qualify for a Grant.
- Each subsidiary that independently meets the eligibility criteria will qualify as an eligible applicant.
- The grantee must have been in operation, which includes start-up and preparatory activities in anticipation of an opening date, as of February 29, 2020.
- An applicant that was not in business during 2019, but was in full operation on February 29, 2020, is eligible to apply as long as its gross earned revenues for the second, third, or fourth quarter of 2020 fell by not less than 25 percent from its gross earned revenues from the first quarter of 2020.
- An applicant that had commenced start-up operations, but was unable to open as anticipated due to the pandemic, is only eligible if it had earned revenue in the first quarter of 2020 from sources, such as advance ticket sales merchandising, etc. An applicant that had been conducting business operations and incurring expenses in 2020 in a pre-opening capacity, but had no earned revenue for the first quarter of 2020, does not qualify for a Grant. An applicant that applied and was approved for a Paycheck Protection Program (PPP) loan prior to December 27, 2020 (the effective date of the Economic Aid Act), may apply for a Grant. An applicant that applied for a PPP loan on or after December 27, 2020, is ineligible for a Grant unless its PPP application is declined.
- In case you are wondering, yes, “theatre” is the spelling in the statute and updated FAQs.
- The following would not qualify for a Grant:
- An applicant that does not have a place of business located in the U.S., does not operate primarily within the U.S., and does not make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
- A publicly traded corporation, or an entity majority-owned and controlled by a publicly traded corporation. The SBA will look to its generally applicable affiliation rules to determine majority ownership.
- An applicant that presents live performances or sells products or services of a prurient sexual nature.
- An applicant that had more than 10 percent of its 2019 gross revenue from the federal government (not counting disaster assistance).
- An applicant that: (1) owns or operates venues, theatres, museums or talent agencies in more than one country; (2) owns or operates venues, theatres, museums or talent agencies in more than 10 states; and (3) had more than 500 employees as of February 29, 2020.
Movie Theatre or Museum Operator
- To be eligible for a Grant, a venue must have fixed seating. This requirement cannot be satisfied by temporary, removable, modular, convertible, or other non-fixed seating arrangements.
- A motion picture theatre operator must have at least one auditorium with a motion picture screen and fixed audience seating. A drive-in movie theatre is ineligible.
- However, there is no requirement that the venue be indoors.
- A museum partially funded with state dollars is eligible as long as it meets other specific eligibility rules for entities owned by state or local governments.
- A museum that received CARES Act funding is eligible.
Live Venue Operator or Promoter
- To be eligible for a Grant, a venue must have a fixed performance space. An applicant that provides talent at weddings/parties, such as a circus, fair, or entertainment business, which does not have fixed performance space, is ineligible for a Grant.
- A wedding or event venue is not likely to be eligible due to the requirement of the Economic Aid Act that 70 percent of the earned revenue of a live venue operator must come from cover charges, ticket sales, or concessions, or the event must be promoted to the public (what a wedding!).
- A sports stadium or venue used for concerts and other live, non-sports performances is not likely to be eligible due to the requirement that its principal business activity must be the organization, promotion, management, or hosting of live concerts, comedy shows, theatrical productions, or other events by performing artists.
- A dinner theatre must meet the same requirement.
- A restaurant that features live music and whose principal business activity is restaurant operation, rather than live venue operation, is not eligible.
- A party can apply even if it hires independent contractor workers who receive IRS Form 1099 (i.e., it is unnecessary to hire only actual employees who receive form W-2). Payments to such 1099 workers are an allowable use of Grants.
- A theatrical producer may be eligible for a Grant even if less than 70 percent of its revenue came from cover charges or ticket sales, as long as its principal business activity has production tickets available for public purchase an average of not less than 60 days before the performance date.
- A talent agency that books actors at live venues, but does not operate a live venue, may be eligible if 70 percent of its operations are involved in managing, booking, or representing performers who appear primarily at live venues.
Definitions
- To determine an applicant’s “principal business activity,” the SBA will consider the distribution of an applicant’s receipts, employees, and costs of doing business, for the most recently completed fiscal year, as well as the distribution of patents, contract awards, and assets, as appropriate. The SBA will apply its extensive experience in classification of small businesses under 13 C.F.R. § 121.107.
- “Fixed seating” is defined as seating permanently fixed to the floor or ground.
- “Cover charges” is defined as front door entrance fees, food or beverage minimums, or other similar charges required to gain admission to a venue, whether collected via ticket sales, addition to a tab or direct payment.
- “Regular programming” is defined as programming provided on an ongoing or nearly continuous basis (i.e., an average of at least four times a month over a year) in a qualifying theatre, lecture hall or similar venue.
Revenue
- The SBA is defining “earned revenue” and “gross earned revenue” in accordance with “common principles” of the accrual method of accounting. This standard would exclude donations, sponsorships, governmental assistance and returns on investments.
- Fundraising events will be treated as they would for tax deduction purposes. So, the portion of the amount or membership costs an individual pays in connection with an event or membership, which represents the estimated value of the goods or services they received in exchange, or provided as a condition of membership, must be included in gross earned revenue.
- Similarly, the portion of the amount or membership costs an individual pays that exceeds the estimated value of the goods or services they receive or provided as a condition of membership will be considered a donation and is not included in gross earned revenue.
- For a non-profit organization, grants are excluded from gross earned revenue, but the SBA will consider the organization’s federal grants revenue (and other federal payments regardless of the use) to determine whether it meets the eligibility limit of having no more than 10 percent of its gross revenue from federal sources, not including disaster assistance.
- Rental income from longer-term tenants and short-term rentals for event hosting should be included in earned revenue, as such rental income is derived from standard commercial transactions for the paid use of facilities.
Business Size/Employees
- Employees who work at least 30 hours per week are considered full-time.
- Employees who work between 10-29 hours per week are considered one-half of a full-time employee. Personnel who work less than 10 hours per week are not considered “employees.”
- Once its number of employees is determined, an applicant must calculate the average number of employees employed over the prior year by totaling the number of employees from each pay period and dividing by the number of pay periods.
- $2 billion of Grant funding is set aside for small employers with 50 employees or fewer.
Application
- The SBA is not yet accepting applications and is currently building an application platform. An interested applicant is encouraged to register for a Dun and Bradstreet (DUNS) number and then a profile on SAM.gov, which is a prerequisite for receipt of a Federal contract or grant.
Grant applicants cannot simply rely on an Individual Taxpayer Identification Number, Employer Identification Number, or other means of identification or registration.
Once a DUNS number is obtained, the prospective applicant should register in SAM.gov, as the SAM registration may take up to two weeks, once submitted.
- Grant applicants are encouraged to gather documents that demonstrate their number of employees and monthly revenues in order to calculate the average number of qualifying employees over the prior 12 months.
- Grant applicants also should determine the extent of gross earned revenue loss experienced between 2019 and 2020 and gather additional information demonstrating Grant eligibility.
Use of Funds
- Refund payments to patrons for canceled shows will qualify under the Economic Aid Act as a necessary and ordinary business expense. As such, it will be considered an allowable use of Grant funds.
- Payments for a loan that was incurred before February 15, 2020, made on commercially reasonable terms and formally documented as a standard, ordinary debt instrument will qualify as an allowable expense of Grant funds.
A Final Note
Pillsbury attorneys can help clients interpret and assess the Shuttered Venue Operator Grants’ requirements as clients assess and strategize regarding the availability of various stimulus funds. We are proactively monitoring any forthcoming regulations and guidance in response to the new legislation. These and any accompanying materials are not legal advice, are not a complete summary of the subject matter, and are subject to the terms of use found at this link. We recommend that you obtain separate legal advice.