On Dec. 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (CAA), Title III of which, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), renews and extends the Paycheck Protection Program (PPP) until March 31, 2021, and provides $284.45 billion in additional funding for the PPP and the newly enacted PPP Second Draw Loan Program (the Second Draw PPP) ($147.45 billion of additional funding for the existing PPP and $137 billion for the new Second Draw PPP). These new funds authorized for the PPP bring the program’s total funding to $806.45 billion. Such additional funds are intended to allow small businesses that either did not participate in the PPP’s initial run or are otherwise currently struggling financially to access PPP loans. The text of the CAA can be found here.
On Jan. 6, the U.S. Small Business Administration (SBA) released new guidance implementing the renewed PPP and Second Draw PPP via two interim final rules (IFRs), the first of which (the PPP IFR) amends, consolidates, and restates in a single document the rules governing the PPP as amended by the Economic Aid Act and can be found here, the second of which (the Second Draw IFR), provides rules implementing the Second Draw PPP and can be found here.
On Jan. 19, the SBA released a third interim final rule (the Forgiveness IFR), providing consolidated guidance on loan forgiveness requirements and loan review procedures as implemented by the Economic Aid Act, which can be found here.
The purpose of this article is to highlight the key differences between the rules governing the renewed PPP and the Second Draw PPP and the original PPP, as provided by the Economic Aid Act and implemented by the subsequently released IFRs. Prospective borrowers under either the renewed PPP or Second Draw PPP should continue to consult the SBA and Treasury Department websites regularly to track new content and revisions to previously released guidance.
Our previous alerts issued in connection with the financial assistance programs available under the CARES Act are collected and published in the Kramer Levin COVID-19 Legal Resource Guide found here: COVID-19 Legal Resource Guide. The Kramer Levin COVID-19 Legal Resource Guide will be updated to include this alert and any future alerts addressing the financial assistance programs available under the CARES Act and Economic Aid Act.
The Renewed PPP
- Timing: The Economic Aid Act renewed the PPP until March 31.
- Borrower Eligibility: The Economic Aid Act and PPP IFR expanded eligibility for the renewed PPP to include (assuming they meet all other PPP eligibility requirements) cooperative housing corporations, certain eligible 501(c)(6) organizations, destination marketing organizations and certain eligible news organizations, and added new categories of businesses that are expressly ineligible to participate in the PPP.
- Loan Amount Calculations: New PPP borrowers have the option of calculating PPP loans based on their payroll costs for calendar year 2019, calendar year 2020 or (for entities) the actual trailing 12-month period prior to the date of their PPP loan application.
- Payroll Costs: The Economic Aid Act expressly confirms that payments for the provision of employee benefits consisting of group health care or group life, disability, vision or dental insurance can be included in the calculation of “payroll costs” for purposes of determining a PPP borrower’s maximum loan amount and eligible use of their loan proceeds during their covered period.
- Permitted Uses: Permissible uses of PPP loan proceeds have been expanded to include new categories of non-payroll costs, including covered operations expenditures, covered property damage costs, covered supplier costs and covered worker expenditures.
- Covered Period: PPP borrowers (both borrowers under the renewed PPP and borrowers under the earlier iteration of the PPP that have not yet sought forgiveness, if the loan was made on or after June 5, 2020) may now select a forgiveness-eligible covered period of any duration from eight to 24 weeks from the date of the origination of its covered loan.
- EIDL Advances: Economic Injury Disaster Loan (EIDL) advances of up to $10,000 will no longer be deducted from the forgiveness payment amounts remitted to a PPP borrower.
- Loan Forgiveness Amount Reductions: A PPP borrower with a loan of $50,000 or less, subject to certain exceptions, is now exempt from reductions in loan forgiveness based on reductions in FTE employees or reductions in employee salary or wages that would otherwise apply.
- Increases in Principal Loan Amount: Borrowers that received First Draw PPP Loans (as defined below) and have not yet received forgiveness of such loans may now be eligible to increase their loan amount, depending on whether the borrower previously returned, or otherwise declined, a portion of its PPP loan amount for which it was eligible.
- SBA Review of Certification of Need: The SBA released loan necessity questionnaires that must be completed and submitted to its lender by each PPP borrower that together with its affiliates received PPP loans with an original principal amount of $2 million or greater in order to assess the borrower’s stated need for its PPP loan.
Second Draw Loans
- Generally: Subject to certain requirements, PPP borrowers may now apply for a second PPP loan on the same terms generally as the original PPP loans.
- Eligibility Requirements: The eligibility requirements for Second Draw Loans are generally narrower than the eligibility for the original PPP loans, including the requirement to demonstrate at least a 25% reduction in revenue in at least one quarter of 2020 relative to the same quarter in 2019 (described more fully below).
- Second Draw Loan Amounts: The maximum amount of a Second Draw Loan has been significantly reduced to the lesser of (i) 2.5 months of the borrower’s average monthly payroll costs or (ii) $2 million.
The Renewed PPP
In connection with the reloading and extension of the PPP for first-time borrowers, the PPP IFR serves to consolidate the various prior SBA IFRs and guidance into a single reference point covering borrower eligibility, lender eligibility, loan application and origination requirements, and loan forgiveness. The PPP IFR is careful to reiterate that it should not be construed to alter or affect the requirements applicable to PPP loans closed prior to Dec. 27, 2021 (the date of enactment of the Economic Aid Act (i.e., these changes do not retroactively affect loans already outstanding)).
The Economic Aid Act renewed the PPP until Mar. 31, clarifying that the last day to apply for and receive a PPP loan under the renewed program is Mar. 31.
Key Changes to PPP
The PPP IFR provides for expanded PPP borrower eligibility along with additional ineligibility guidelines, new calculation procedures, expanded permitted uses of loan proceeds, and new procedures regarding forgiveness and required documentation.
The Economic Aid Act and PPP IFR expand PPP eligibility to include (assuming they meet all other PPP eligibility requirements):
- The following potential PPP borrowers, if they have no more than 300 employees (subject to the SBA’s previously implemented affiliation rules):
- Cooperative housing corporations (as defined in Section 216(b) of the Internal Revenue Code of 1986 (the IRC));
- Eligible 501(c)(6) organizations (excluding (i) professional sports leagues or organizations that have a purpose of promoting or participating in a political campaign or other activity; (ii) organizations that receive more than 15% of their receipts from lobbying activities; (iii) organizations where lobbying activities comprise more than 15% of the total activities of the organization; and (iv) organizations where the total cost of the organization’s lobbying activities exceeds $1,000,000 during the organization’s most recent tax year that ended prior to Feb. 15, 2020); and
- News organizations that are majority owned or controlled by a business or nonprofit public broadcasting entity with a trade or business under either a NAICS code 511110 (Newspaper Publishers) or 5151 (Radio or Television Broadcasting) that:
- Employ no more than 500 employees (or the applicable NAICS size standard) per physical location (i.e., the employees of the broadcasting station itself and not, for example, the employees of a college or university that operates or holds the license for a public broadcasting station that is not a separate legal entity from the university); and
- Make a good faith certification that the loan proceeds will be used to support expenses on the component of the business that produces or distributes locally focused or emergency information.
The Economic Aid Act and PPP IFR expand the list of businesses and organizations that are expressly ineligible to receive PPP loans to include:
- Persons or entities that receive shuttered venue grants under the Shuttered Venue Operator Grant program established by the Economic Aid Act;
- Public companies (i.e., company issuers whose securities are listed on a national securities exchange);
- Any entity in which certain federal political officials hold more than 20% of any class of equity;
- Businesses that have permanently closed (i.e., have gone out of business and have no intention of reopening).
Loan Amount Calculation
For purposes of determining their maximum PPP loan amount for new PPP loans, the PPP IFR allows for new PPP borrowers to have the option of calculating such loan amounts based on their payroll costs for calendar year 2019, calendar year 2020 or (for entities) the actual trailing 12-month period prior to the date of their PPP loan application (to note, such chosen time period will be the same time period used for purposes of determining employee headcount for eligibility purposes). Additionally, as a result of the Economic Aid Act providing that a PPP borrower’s forgiveness amount will not be reduced by the amount of an EIDL advance received by such borrower (as described further below), when calculating the maximum amount of a new PPP loan that will be used to refinance an EIDL made between Jan. 31, 2020, and April 3, 2020, borrowers should not include the amount of an EIDL advance as this advance does not need to be repaid. Note that the maximum amount a PPP borrower may receive under the renewed PPP continues to be the lesser of 2.5 times the borrower’s average monthly payroll costs and $10 million, subject to an aggregate cap of $20 million for businesses that are part of a single corporate group.
While suggested in PPP guidance released prior to the Economic Aid Act, the Economic Aid Act clarified (and the PPP IFR implemented) that payments for the provision of employee benefits consisting of group health care or group life, disability, vision or dental insurance can be included in the calculation of “payroll costs” for purposes of determining a PPP borrower’s maximum loan amount and eligible use of their loan proceeds during their covered period.
The PPP IFR expands the permissible uses of PPP loan proceeds (including for PPP loans made prior to Dec. 27, 2020, as long as the SBA has not already remitted a loan forgiveness payment to the lender with respect to the loan) to include:
- Covered Operations Expenditures: Payments made for any business software or cloud computing service that facilitates business operations, product or service delivery; the processing, payment or tracking of payroll expenses; human resources, sales and billing functions; or accounting or tracking of supplies, inventory, records and expenses.
- Covered Property Damage Costs: Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 not covered by insurance or other compensation.
- Covered Supplier Costs: Business expenditures for goods that (1) are essential to business operations at the time at which the expenditure is made; and (2) are made pursuant to a contract, order or purchase order (i) in effect at any time before the covered period with respect to the applicable covered loan, or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
- Covered Worker Protection Expenditures: Operating or capital expenditures to facilitate the adaptation of business activities to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, or any equivalent requirement established or guidance issued by a state or local government beginning on Mar. 1, 2020, and ending on the date on which the COVID-19 national emergency expires.
PPP Loan Forgiveness and Covered Period
- PPP borrowers may now select a forgiveness-eligible covered period of any duration from eight to 24 weeks from the date of the origination of its covered loan.
- EIDL advances of up to $10,000 received by PPP borrowers will no longer be deducted from the forgiveness payment amounts remitted to such borrower.
- PPP loans in an amount of $150,000 or less may now be forgiven if the PPP borrower provides a simplified one-page certification that describes (i) the number of employees the PPP borrower was able to retain because of the covered loan, (ii) the estimated amount spent on payroll costs and (iii) the total loan value. This new, easy application process for loans of not more than $150,000 has retroactive effect and applies to both existing PPP loans and PPP loans made on or after Dec. 27, 2020.
In addition to the previously released SBA Forms 3508 and 3508EZ, the Economic Aid Act introduced SBA Form 3508S to provide certain eligible PPP borrowers with a simpler forgiveness application process.
- A PPP borrower that received a PPP loan in an amount of $150,000 or less may apply for forgiveness using Form 3508S, which eliminates the need to submit the extensive documentation and information that is required if using other forgiveness application forms. Note that the ability to use Form 3058S with its diminished documentation requirements does not extend to borrowers of Second Draw Loans unless such borrowers have already submitted the required documentation sufficient to establish that the borrower experienced a reduction in revenue as required to be eligible for its Second Draw Loan (as discussed further below) at the time that it applied for its Second Draw Loan. Despite there being no documentation requirement at the time of forgiveness, it is important to note that the SBA may choose to review and audit PPP loans of $150,000 or less and access any records the borrower is required to retain. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements. As the SBA Forms 3508 and 3508EZ require more extensive documentation and information than SBA Form 3508S does, those eligible to use Form 3508S will likely prefer to use this simplified application.
A PPP borrower with a loan of $50,000 or less (excluding any borrower that together with its affiliates received First Draw Loans (as defined below) totaling $2 million or more (or Second Draw Loans totaling $2 million or more)) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or reductions in employee salary or wages that would otherwise apply.
- PPP borrowers are also exempted from the loan forgiveness reduction arising from a reduction in the number of FTE employees during the covered period if the borrower is able to document in good faith an inability to return to the same level of business activity the borrower was operating at before Feb. 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and 31, 2020, by the secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (or, for a PPP loan made on or after Dec. 27, 2020, no later than the last day of the loan’s covered period).
Borrowers that received PPP loans during the first round and have not yet received forgiveness of such loans may now be eligible to increase their loan amount if:
- The borrower borrower returned all of its PPP loan, the borrower may reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules.
- The borrower borrower returned a portion of its PPP loan, the borrower may reapply for an amount equal to the difference between the amount retained and the maximum loan amount previously approved.
- The borrower did not accept the full amount of its PPP loan for which it was approved, the borrower may request an increase in the amount of the PPP loan up to the amount previously approve.
While not expressly stated in the PPP IFR, it would appear that any borrower who increases its loan amount based on the foregoing would then be permitted to separately apply for a Second Draw Loan once the additional (increased) PPP loan amount has been used, subject to the additional criteria for a Second Draw Loan as discussed below.
SBA Review of Certification of Need
In late 2020, to assist the SBA in its review of a borrower’s good faith certification of its need for the PPP loan, and whether alternate sources of capital not significantly detrimental to the borrower’s business existed at the time, the SBA released loan necessity questionnaires for for-profit borrowers (SBA Form 3509) and nonprofit borrowers (SBA Form 3510) that must be completed by each borrower that together with its affiliates received PPP loans with an original principal amount of $2 million or greater. Each such borrower must complete and submit its applicable form to such borrower’s lender within 10 business days of receipt of such form from such lender. Failure to complete such forms and provide required supporting documents may result in SBA’s determination that a borrower is ineligible for its PPP loan, its PPP loan amount or any forgiveness amount claimed.
The questionnaire focuses on components of the borrower’s business activities and liquidity following the date of the PPP loan in order to paint a picture of whether such borrower subsequently acted in a manner consistent with an entity that required the PPP loan in order to continue operations. The business activity assessment focuses on gross revenue, forced shutdowns, reported alterations to operations, voluntary reductions or alterations to operations, and new voluntary capital improvement projects. The liquidity assessment focuses on the borrower’s cash position prior to applying for the PPP loan; payment of dividends or distributions to owners during the covered period; prepayments of debt during the covered period; employee or owner compensation during the covered period in excess of $250,000 on an annualized basis; whether the borrower’s equity is publicly traded; whether at the time of application 20% or more of the borrower was owned by a public company or by a private equity or venture capital firm or hedge fund; information regarding any parent entity of the borrower and the borrower’s book value; and any foreign affiliation.
The FAQ accompanying the release of this new questionnaire notes that the SBA’s assessment of whether a borrower had adequate basis for making the required good-faith certification will focus on the individual circumstances of the borrower whether the certification was made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary. As part of this analysis, the FAQ notes that the SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist the SBA in determining whether the borrower made the required certification in good faith at the time of its loan application. For new borrowers that have not yet participated in the PPP, the questionnaire may serve as a useful guide in determining whether the borrower can make the needed certification and how the SBA may assess alternative sources of applicable capital.
Second Draw Loans
The Economic Aid Act grants certain eligible PPP loan recipients the opportunity to receive a second PPP loan (Second Draw Loans). Second Draw Loans are generally subject to the same terms as the original PPP loans (First Draw Loans), including (1) a 100% SBA guarantee; (2) no collateral or personal guarantee requirement; (3) a non-compounding and non-adjustable interest rate of 1% and five-year maturity; (4) similar PPP borrower eligibility, certification and forgiveness requirements; and (5) similar lender processing requirements. As such, except whereas expressly noted in the Second Draw IFR, the rules provided in the PPP IFR apply to both original PPP and Second Draw Loans. While generally subject to the same terms as PPP loans, Second Draw Loans are subject to several key notable differences as described below.
The eligibility requirements for a Second Draw Loan are generally narrower than the eligibility for First Draw Loans. A PPP borrower is eligible for a Second Draw Loan only if it:
- Together with its affiliates, employs 300 or fewer employees (compared to the 500 employee standard for First Draw Loans), subject to certain exceptions described below.
- Was an eligible recipient of its initial PPP loan (potential PPP borrowers whose initial PPP loans are under review will not receive a Second Draw Loan until the eligibility of such “unresolved borrowers” for First Draw Loans is confirmed) and has used, or will use, its First Draw Loan funds on eligible expenses before the Second Draw Loan is disbursed (however, pursuant to the Second Draw IFR, borrowers cannot receive the disbursement of the Second Draw Loan until they have fully used the First Draw Loan proceeds).
- Demonstrates at least a 25% reduction in revenue in at least one quarter of 2020 relative to 2019 (described more fully below).
With respect to reduction in revenue, a potential second draw borrower must calculate such revenue reduction by comparing its quarterly gross receipts for any one quarter in 2020 against its gross receipts for the corresponding quarter in 2019. Alternatively, the borrower may show a 25% revenue decline in its annual gross receipts from FY 2020 as compared to FY 2019. An entity that was not in business during 2019 but was in operation on Feb. 15, 2020, may alternatively satisfy the revenue reduction requirement for a Second Draw Loan if it had revenue during the second, third or fourth quarters of 2020 and can demonstrate at least a 25% reduction from the revenue of the entity during the first quarter of 2020. In any such case, a potential second draw borrower generally must submit documentation — such as annual tax forms or quarterly financial statements — to substantiate such claims at the time of its application. However, potential borrowers of Second Draw Loans under $150,000 need not demonstrate such a decline at the time of application, but ultimately will need to submit documentation to demonstrate such a decline as part of the forgiveness process.
The Second Draw IFR expanded the ineligibility criteria for Second Draw Loans to exclude, among other excluded PPP borrowers, any borrower that:
- Is a business concern or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents;
- Is organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People’s Republic of China or the Special Administrative Region of Hong Kong;
- Is required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938; and
- Has permanently closed (i.e., has gone out of business and has no intention of reopening).
Second Draw Loan Amounts
- The maximum amount of a Second Draw Loan has been significantly reduced from the maximum amount that was available to PPP borrowers with respect to the First Draw Loans, being generally equal to the lesser of (i) 2.5 months of the borrower’s average monthly payroll costs or (ii) $2 million. The relevant time period for calculating a borrower’s payroll costs for purposes of determining the maximum amount of its Second Draw Loan is either calendar year 2019, calendar year 2020 or (for entities) the actual trailing 12-month period prior to the date of its Second Draw Loan application. Additionally, for eligible businesses that did not exist in the one-year period preceding Feb. 15, 2020, its maximum loan amount is the lesser of 2.5 months of the PPP borrower’s average monthly payroll costs for the life of the business or $2 million.
- To the benefit of hotels and restaurants, otherwise eligible Second Draw Loan borrowers in the food and hotel industry (with a NAICS code beginning in 72) are permitted to receive a Second Draw Loan in the amount of the lesser of (i) 3.5 months of the borrower’s average monthly payroll costs or (ii) $2 million.
- Businesses that are part of a single corporate group may not collectively receive more than $4 million in Second Draw Loans in the aggregate. Given the maximum individual loan amount of $2 million, this cap is in proportion to the $10 million individual borrower cap and $20 million aggregate cap for First Draw Loans to businesses that are part of a single corporate group.
Although the documentation required to substantiate an applicant’s payroll cost calculations is generally the same as the documentation required with respect to First Draw Loans, no additional documentation to substantiate payroll costs will be required in connection with the Second Draw Loan if the applicant (i) utilized calendar year 2019 payroll amounts to determine its First Draw Loan amount; (ii) used calendar year 2019 payroll amounts to determine its Second Draw Loan Amount; and (iii) the lender for the borrower’s Second Draw Loan is the same as the lender that made the applicant’s First Draw Loan. Note that similarly to First Draw Loans, lenders can rely on the certifications made by a borrower on its Second Draw Loan application, and the lender is not required to investigate further as to the accuracy of such information.
The SBA’s affiliation rules are similarly waived for eligible news organizations in connection with Second Draw Loans.
Second Draw Loan forgiveness is subject to certain specific requirements:
- For Second Draw Loans in excess of $150,000, the borrower must submit its loan forgiveness application for the First Draw Loan prior to or simultaneously with submission of the loan forgiveness application for the Second Draw Loan, even if the calculated amount of forgiveness on the First Draw Loan is zero.
- The covered periods for a First Draw Loan and a Second Draw Loan cannot overlap; the borrower must use all proceeds of the First Draw Loan for eligible expenses before disbursement of the Second Draw Loan.
- For Second Draw Loans, all borrowers must certify on their loan forgiveness application that the borrower used all First Draw Loan amounts on eligible expenses prior to disbursement of the Second Draw.