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New IFRs For Paycheck Protection Program Second Draw Loans

January 10, 2021 | Category: Articles, Asset Protection, Corporate and Taxation, Estate Planning and Probate, News

On January 6, 2021, the SBA issued interim final rules (“IFRs”) regarding the implementation of section 311 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act). The Economic Aid Act authorizes the SBA to guarantee loans under the Paycheck Protection Program (PPP), which was established under the Coronavirus Aid, Relief, and Economic Security Act. The Economic Aid Act adds a second temporary program to SBA’s 7(a) Loan Program titled, “Paycheck Protection Program Second Draw Loans.” The SBA may guarantee loans under the PPP Second Draw Program under generally the same terms and conditions available under to borrowers through March 31, 2021 (“Second Draw PPP Loans”) that previously received a PPP loan (“First Draw PPP Loans”) and have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan.

The key differences between First Draw PPP Loans and Second Draw PPP Loans are described in the IFR, which explains the loan terms, eligibility requirements, and application process for Second Draw PPP Loans. The last day to apply for and receive a PPP loan is March 31, 2021.

Summary of Key Terms of PPP Second Draw Loans

Second Draw PPP Loans are generally subject to the same terms, conditions and requirements as First Draw PPP Loans. These include, but are not limited to the following terms:

  • The guarantee percentage is 100 percent.
  • No collateral will be required.
  • No personal guarantees will be required.
  • The interest rate will be 100 basis points or one percent, calculated on a non- compounding, non-adjustable basis.
  • The maturity is five years.
  • All loans will be processed by all lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds.

The IFR confirmed that previous guidance issued by the SBA applicable to original PPP loans terms, including IFRs and FAQs  apply to Second Draw PPP Loans, except as otherwise specified in the IFR.

Eligibility requirements

  1. General eligibility requirements

In general, the Economic Aid Act made the eligibility requirements for Second Draw PPP Loans narrower than the eligibility requirements for First Draw PPP Loans. The Economic Aid Act generally provides that a borrower is eligible for a Second Draw PPP Loan only if it has 300 or fewer employees and experienced a revenue reduction in 2020 relative to 2019. In addition, the Economic Aid Act provides that a Second Draw PPP Loan may only be made to an eligible borrower that (i) has received a First Draw PPP Loan, and (ii) has used, or will use, the full amount of the First Draw PPP Loan on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower.  The IFR clarifies that “the full amount” of the borrower’s First Draw PPP Loan includes the amount of any increase on such First Draw PPP Loan made pursuant to the Economic Aid Act. The borrower must have spent the full amount of its First Draw PPP Loan on eligible expenses under the PPP rules to be eligible for a Second Draw PPP Loan.

  1. Revenue reduction requirement

The Economic Aid Act provides that, to be eligible for a Second Draw PPP Loan, the borrower must have experienced a revenue reduction of 25% or greater in 2020 relative to 2019. A borrower must calculate this revenue reduction by comparing the borrower’s quarterly gross receipts for one quarter in 2020 with the borrower’s gross receipts for the corresponding quarter of 2019. For example, a borrower with gross receipts of $50,000 in the second quarter of 2019 and gross receipts of $30,000 in the second quarter of 2020 has experienced a revenue reduction of 40 percent between the quarters, and is therefore eligible for a Second Draw PPP loan (assuming all other eligibility criteria are met). The IFR provides that 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 receipts of 25 percent or greater in 2020 compared to 2019 and the borrower submits copies of its annual tax forms substantiating the revenue decline. This provision will allow a borrower to provide annual tax return forms to substantiate its revenue reduction.

This method will be particularly important for small borrowers that may not have quarterly revenue information readily available. Moreover, this approach is appropriate because, if annual filings show a 25 percent revenue reduction, then at least one quarter in 2020 would have had at least a 25 percent revenue reduction. A borrower that did not experience a 25 percent annual decline in revenues, or that was not in operation in all four quarters of 2019, may still meet the revenue reduction requirement under one of the quarterly measurements described above.

The IFR specifies that any forgiveness amount of a First Draw PPP Loan that a borrower received in calendar year 2020 is excluded from a borrower’s gross receipts.

  1. Business concerns with more than one physical location

Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and employs not more than 500 employees per physical location is eligible to receive a First Draw PPP Loan. 

The Economic Aid Act modified this provision for Second Draw PPP Loans by reducing the limit on employees per physical location to 300. Accordingly, a single business entity that is assigned a NAICS code beginning with 72 is eligible to receive a Second Draw PPP Loan if it employs no more than 300 employees per physical location.

Affiliation rules

The same affiliation rules that apply to First Draw PPP Loans apply to Second Draw PPP Loans, except as provided in the IFR. As with First Draw PPP Loans, in most cases, a borrower is considered together with its affiliates to determine eligibility for the PPP.

Excluded entities

An entity that is ineligible to receive a First Draw PPP Loan under the CARES Act or Consolidated First Draw PPP IFR is also ineligible for a Second Draw PPP Loan. 

The Economic Aid Act also prohibits several additional categories of borrowers from receiving a Second Draw PPP Loan. These categories of prohibited borrowers are listed in the IFR as follows:

  • a business concern or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents;
  • certain entities organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People’s Republic of China or the Special Administrative Region of Hong Kong;
  • any person required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938;
  • a person or entity that receives a grant for shuttered venue operators under the Economic Aid Act;
  • entities in which the President, the Vice President, the head of an Executive department, or a Member of Congress, or the spouse of such person owns, controls, or holds at least 20 percent of any class of equity; or
  • a publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934.

The IFR provides that an entity that has previously received a Second Draw PPP Loan may not receive another Second Draw PPP Loan, as required by the Economic Aid Act.  It also prohibits an entity that has permanently closed from receiving a Second Draw PPP Loan. However, a borrower that has temporarily closed or temporarily suspended its business remains eligible for a Second Draw PPP Loan.

Payroll cost calculation

In general, the Economic Aid Act provides that the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of two and half months of the borrower’s average monthly payroll costs or $2 million. Relative to First Draw PPP loans, the Economic Aid Act adjusted the methodology for calculating a borrower’s payroll costs. Unlike First Draw PPP Loans, the Economic Aid Act provides that the relevant time period for calculating a borrower’s payroll costs for a Second Draw PPP Loan is either the twelve-month period prior to when the loan is made or calendar year 2019. Calculating payroll costs based on calendar year 2020 rather than the twelve months preceding the date the loan is made will simplify the calculations and documentation requirements for borrowers because payroll records are more commonly created and retained on a calendar-year basis. However, the rule notes that Second Draw PPP Loan borrowers who are not self-employed (including sole proprietorships and independent contractors) are also permitted to use the precise 1-year period before the date on which the loan is made to calculate payroll costs if they choose not to use 2019 or 2020 to calculate payroll costs.

Consistent with the Economic Aid Act, the IFR include tailored calculation methodologies for seasonal businesses, new entities that did not exist for the full twelve-month period preceding the Second Draw PPP Loan, and borrowers assigned a NAICS code beginning with 72 at the time of disbursement. For borrowers assigned a NAICS code beginning with 72 (small businesses in the accommodation and food services sector) at the time of disbursement, the Economic Aid Act provides that the maximum loan amount is equal to three-and-a-half (3.5) months of payroll costs rather than two-and-a-half (2.5) months. 

The IFR includes tailored calculation methodologies for self-employed individuals and partnerships. These methodologies are based on the  corresponding methodologies for self-employed individuals and partnerships that are used for First Draw PPP Loans.  These methodologies have been adjusted to eliminate the provision for refinancing of an EIDL loan, which does not apply to Second Draw PPP loans and to apply the choice of time period for calculating payroll costs, consistent with other Second Draw PPP loans.

Finally, businesses that are part of a single corporate group shall in no event receive more than $4,000,000 of Second Draw PPP Loans in the aggregate.

Second Draw PPP Loan application and documentation requirements

The IFR includes the application and documentation requirements for Second Draw PPP Loans. The documentation required to substantiate an applicant’s payroll cost calculations is generally the same as documentation required for First Draw PPP Loans.

However, no additional documentation to substantiate payroll costs will be required if the applicant (i) used calendar year 2019 figures to determine its First Draw PPP Loan amount, (ii) used calendar year 2019 figures to determine its Second Draw PPP Loan amount (instead of calendar year 2020), and (iii) the lender for the applicant’s Second Draw PPP Loan is the same as the lender that made the applicant’s First Draw PPP Loan. In such cases, additional documentation is not required because the lender already has the relevant documentation supporting the borrower’s payroll costs.

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. Such documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, quarterly financial statements or bank statements. 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 loan, but must be submitted on or before the date the borrower applies for loan forgiveness

I will be providing further information regarding Second Draw PPP Loans in the coming days and weeks, as the need for such loans persist among the many small businesses still suffering and trying to survive through this pandemic!

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