Articles

Client Alert: What We’re Learning About Second Draw Paycheck Protection Loans and Other Implementation of Recent Legislative Action

ANNOUNCEMENT: According to an SBA news release issued January 8, 2021, the PPP will re-open the week of January 11. Only community financial institutions will be able to make new PPP loans on January 11 and second draw PPP loans on January 13. Shortly thereafter, all participating lenders will be able to make loans.
 
A list of community financial institutions is available here.
 
Minority depository institutions are also prioritized under the latest legislation, a list of which are available here.
   
As we recently announced regarding the Economic Aid Act, Congress authorized certain PPP borrowers who have already used (or will use) their PPP funds to apply for a second draw PPP loan (“PPP2”).  Effective January 6, 2021, SBA released an Interim Final Rule on PPP2 (the “PPP2 IFR”). This client alert summarizes some of the salient and broadly applicable terms in the PPP2 IFR.  Following this discussion, we also highlight parts of the Amended Interim Final Rule (the “Amended IFR”), also effective January 6, 2021, that consolidates previously published interim final rules and amends them to incorporate changes under the Economic Aid Act.
 
SECOND DRAW PAYCHECK PROTECTION PROGRAM LOANS
 
In General
 
The PPP2 IFR prologue explains that PPP2 loans are generally administered under the same terms, conditions and processes as first draw PPP loans (“PPP1 loans”) and are subject to all of the interim final rules and FAQs applicable to PPP1 loans except as specifically provided in the PPP2 IFR.
 
PPP2 Eligibility
 
A borrower is only eligible for a PPP2 loan if it (i) has 300 or fewer employees, (ii) experienced a revenue reduction in 2020 relative to 2019 (described below), (iii) received a PPP1 loan and (iv) used or will use the full amount of its PPP1 loan on or before the expected date of disbursement of the PPP2 loan on eligible expenses.  A borrower may only receive one PPP2 loan. 
 
Revenue Reduction Requirement
 
Under the Economic Aid Act, to be eligible for a PPP2 loan, the borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019. This is calculated by comparing the borrower’s quarterly gross receipt for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019. If an applicant was in business only during the fourth quarter of 2019, the applicant must show a 25% reduction from such quarter to any quarter of 2020. Similarly, if an applicant was in business before February 15, 2020, but not before the first quarter of 2020, the applicant must show a 25% reduction from such quarter to the second, third or fourth quarter of 2020.
 
As an alternative approach, a borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipt of 25% or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating such decline.
 
For purposes of determining a decline in gross receipts, the PPP2 IFR defines gross receipts consistent with 13 CFR 121.104 (“How does SBA calculate annual receipts?”). Any forgiveness amount of a PPP2 loan is excluded from a borrower’s gross receipts.
 
Certain Excluded Entities
 
Businesses that have permanently closed are ineligible for a PPP2 loan, but a borrower that has temporarily closed or temporarily suspended its business remains eligible for a PPP2 loan.  Businesses that are in any chapter of bankruptcy (e.g., Chapter 11 or Chapter 7) are ineligible.
 
Payroll Costs Calculation with Respect to PPP2 Loan Amount
 
For PPP2 loans, the relevant time period for calculating a borrower’s average monthly payroll costs is either the 12-month period prior to when the loan is made, calendar year 2019 or calendar year 2020.
 
For borrowers assigned a NAICS code beginning with 72 (Accommodations and Food Services), the maximum loan amount is equal to 3.5 times monthly payroll costs, rather than 2.5 times payroll costs.
 
Corporate groups (including businesses assigned a NAICS code beginning with 72) should be aware that, in the aggregate, their businesses are not eligible for, in the aggregate, more than $4 million in PPP2 loans.
 
PPP2 Loan Application and Documentation Requirements
 
The PPP2 application will be submitted on SBA Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) or the lender’s equivalent form.
 
The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for PPP1 Loans. To ease some administrative burden, no additional documentation to substantiate payroll costs will be required if the applicant (i) used calendar year 2019 figures to determine its PPP1 loan amount, (ii) uses calendar year 2019 figures to determine its PPP2 loan amount (instead of calendar year 2020), and (iii) the lender for the applicant’s PPP2 loan is the same as the lender that made the applicant’s PPP1 loan.
 
For loans with a principal amount greater than $150,000, the applicant must also submit documentation adequate to establish that the applicant experienced a revenue reduction of 25% or greater in 2020 relative to 2019, as described above. For loans with a principal amount of $150,000 or less, such documentation is not required at the time the borrower submits its application for a PPP2 loan, but must be submitted on or before the date the borrower applies for loan forgiveness.
 
PPP2 Loan Forgiveness
 
PPP2 loan forgiveness will be consistent with PPP1 loans.  The Economic Aid Act substantially streamlined forgiveness applications for borrowers of $150,000 or less. 
 
Availability
 
Approximately $281,440,000,000 is available for PPP2 loans, including $25 billion specifically reserved for entities with no more than 10 employees. These and other set asides are going to increase demand on smaller lenders and community financial institutions for both PPP2 loans and for first draw PPP loans, for those businesses that did not receive a PPP loan during 2020.
 
Many readers will certainly remember the early days of the PPP while applicants waited for lenders to open their application portals. While this will probably be less chaotic, we expect that there will be some delay before PPP2 loans become fully available as lenders retool their systems for this new program.
 
Amended IFR
 
Permitted Uses
 
New permitted uses of PPP loan proceeds are identified with some more detail than stated in the Economic Aid Act:
 

• “Covered operations expenditures” means payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.

 

• “Covered supplier costs” means expenditures made by a borrower to a supplier of goods for the supply of goods that:

 

• (A) are essential to the operations of the borrower at the time at which the expenditure is made; and

 

• (B) is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan).

 

• “Covered worker protection expenditures” means operating or capital expenditures to adapt the activities of a PPP borrower to comply with requirements established or guidance issued by governmental agencies, during the period beginning on March 1, 2020, and ending the date on which the national emergency with respect to the COVID–19 expires related to standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

 

• Covered worker protection expenditures may include—(i) the purchase, maintenance, or renovation of assets that create or expand—(I) a drive-through window facility; (II) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (III) a physical barrier such as a sneeze guard; (IV) an expansion of additional indoor, outdoor, or combined business space; (V) an onsite or offsite health screening capability; or (VI) other assets relating to the compliance with the requirements or guidance described in the preceding paragraph; and (ii) the purchase of—(I) covered materials described in 44 CFR 328.103(a), or any successor regulation; (II) particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or (III) other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor. These expenditures do not include residential real property or intangible property.

 

• “Covered property damage costs” means costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.

 
Other Regulatory Changes
 

• SBA has removed the “alternative covered period” concept, which previously allowed PPP borrowers to “shift” their covered period for purposes of determining payroll costs paid with PPP proceeds to match their biweekly or more frequent pay period. This was done because the Economic Aid Act changed the loan forgiveness covered period from either an 8- or 24-week period to a covered period between 8 and 24 weeks at the election of the borrower.

 

• PPP borrowers can reapply or request an increase in their original PPP loan (as issued in 2020) in certain circumstances:

 

• A borrower that returned all of its PPP loan can reapply for a PPP loan in an amount the borrower is eligible for under current PPP rules. This is especially useful for 501(c)(6) entities that may have mistakenly received PPP funds early in the process which it then returned.

 

• A borrower that returned part of a PPP loan can reapply for an amount equal to the difference between the amount retained and the amount previously borrowed.

 

• A borrower that did not accept the full amount of a PPP loan for which it was approved can request an increase in the amount of the PPP loan up to the amount previously approved.

  ---