SBA Guidance for Expanded Paycheck Protection Program
On January 6, 2021, the Small Business Administration (SBA) released additional guidance for the Paycheck Protection Program (PPP), which was expanded under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act that formed a key part of the Consolidated Appropriations Act, 2021 (CAA). This additional guidance indicates that lenders are authorized to re-open their portals and application processes to allow small business borrowers to apply both for new First Draw PPP Loans and for Second Draw PPP Loans through March 31, 2021. Applications forms for the Second Draw loans and the updated First Draw loans are on the SBA’s website and closely resemble the original PPP application form.
The guidelines implement the new rules promulgated under the CAA and largely reiterate that the existing PPP guidelines will remain in place, except as otherwise amended by the CAA. The new guidance includes helpful information about additional ‘eligible costs’ for which PPP funds may be used, additional eligible classes of borrowers previously excluded from the PPP, and how certain borrowers can seek to re-apply for funds not taken or not available to them during the initial First Draw PPP application period. The guidelines also limit the maximum borrowing for affiliated borrower groups, and elaborate on a borrower’s access to a Second Draw loan if its First Draw loan is “under review.”
Second Draw PPP Loans
The SBA will soon make available Second Draw PPP Loans of up to $2 million to borrowers that have used, or will use, all of their First Draw PPP Loans, subject to the following rules and conditions:
- Gross Revenue Reductions in 2020. Under the CAA, a key eligibility requirement for a Second Draw PPP Loan is that the borrower must have experienced a twenty-five percent (25%) or greater reduction in gross revenue in any quarter in 2020 compared to the same quarter in 2019. The regulations clarify that if a borrower experiences a twenty-five percent (25%) or greater reduction in annual gross from 2019 to 2020, then this requirement is deemed to have been satisfied. The regulations incorporate a broad definition of “gross receipts,” but exclude the forgiveness of First Draw PPP Loans from that definition. A borrower can provide relevant tax return forms, financial statements, or bank statements to its lender to demonstrate this revenue reduction. Alternative calculations are also provided for seasonal and newer businesses.
- Limit for Corporate Groups. The regulations impose a $4 million limit on all Second Draw PPP Loans for corporate groups, which are defined as businesses that are majority-owned, directly or indirectly, by a common parent. This corporate group limit will apply to all borrowers, including borrowers with a NAICS Code starting with 72; this limitation will significantly limit the ability of restaurant and hotel groups to access meaningful relief via a Second Draw PPP Loan.
- Second Draw Loans if First Draw is Under Review. The regulations specify that if a First Draw PPP Loan is under review pursuant to PPP rules and/or information in the SBA’s possession indicates that the borrower may have been ineligible for the First Draw PPP Loan, the SBA will not authorize a Second Draw Loan for that borrower but will work expeditiously to complete its review. Borrowers and their lenders may first learn that their First Draw PPP Loans are under review as a result of their Second Draw applications. This should be of particular concern to borrowers that received loans larger than $2 million, who are more likely to be “under review.” Given the limited funds available for Second Draw PPP Loans, delays associated with resolving issues related to First Draw PPP Loans could prevent these borrowers from obtaining Second Draw PPP Loans. Accordingly, these Borrowers should move quickly to submit their applications and work with their lenders to resolve any issues with the SBA/Treasury.
- Must Be in Business. The regulations specify that Second Draw PPP Loans are not available to borrowers that have permanently closed. Since the goal of PPP is to preserve employment, an entity must either be open or temporarily closed to be eligible for a Second Draw PPP Loan.
- Payroll Cost Documentation. For Second Draw PPP Loan application purposes, if a borrower used 2019 figures for its First Draw PPP Loan application, it may again use those same figures to determine its Second Draw PPP Loan amount (instead of using 2020 figures).
Reopening of PPP for New and Increased Loans
The SBA is re-opening the PPP to allow small businesses that were previously ineligible, returned, did not accept, or did not receive all of the PPP loan funds available to them to get new PPP Loans or supplemental PPP funds as part of their First Draw PPP Loan:
- Expanded Eligible Borrowers for First Draw PPP Loans. The following types of borrowers are now eligible under the CAA to receive First Draw PPP Loans:
- 501(c)(6) non-profit organizations and destination marketing organizations with 300 or fewer employees, provided that the organization does not receive more than 15% of its receipts from lobbying activities. Neither the Act nor the guidance clarifies whether “lobbying activities” are limited to federal lobbying activities or whether it also includes state and local lobbying activities.
- Hospitals owned by governmental entities provided that they receive less than 50% of their funding from state or local government sources, exclusive of Medicaid;
- Businesses that receive revenue from legal gaming;
- 501(c)(12) electric cooperatives and telephone cooperatives;
- Housing cooperatives (under Section 216(b) of the Internal Revenue Code) with 300 or fewer employees; and
- Television and/or radio stations owned by NAICS Code 551110 or 5151 entities and public broadcasting entities (as defined in Section 397(11) of the Communications Act of 1934).
- Reapplication for Certain Borrowers. Borrowers who returned or never took all or part of their First Draw PPP Loan proceeds can reapply for a First Draw PPP Loan and request the amounts never previously received, including amounts that may not have been available to them under the prior guidelines.
- Limit for Corporate Groups. The original regulations related to First Draw PPP Loans create a $20 million limit for corporate groups, but this limit is not made retroactive for groups that had already applied for PPP Loans. The new regulations reiterate this limit. Thus for new First Draw PPP borrowers, corporate groups will need to coordinate their loan applications to ensure that the group cap isn’t exceeded.
Revisions and Clarifications Impacting PPP Generally
The SBA’s regulations also clarified and created the following additional guidelines related to the PPP:
- Expanded Eligible Uses. Covered operations expenditures (such as business software or cloud computing services that facilitate business operations), covered property damage costs, covered supplier costs, and covered worker protection expenditures constitute additional eligible uses of PPP Loan proceeds. For forgiveness purposes, the SBA has reiterated that that at least 60% of all forgiven PPP Loan proceeds must be spent on payroll costs.
- Foreign Subsidiaries Still Largely Shut-Out. The regulations formally codify that foreign subsidiaries must count employees of their foreign affiliates and parents for PPP eligibility purposes. Thus, subsidiaries of larger foreign corporations (over 500 employees) are largely (dependent on industry) ineligible for First Draw PPP Loans.
- Shuttered Venue Operator Grant. The regulations reiterate that if a business received or will receive a grant under the Shuttered Venue Operator Grant Program under Section 324 of the CAA, then it is not eligible to receive any PPP Loan (First Draw or Second Draw).
- Publicly Traded Companies. Publicly traded entities registered on a national securities exchange are ineligible to receive PPP loans.
- Portfolio Companies. The regulations note that while portfolio companies of private equity funds may be eligible for PPP, they should “carefully review” the necessary certification that must be made on their PPP application.
- ESOP Borrowers. The regulations make clear that borrowers that have an employee stock ownership plan (ESOP) are not considered affiliates of the ESOP for the purposes of PPP. This clarifying guidance is helpful for the growing number of companies that have ESOPs.