By Bernadette Kasnicki of Farrell Fritz, P.C.
Published January 19, 2021
Today the U.S. Department of the Treasury and the U.S. Small Business Association (“SBA”) have fully reopened the Paycheck Protection Program (“PPP”) loan portal to participating lenders to submit first- and second- draw loan applications.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venue Act (“Economic Aid Act”) was included in the Consolidated Appropriations Act, 2021 (the “CAA”), which was signed into law on December 27, 2020. Through the Economic Aid Act, the CAA, among many other things, reauthorizes and modifies the PPP, allocating more than $284 billion in new loan funding, under new criteria, until March 30, 2021 or the funding runs out—whichever comes first.
By way of providing guidance about the foregoing, on January 6, 2021, the Department of the Treasury and the SBA released the following two Interim Final Rules: (1) the “Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans” (the “Second Draw Rules”), and (2) the “Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by Economic Aid Act” (the “Consolidated Initial Rules”). Catchy titles notwithstanding, these Interim Final Rules provide helpful guidance for those considering applying or re-applying for a PPP loan.
The Second Draw Rules address the new PPP loans available for borrowers. These are generally subject to the same terms and conditions as the first draw PPP loans, which are described more fully below. The Consolidated Initial Rules, in the SBA’s own words, primarily “restates existing regulatory provisions to provide lenders and new PPP borrowers a single regulation to consult on borrower eligibility, lender eligibility, and loan application and origination requirements, as well as general rules on increases and loan forgiveness for PPP loans.” To enhance the “readability” of the guidance, the Consolidated Initial Rules generally does not include the policy and legal justifications for the existing regulatory provisions, but those can be found in the original interim final rules.
PPP Program Generally
As a refresher, both first- and second- draw PPP loans are 100% guaranteed by the SBA. They require neither collateral nor personal guarantees, have a five-year maturity date, and bear interest at a rate of 1%, calculated on a non-compounding, non-adjustable basis. All loans will be processed by lenders under delegated authority, and those lenders may rely on a borrower’s certification regarding the necessity of the loan. Generally, the maximum amount that a small business may borrow for a first time PPP loan is the lesser of (1) 2.5 multiplied by the borrower’s average monthly payroll costs, or (2) $10 million. For the purposes of this calculation, a borrower may choose to use average monthly payroll from the one-year period before the date on which the loan is made, calendar year 2019, or calendar year 2020.
Second Draw Loans
Eligible borrowers that previously received a PPP loan may now also apply for a second draw PPP loan in order to fund payroll costs, including benefits, pay for mortgage interest, rent, utilities, worker protections related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
A borrower is generally eligible for a second draw PPP loan if the borrower previously received a first draw loan and will or has used the full amount only for authorized uses; has no more than 300 employees (per location, if applicable); and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. The Economic Aid Act added housing cooperatives, 501(c)(6) organizations, and eligible nonprofit news organizations to the list of businesses that are eligible for PPP loans, which included 501(c)(3) organizations in addition to for-profit small businesses in its original iteration.
Generally, the principal amount of a second draw loan may not exceed the lesser of $2 million or 2.5 multiplied by a borrower’s average monthly payroll costs, as described more fully above. However, borrowers who used North American Industry Classification System (NAICS) 72 on their most recent federal tax return—the “Accommodation and Food Services” sector, which comprises establishments providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption—can use a multiplier of 3.5 on average monthly payroll costs in doing its calculation. The devastation of the hospitality industry as a result of the pandemic has been apparent in towns and cities across the country, as countless restaurants have shuttered and the jobs they once supported have disappeared. The accommodation in the Economic Aid Act for additional relief for the industry was intended to help eligible business continue to weather the storm, with the hope that they will still be standing once this time has passed.
The Second Draw Rules provide detailed calculations to determine eligibility and loan amounts. There is a $20 million loan limit on businesses that are part of a single corporate group, defined as businesses that are majority owned, directly or indirectly, by a common parent. Additionally, a corporate group limit of $4 million (twice the individual limit of $2 million) applies to second draw PPP loans.
Second draw PPP loans are eligible for full forgiveness if, during the 8- to 24-week period covered following loan disbursement, employee and compensation levels are maintained in the same manner as required for the first draw PPP loan; the loan proceeds are spent on payroll costs and other eligible expenses; and at least 60% of the proceeds are spent on payroll costs.
To learn more, please visit Farrell Fritz’s COVID-19 resource page, which contains several articles regarding PPP issues.
Bernadette Kasnicki is counsel with Farrell Fritz, P.C., concentrating on tax and corporate law. She can be reached at email@example.com or 516.227.0728.