• New (first-time) applicants that did not receive a PPP loan in 2020 may now apply (max loan amount of $10 million)
• A qualifying business that previously received a PPP loan in 2020 may apply for a “Second Draw” PPP loan under certain circumstances (max loan amount of $2 million) if the business:
• Exhausted all funds from the first PPP loan;
• Employs no more than 300 employees; and
• Experienced at least a 25% a decline in gross receipts in Q1, Q2, Q3, or Q4 2020 as compared to the same quarter in 2019
• Both first and Second Draw PPP loan applications must be made by the current deadline of March 31, 2021
• Applicants may now choose their own covered period in which to spend the PPP loan proceeds (minimum of eight weeks up to a maximum of 24 weeks), providing more flexibility for workplace decisions
• PPP loans are not included as taxable income, and expenses paid with PPP funds are now tax deductible
• Expanded eligible non-payroll expenses may now include operational expenditures such as software, PPE, and safety improvements like air filtration and employee health screenings
• A further streamlined one-page forgiveness application for all PPP borrowers with loans under $150,000

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Importantly, as of this writing, the Act is still pending signature by the President before it becomes binding law.  However, because 1) the PPP Flexibility Act fundamentally overhauls the PPP Loan program, and 2) the President’s approval of the Act appears to be imminent, this information is being provided to aid borrowers who continue facing difficult PPP loan spending decisions.

Key points from the PPP Flexibility Act

• Extends the “Covered Period”: The covered period for the use of PPP loan proceeds has been tripled from eight weeks from loan origination to 24 weeks (or December 31, 2020, whichever comes first);  notwithstanding, current PPP borrowers may still elect to use an eight week covered period
• New “60/40 Rule”: The minimum percentage of PPP loan proceeds used for eligible payroll expenses has been reduced from 75% to 60%, and the corresponding percentage of eligible non-payroll expenses (mortgage interest, rent, and utilities) has been increased to 40% (replacing the previous “75/25 rule”)
• 60% Forgiveness “Cliff”: While the CARES Act previously reduced forgiveness on a dollar-for-dollar basis for spending outside the payroll/non-payroll ratio, the PPP Flexibility Act creates a “cliff” that eliminates all forgiveness if the borrower fails to meet the 60% payroll spending threshold
• Retroactively applies to all PPP loans (except the maturity date in existing loan documents, which lenders and borrowers can modify)
• Extends loan maturity to five years (previously two years) for all loans made on or after the PPP Flexibility Act becomes law;  explicitly permits current PPP lenders and borrowers to modify existing loans to achieve this extended maturity
• Two additional forgiveness exceptions: A borrower’s forgiveness won’t be reduced or eliminated for failing to restore its pre-pandemic workforce if it can document 1) an inability to rehire employees or find qualified replacement employees, or 2) an inability to restore “the same level of business activity” that it enjoyed before Feb. 15, 2020 due to COVID-19 related operating restrictions (social distancing, health and safety compliance, etc.)
• 10 Months To Seek Forgiveness: A borrower has 10 months from the last day of the covered period to apply for forgiveness, otherwise loan payments begin automatically
• Extends loan deferral period for Borrower’s first loan payment from six months to the time the SBA makes its forgiveness decision
• Extended Safe Harbor to December 31, 2020 to employers seeking to restore full time equivalent employment levels (previously June 30, 2020)
• Eliminates Prohibition on Payroll Tax Deferral: Borrowers may now take advantage of payroll tax deferral under the CARES Act (eliminating the prior restriction applied to PPP loan recipients)

PPP loan borrowers, specifically those approaching the end of their 56 day covered period should be aware of these significant changes and the newfound flexibility in the PPP loan program.  Our firm is ready to assist you in navigating your PPP loan forgiveness issues and advise you with respect to other public and private lending opportunities related to COVID-19’s impact on your business.

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Key points from the application

• Clarifies a $15,385 per individual maximum payment from PPP loan proceeds
• Clarifies that both real and personal property lease payments are eligible non-payroll expenses; i.e. automobile lease payments and equipment lease obligations should qualify for the 25% maximum non-payroll portion
• Specifically includes “transportation, telephone, or internet access” as additional eligible utility expenses
• Creates an elective “Alternative Payroll Covered Period”:  Borrowers with a biweekly or more frequent payroll may choose to delay the start of their 56 day covered period to coincide with payroll cycles
• Clarifies that Eligible Payroll Costs include both “costs paid” and “costs incurred” during the 56 day covered period;  a Borrower may use PPP funds for payroll “costs incurred” (W-2 salary or wages earned in the covered period) after the end of the covered period “if paid on or before the next regular payroll date”;  this suggests that Borrowers who elect not to use an Alternative Payroll Covered Period will need to pro-rate their final payroll to coincide the covered period
• Outlines supporting documentation that must accompany the application
• Borrower must affirmatively designate if its PPP loan exceeds $2 million
• Confirms the June 30, 2020 “FTE Reduction Safe Harbor” deadline by which a Borrower may restore its FTE employee levels to Borrower’s pre-pandemic levels, as measured against  “Borrower’s pay period that included February 15, 2020”

PPP loan funds remain available and lenders continue to accept new applications.  Our team is available to assist you in navigating through the complexities of the PPP loan forgiveness application and advise with respect to other public and private lending opportunities related to COVID-19’s impact on your business.

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Since the Paycheck Protection Program (PPP) went live on April 3, 2020, over four million businesses across the country have been approved for PPP loans across two rounds of federal funding.  Through May 8, 2020, the United States Small Business Administration (SBA) approved over $530B in PPP loans, which are administered through SBA approved lenders.

The PPP loan program has been the subject of significant public scrutiny amid concerns that it benefitted larger companies with questionable need to the exclusion of small business concerns with significant need.  In response, Congress approved a second round of funding for the PPP loan program with an emphasis on smaller lending institutions, and the Treasury Department indicated that it will exercise heightened auditing and oversight over the loans.  In late April, Treasury issued guidance recommending that borrowers revisit their PPP loan certifications of need based on “[c]urrent economic uncertainty” to determine if they were truly eligible to receive the PPP loan. Specifically, Treasury’s responses to FAQ’s 31 and 39 in late April, 2020 “reminded all borrowers” of the need certification requirements and indicated that the SBA will review all loans over $2 million, “in addition to other loans as appropriate.”  These comments, in conjunction with the lack of criteria concerning how need and certifications will be evaluated, has caused uneasiness among borrowers that received PPP loans and began spending those funds weeks ago.

May 13, 2020 Guidance

On May 13, 2020, the Treasury Department issued updated guidance that clarified its position on the above issues and created additional safe harbors to PPP loan recipients.   This guidance should provide meaningful comfort to PPP loan recipients both under and over the $2 million loan threshold.

Loans under $2 million

The first safe harbor benefits small businesses that received a PPP loan under $2 million. Specifically, Treasury indicated that “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” (FAQ 46).   Essentially, the guidance suggests that 1) small businesses receiving smaller PPP loans were less likely to abuse the program, compelling less scrutiny by the SBA over loan compliance, and 2) the SBA does not wish to expend its “finite audit resources” on smaller balance loans.

Loans over $2 million

While the May 13th guidance confirms that the SBA will review all loans over the $2 million threshold without affording those borrowers a presumption of good faith, the Treasury Department’s guidance offers some latitude to borrowers receiving larger loans.  The guidance appears to soften the Treasury’s prior comments targeted towards larger loan recipients, implying that a borrower’s “individual circumstances” and the language in the SBA guidance and the good faith certification may have created an “adequate basis” for the borrower to seek a PPP loan.   Importantly, where the SBA deems borrowers of these larger PPP loans ultimately lacked an adequate basis to claim a need for the loan, 1) the loan will not be subject to forgiveness and must be paid back, and 2) upon repayment, the borrower will not be subject to “administrative enforcement or referrals to other agencies”.

Safe Harbor to Return PPP Funds

In addition, the updated guidance extended the safe harbor for a borrower to return improperly received PPP loan funds to May 18, 2020. (FAQ 47).   The date was extended from the initial May 7, 2020 deadline due to the timing of the updated guidance.

Questions Remaining

Most importantly, the May 13, 2020 guidance failed to clarify a number of outstanding questions regarding borrowers’ real time PPP loan spending or the mechanics of how loan forgiveness will work. Borrowers and industry trade groups continue awaiting clarification from the SBA concerning issues of how payroll cycles and non-payroll expenses may be adjusted in the eight week (56 day) covered period.  Since the covered period begins on the date the PPP loan is funded by the lender, the timing of the loan often does not coincide with a borrower’s payroll cycle or its ability to meaningfully reopen the business in light of government restrictions.  Additional questions that remain unanswered surround the borrower’s payment of bonuses, pre-payment of rent, and whether cellular phone and internet plans classify as eligible non-payroll utilities eligible for PPP loan spending.

Until specific guidance is issued on these topics, we suggest borrowers continue maintaining meticulous records of PPP loan spending and closely monitoring their compliance with the “75/25 ratio” of payroll to non-payroll expenses during the covered period.

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The PPP Enhancement Act is a $484 billion relief package that appropriates additional federal funds to address the COVID-19 crisis, as follows:

• Appropriates an additional $310 billion for the PPP loan program, bringing the total funding of the PPP loan program to $659 billion;
  • $60 billion carve out of PPP loan funds for smaller lending institutions
    • $30 billion for lending institutions and credit unions with capitalization of at least $10 billion but no larger than $50 billion
    • $30 billion for smaller credit unions and community development lenders
  • Appropriates an additional $50 billion for the SBA’s Economic Injury Disaster Loan (EIDL) loan program
  • Appropriates an additional $10 billion for the SBA’s EIDL emergency grant program
  • Appropriates an additional $100 billion to the ‘Public Health and Social Services Emergency Fund’’ for healthcare related expenditures
  • Additional funding of federal salaries related to the foregoing programs

PPP Loan Program

Effective Monday April 27, 2020, the SBA resumes funding small business loans under the Paycheck Protection Program (PPP) with an additional $310 billion injection.  This second round of PPP loan funding comes just four weeks after the PPP loan program was established in the $2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES Act) enacted on March 27, 2020.  In its PPP Loan Report published on April 16, 2020, the SBA reported over 1.6 million PPP Loans had been applied for with an average overall loan size of $206,000.

Our prior summary of the PPP loan program is found here.

Since passage of the CARES Act, the initial $349 billion in PPP loan program funding was quickly depleted, with some controversy surrounding the program and its administration. Some critics  questioned the “first come, first served” implementation of the PPP loan program by eligible lenders, the timeliness of loan funding, and the receipt of PPP funds by larger public companies.  In its efforts to address some of these concerns, the Treasury Department issued supplemental guidance for the PPP Program on April 23, 2020 and again on April 26, 2020.  The guidance further restricts borrower eligibility criteria for the PPP loan program.   The Treasury Department specifically appeared to tackle the criticism head on by stating “ . . . it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith…”

EIDL Loan Program

The PPP Enhancement Act also infuses an additional $60 billion into the SBA’s Economic Injury Disaster Loan (EIDL) loan program.   As with the PPP loan program, significant demand for EIDL loans in the wake of the CARES Act resulted in a lapse in appropriations for the EIDL program.

Unlike the PPP loan program, the EIDL program is directly administered by the SBA and not through approved lenders.   As of April 24, 2020, the SBA reported nearly $8 billion in approved EIDL loans in response to the COVID-19 crisis.

EIDL loans offer very different features and terms from PPP loans.  EIDL loans are capped at a maximum of $2 million, carry a higher interest rate, and may require a personal guaranty over  certain loan amounts.  While PPP loans offer the potential for complete loan forgiveness, only $10,000 of the EIDL loan (an Emergency EIDL grant or loan advance) may be forgiven.

The business lending attorneys at Weiss Serota Helfman Cole & Bierman stand ready to assist clients in evaluating their business lending needs.  We can advise you in gathering due diligence, completing applications, and engaging with SBA Preferred Lenders and the SBA to process your applications as soon as possible.

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Summary of the Coronavirus Relief Fund:  Key Points

• $150 Billion total allocation: $139 Billion to states and qualifying local governments; $8 Billion to Tribal governments and $3 Billion to the District of Columbia, Puerto Rico and other U.S. territories
• Qualifying expenses must be necessary expenditures related to the COVID-19 epidemic, not accounted for in the most recently approved governmental budget enacted before March 27, 2020, and incurred between March 1, 2020 and December 30, 2020
• Each state receives a minimum of $1.25B; the ultimate relief to each state is allocated proportionally based on the state’s population relative to the population of all states, as determined by the most current year census data
• Eligible local governments with a population of at least 500,000 may petition the Department of the Treasury for direct payments
• 45% cap on funds directed to local government
• Funds directed to local governments are applied against the proportionate share of funds allocated to that State
• Payments are made directly by the Treasury Secretary and monitored by the Office of the Inspector General
• Future COVID-19 stabilization funds may include direct funding to local governments with smaller populations. On April 3, 2020, several members of Congress petitioned Speaker Nancy Pelosi to consider smaller local government units in the next COVID-19 aid package.   A copy of the letter can be found here.

Our Firm’s Government and Business Transactions Divisions are actively assisting local government clients in seeking financial aid available under the CARES Act.   Should you have any questions or need additional guidance, please contact a member of our Government Division or Banking & Financial Institutions Practice Group.

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On March 27, 2020, President Trump signed into law the largest economic stimulus bill in U.S. history, the Coronavirus Aid, Relief and Economic Security Act [The CARES Act (H.R. 748)].    The SBA Paycheck Protection Program (PPP) contained in the Act will provide expedited and much-needed relief to thousands of small and medium-sized businesses.

WHO IS ELIGIBLE:

• Any business concern or nonprofit which employs not more than 500 employees (full-time, part-time or other basis)
• Any “small business concern” – i.e., a business that meets the traditional SBA loan criteria
• Sole proprietors, independent contractors and eligible self-employed individuals
• The business must have been in operation on February 15, 2020

Important Note:  Currently, the SBA’s website features an application for a Disaster Assistance Loan.  Please understand that this loan is NOT the same as the PPP loan subject of the CARES Act.  As it’s currently written, the CARES Act may render a borrower ineligible for a PPP 7(A) Loan where that Borrower is also receiving a Disaster Assistance Loan related to COVID-19.

SUMMARY OF THE LOAN PROGRAM:

Once enacted into law, the loan size will be calculated by taking the average total monthly payments by the applicant for payroll costs incurred during the one-year period before the date on which the loan is made and multiplying that number by 2.5.  The maximum loan size will be $10 million.  The Act does not require the loans to be supported by collateral or personal guarantees.

The loan proceeds must be used for the borrower’s ongoing payroll (including paid sick, medical or family leave, and group health benefits), employee salaries, mortgage interest payments, rent, utilities and interest on other debt obligations.

The loans will be forgivable under certain conditions and the cancellation of that debt will be excluded from taxable income.   The amount forgiven will be equal to payroll costs and costs related to debt obligations for the covered period.   The amount of forgiveness will be reduced proportionally by the number of employees laid off during the covered period, or if the employer reduces the salary or wages of any employee in excess of 25 percent.  Employees making over $100k are excluded from this “forgiveness” calculation. There is no reduction if a borrower re-hires the employees who earlier were terminated.

WHAT YOU NEED TO DO NOW:

Like any loan, Lenders administering the loans will gather due diligence materials to qualify potential borrowers and calculate maximum loan amounts.  We urge you to start gathering the following materials right away, to avoid delays in processing your loans:

• Business formation documents (operating agreements, bylaws, etc.);
• Payroll data/employee lists/payroll tax receipts from January 1, 2019 to the present;
• All existing loan agreements, real and personal property leases (i.e., equipment, automobiles), and documents that substantiate your regular business expenses and debt obligations;
• Employer covered group health and other out-of-pocket employer benefits paid;
• Previous 12 months’ bank account statements and most recent tax returns.

ADDITIONAL CONSIDERATIONS:

The CARES Act is several hundred pages and covers a range of economic concerns related to COVID-19.    We are advising our business owner clients and friends that are in need of working capital and/or considering furloughs or layoffs of their various options.  It is significant to note that not all available options will permit the type of payroll expense and debt forgiveness cancellation that is contemplated under the CARES Act.  There are a number of additional considerations related to the CARES Act, including:

• $367 billion in lending authority for SBA 7(a) loans;
• Delegated (underwriting) authority will be made for SBA participating lenders to expedite loan processing;
• Standard 7 (a) SBA loan term of 10 years;
• A maximum interest rate of 4%;
• 100% government-guarantees on these SBA relief loans made through 12/31/20;
• Applicants with seasonal employees are eligible; payroll expenses would be based on the average total monthly payments for payroll from 3/1/19 through 6/30/19;
• Borrower guarantee fees will be waived.

The business lending attorneys at Weiss Serota Helfman Cole & Bierman stand ready to assist clients in evaluating their business lending needs.  We can advise you in gathering due diligence, completing applications, and engaging with SBA Preferred Lenders and the SBA to process your applications as soon as possible.  

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