On June 3, 2020, the Senate unanimously passed the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”, H.R. 7010). The PPP Flexibility Act is a streamlined bill that resolves major criticism over the PPP loan program by adding several borrower-friendly changes. Notably, the PPP Flexibility Act comes at a critical time for hundreds of thousands of PPP loan borrowers nearing the end of the 56 day “covered period” on their loans.
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.