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Stimulus Bill Creates Second Draw PPP Loans

On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects new PPP borrowers. The changes previously discussed that will affect all PPP borrowers will also generally affect Second Draw PPP loans, and the changes previously discussed that only affect new PPP loans will also generally apply. The discussion below is based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Ability to Apply for a Second PPP Loan. While the CARES Act originally limited eligible small businesses to one PPP loan, Section 311 of the Act creates a new opportunity for certain PPP borrowers (including those that received a PPP loan in 2020 or that will receive a new PPP loan in 2021) to apply for one additional PPP loan, a so-called “second draw” loan. In order to apply for a second draw loan, the PPP borrower will need to have utilized 100% of their prior PPP loan prior to distribution of the second draw loan. This requirement should presumably not be particularly burdensome for those that obtained their PPP loan in 2020, but may limit the ability of new PPP borrowers to obtain both a PPP loan and a second draw PPP loan in 2021.

The Act provides for up to $259 billion for second draw PPP loans, with $25 billion set aside for second draw PPP loans to entities with no more than 10 employees (in individual loan amounts not to exceed $250,000 and made to an entity in a low or moderate income neighborhood). Second draw PPP loans are to be available through March 31, 2021.

Eligibility – Number of Employees. In order to be eligible for a second draw loan, the small business may have no more than 300 employees (down from 500 employees for general PPP loan eligibility). Based on the language in the Act, it appears that the other means of eligibility for a small business to have qualified for a PPP loan, namely the revenue standards or the alternative size standard, will not be available to qualify for a second draw loan.

Eligibility – Revenue Decline. Unlike a primary PPP loan, eligibility for a second draw PPP loan is also conditioned on specific evidence that the business has been harmed by the pandemic. Specifically, to be eligible for a second draw loan, a small business will need to show that gross receipts during at least one quarter in 2021 was down at least 25% from the comparable 2019 quarter. The Act provides that for loans up to $150,000, borrowers may merely attest certification to this revenue standard, but would then be required to provide supporting documentation before submitting forgiveness.

Loan Size. Like the primary PPP loan, the size of the loan is generally set to be an amount equal to 2.5 times monthly payroll costs, however the maximum size of a second draw PPP loan will be $2 million. (As over 995 of the original PPP loans were for $2 million or less, this small size cap should not affect most borrowers.) In addition, the Act provides that small businesses that are classified under NAICS 72 code (generally those in the accomodation and food services sector) are eligible for a larger PPP loan, namely up to 3.5 times their monthly payroll costs (but still capped at $2 million).

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Stimulus Bill Changes to New PPP Loans

On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects new PPP borrowers. The changes previously discussed that will affect all PPP borrowers will also affect new borrowers. The changes below only affect new PPP borrowers, and do not affect existing outstanding PPP loans. The changes below are based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Applications Re-Opened through March 31, 2021. The Act authorizes a renewed opportunity for eligible small businesses to apply for a PPP loan. The Act authorizes up to $259 billion in new PPP loans, although some of that money could also be utilized for second draw PPP loans. The prior authorization for new PPP loans ended on August 8, 2020. The terms of these new (first) PPP loans remain essentially the same… up to $10 million, based on monthly payroll costs, with a cap of $20 million for any affiliated corporate group. Eligibility is also generally unchanged: less than 500 employees and ability to certify that due to economic uncertainty the PPP loan is necessary.

Public Companies Ineligible. If a company has securities listed on an exchange registered with the SEC, then it is ineligible for a covered loan on or after December 27, 2020.

Expanded Non-Profit Eligibility. Section 318 of the Act slightly expands eligibility for non-profit entities to include 501(c)(6) and “destination marketing organizations.”

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Stimulus Bill Changes to All PPP Loans

On December 27, 2020, President Trump signed the 2021 Consolidated Appropriations Act, which also contained the latest stimulus relief bill. Part of that bill was the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act, which made changes to all Paycheck Protection Program (PPP) loans, re-opened the PPP program for new loans, and allowed certain borrowers to obtain a second PPP loan.

This post specifically looks at the changes implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venue Act (the “Act”) that affects all PPP borrowers. The changes below are based on the text of the Act, and may be further modified or clarified by subsequent regulations or guidance.

Tax Treatment. Most importantly, Section 276 of the Act reverses the prior Internal Revenue Service guidance and provides significant tax relief to all PPP borrowers. Not only does the Act confirm that any cancellation of debt income obtained from forgiveness of the PPP loan is tax exempt (as provided for in the CARES Act), but now any tax deductible expenses used to generate such forgiveness may still be taken to reduce taxable income.

Covered Period Flexibility. Section 306 of the Act provides PPP borrowers with the flexibility of setting the length of the “Covered Period” for purposes of PPP loan forgiveness and FTE representations at any length between 8 and 24 weeks. The Covered Period will begin on the date of the origination of the PPP loan, and end on the date selected by the borrower that occurs between 8 weeks and 24 weeks after origination.

EIDL Advance Does Not Affect Forgiveness. Section 333 of the Act repeals a prior CARES Act provision that said that any forgiveness would be reduced by the amount of the EIDL Advance. We understand that newly processed forgiveness remittances from the Small Business Administration (SBA) already reflect this change, but we are awaiting SBA guidance for how they will handle previous EIDL Advance-based forgiveness reductions.

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PPP & Asset Sales: Is the Buyer Required to Assume the PPP Note?

No.

On October 2, the Small Business Administration published a procedural notice on changes of ownership for PPP borrowers. One specific area where we’ve seen confusion is whether the procedural notice requires a Buyer to assume all of the PPP Borrower’s obligations in an asset sale transaction. As discussed below, while the procedural notice does require the Buyer to assume the PPP loan obligations in an asset sale in order to obtain the SBA’s prior approval, so long as the SBA’s prior approval is not required, then the parties remain free to structure the asset transaction in whatever manner makes economic sense for the parties, including leaving the PPP loan obligations with the Seller.

Section 2.b. of the procedural notice indicates that, in connection with obtaining SBA pre-approval for a change of ownership, that SBA approval “will be conditioned on the purchasing entity assuming all of the PPP borrower’s obligations under the PPP loan, including responsibility for compliance with the PPP loan terms.” The procedural notice goes on to indicate that the purchase or sale agreement “must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA.” Accordingly, if SBA pre-approval is required in connection with a change of control structured as an asset sale, then it would be necessary to have the Buyer assume the PPP loan. However, this obligation is limited to circumstances in which SBA pre-approval is required.

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GAO Report Highlights Need for Additional PPP Forgiveness Guidance

On September 21st (do you remember?), the U.S. Government Accountability Office released a report on the Federal Government’s COVID-19 response, including with respect to the Paycheck Protection Program. The GAO report provides additional statistical breakdown of the PPP loans, addresses some of the SBA’s oversight plans, and then addresses the need for further guidance on the PPP forgiveness process.

Updated Statistics

The GAO Report notes that most of the largest PPP loans (those over $2 million), were made during the first phase of the program, between April 3rd and April 26th. 75% of the loans for more than $2 million were approved in the first phase, with the report noting that this may have been due to increased scrutiny from the public, Treasury and SBA.

The vast majority of PPP loans were made to borrowers with 10 or fewer employees (73.6% of the loans) while the majority of PPP loan dollars went to businesses with 100 or fewer employees (67.6%). While borrowers with more than 500 employees were granted limited access to participate in the program, less than 0.1% of borrowers had more than 500 employees.

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The Unsafe Waters of the PPP Purported FTE Reduction Safe Harbors

On June 17, 2020, the SBA and U.S. Treasury published an updated form of application and instructions for borrowers seeking forgiveness of their Paycheck Protection Program loans, as well as a new “EZ” form of application and instruction. In both cases, these applications generally implement the statutory changes required by the Paycheck Protection Program Flexibility Act.

While the improved likelihood of full forgiveness due to the 24-week covered period is likely to draw the most attention, potential compliance with two of the safe harbors provided to avoid a loss of forgiveness in the event of a reduction in the number of Full Time Equivalent (FTE) employees comparing the applicable “covered period” with the applicable reference period. Under the CARES Act, while borrowers are generally eligible for loan forgiveness for certain expenditures during the covered period, actual loan forgiveness must be reduced if the borrower’s weekly average number of FTE employees during the covered period was less than during the borrower’s chosen reference period (generally, February 15, 2019 through June 30, 2019 or January 1, 2020 and February 29, 2020; or, for seasonal employers, any consecutive 12-week period between May 1, 2019 and September 15, 2019).

However, under the revised PPP loan forgiveness application, there are certain FTE reduction exceptions and two safe harbors. Each of these provide potential relief from a decrease in forgiveness due to a reduction in FTE levels… but they also provide enhanced risk for borrowers needing to rely on them. In addition, general eligibility for the use of the Form EZ loan forgiveness application is conditioned on compliance with the reduction exceptions or one of the safe harbors.

FTE Forgiveness Reduction Exceptions

As provided in the original forgiveness application, in calculating the average number of FTE employees during the covered period, borrowers are permitted to effectively add back the FTEs for: (1) any positions for which the employer made a good-faith, written offer to rehire, which was rejected, (2) any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours. (If the positions were re-filled during the covered period, than borrowers are required not to double-count such positions.)

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PPP Loan Statistics Through June 6, 2020

From the launch of the Paycheck Protection Program (“PPP”) on April 3, 2020, through June 6, 2020, 5,458 lenders have approved loans to over 4.5 million small businesses for over $511 billion dollars. On June 7, 2020, the SBA published an updated Paycheck Protection Program Report with additional details.

To put some scale around the size of the program, for the last five years, the SBA has averaged annual total personal loans approved under its 7(a) small business loan program (the same umbrella under which PPP loans fall) of roughly $17.4 billion. Accordingly, in April and May of 2020, the SBA has processed roughly 29 years worth of SBA loans. While the rate of PPP loans being improved has slowed greatly, as discussed more below, this still highlights the size of the program and the strain under which the SBA has been operating.

Average Loan Size

The overall average size of a PPP loan is now approximately $113 thousand. This is down significantly from the first round of PPP funding, where the average approved PPP loan was $206 thousand. Based on the formula for PPP lending, this means the average borrower likely had monthly payroll costs of approximately $45 thousand.

Of course, the average size of PPP loan is certainly affected by a relatively small number of larger loans. As reflected above, the majority of loans made were for loans of less than $50 thousand (reflecting monthly payroll costs of less than $20 thousand). Over 85% of the total PPP loans made were for less than $150 thousand, and over 93% of the total PPP loans made were for less than $350 thousand. While significant ink (digitally and otherwise) has been spilled on larger PPP borrowers, less than 2% of the PPP loans made were for more than $1 million.

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Paycheck Protection Program and EIDL Advances

The interplay of Economic Injury Disaster Loan (EIDL) Loan Advances and Paycheck Protection Program (PPP) Loan Forgiveness is broken. Maybe there’s further guidance to come that will make the existing application and guidances makes sense, but as I’m reading the current guidance, PPP lenders could be required to “eat” the EIDL advances received by their PPP borrowers. While that’s certainly not the intent of the PPP, the existing mechanics may make that a reality.

Background

Section 1102 of the CARES Act provided that PPP borrowers who had received an EIDL loan between January 31, 2020 and April 3, 2020, could (and in some circumstances had to) increase their PPP loan amount to refinance outstanding EIDL loans. Section 1110 of the CARES Act provided that if an EIDL applicant received an EIDL advance subsequently was approved for a PPP loan, the advanced amount would be reduced from the loan forgiveness amount. (Whether Section 1110 of the Cares Act makes sense or not is also beyond this post; for now, I’m simply assuming it means what it says, at least with regard to EIDL advances related to COVID-19 existing at the time of PPP loan forgiveness.)

Note: Section 1102 only applied for existing EIDL loans as of April 3, 2020, while Section 1110 applies to subsequent EIDL advances, even if those amounts were not rolled into PPP loans.

Under the first Interim Final Rule, outstanding EIDL loans, less the amount of any outstanding EIDL advance, were rolled forward into the maximum PPP loan amount. Proceeds from any advance up to $10,000 on the EIDL loan would be deducted from the loan forgiveness amount on the PPP loan. “For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.”

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COVID-19 and Business Operations/Reopening, Cybersecurity from Home, and SEC Whistleblower Activity

The devastating impact of the Coronavirus (COVID-19) needs no introduction.  BCLP has consolidated all of its client alerts regarding Coronavirus (COVID-19) as one page of resources. On that page, you can also limit by topic area, jurisdiction and areas of practice.

In this post, we have highlighted some of the client alerts that we believe may be of specific importance to our community bank clients.

U.S. Businesses Challenge Government Orders in Attempt to Continue Operations

Shelter-in-place and social distancing have become the new normal as we try to combat the spread of COVID-19 in the U.S.  Many state governments have implemented stay-home or shelter-in-place orders to try to “flatten the curve” and protect citizens’ safety. But as time passes, businesses are also concerned.  Under many such executive orders, a business that is not deemed “essential” or “life-sustaining” may be required to stop in-person operations, and we’re starting to see an uptick in local enforcement, including cease and desist letters and revocation of occupancy permits. Some shuttered businesses have started to bring their claims to court.  This post provides a summary of the prominent claims and factual allegations featured in complaints from business plaintiffs.   

Employer Guidance for Reopening the Workplace

Over the past week, increased discussion of reopening the U.S. economy has raised numerous questions as employers prepare to return their employees to the workplace. While the exact steps to reopen the economy remain uncertain, employers should begin to consider what measures will help ensure a safe, orderly return to business, particularly since President Trump’s White House issued its Opening Up America Again three phased approach for re-opening the economy, and the Equal Employment Opportunity Commission issued guidance about returning to work. This alert details the potential measures and related issues BCLP suggests clients consider in preparing to return to work, whether next week, next month, or this summer.

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PPP Refresh – $310 Billion More

Based on news reporting, we understand that Congress and President have collectively agreed on $300 billion in additional funding for the Paycheck Protection Program. The circulated draft of the “Paycheck Protection Program and Health Care Enhance Act” makes no changes to the eligibility or terms of the PPP, but does authorize an additional $310 billion in funds, raising the total funding level for PPP loans to $659 billion.

The Paycheck Protection Program and Health Care Enhance Act would also increase the amount authorized for the SBA to ultimately forgive to $670 billion, presumably recognizing an intent to also be in position to forgive interest in additional to principal.

While the Paycheck Protection Program and Health Care Enhance Act does not alter the eligibility or terms for either borrowers or lenders, it does provide some protected classes of lenders who are ensured a set aside of a portion of the expanded PPP authorization. Specifically, depository institutions and credit unions with between $50 billion and $10 billion in consolidated assets will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP. Depository institutions and credit unions with less than $10 billion in consolidated assets, as well as community development financial institutions (CDFIs), minority depository institutions (MDIs), and certain state development companies certified under Title V of the Small business Investment Act will be ensured the ability to issue, in the aggregate, at least $30 billion in loans guaranteed by the SBA under the PPP.

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