The Consolidated Appropriations Act of 2021, which became law on December 27, 2021, includes a second round of stimulus funding in the form of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act(the "Economic Aid Act"). Among many other measures, the Economic Aid Act further extends and revises the Paycheck Protection Program ("PPP"), which provides loans guaranteed by the Small Business Administration ("SBA") to certain businesses and organizations adversely affected by the COVID-19 crisis. Applications for the prior round of PPP funding closed on August 8, 2020.
The SBA reopened the PPP on January 11, 2021, and will keep it open through March 31, 2021. As of January 11, 2021, eligible businesses and organizations can apply for an initial PPP loan (or "first draw loan"), and as of January 13, 2021, select eligible entities that previously received a PPP loan can apply for a "second draw" PPP loan. The revised PPP also permits certain borrowers to increase their initial loan amount. The SBA published two interim final rules ("IFRs") on January 6, 2021, to implement the Economic Aid Act changes to the PPP program – one for existing and first draw PPP loans and another for second draw PPP loans.
Below, we summarize the key changes to the PPP created by the Economic Aid Act and key features of the second draw loan program. For further information, please refer to our prior coverage of the PPP and the SBA's PPP website.
First Draw Loans and Changes to Existing PPP Loans
Eligibility: Businesses that, together with their applicable affiliates, have 500 or fewer U.S.-based employees or small businesses that meet the SBA alternative size standards or the small business size standard for their particular industries, and that otherwise meet the SBA's eligibility criteria (which we more specifically discuss here and here), are eligible to apply. Independent contractors, eligible self-employed individuals, and sole proprietors are also eligible, as are nonprofit organizations. The Economic Aid Act further expands the eligibility criteria to include housing cooperatives, section 501(c)(6) organizations, and certain destination marketing organizations that, in each case, employ no more than 300 employees. Certain news organizations are also eligible.
Ineligibility: Certain businesses are expressly ineligible for PPP loans, including those that are engaged in activities illegal under federal law, that have previously defaulted on a government-backed loan, with a majority owner that has committed certain felonies or defaulted on government loans, and businesses ineligible under 13 C.F.R. § 120.110. In addition, the Economic Aid Act states that recipients of Shuttered Venue Operator Grants under Section 324 of the Economic Aid Act are not eligible for PPP loans. Additionally, the Economic Aid Act specifically prohibits any publicly traded entity from the PPP loan program.
Maximum Loan Amounts: New borrowers can choose to use either their 2019 or 2020 financial information to calculate their maximum PPP loan amounts. In general, the limit is 2.5 times monthly payroll or $10 million, whichever is less.
Affiliation Rules: The SBA financial assistance programs affiliation rules apply for purposes of determining eligibility, but they are waived for (a) any business with 500 employees or less that is assigned a NAICS code beginning with 72 (restaurants and hospitality), (b) any business operating as a franchise and assigned a franchise identifier code by the SBA, (c) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958, and (d) certain news organizations with NAICS code 511110 or 5151.
Permitted Uses: In addition to existing permitted uses of PPP loans – payroll costs, rent, mortgage, utilities – the Economic Aid Act expands the permitted use of PPP loans to cover certain operations expenditures, as well as costs associated with property damage, supplier disruptions, and worker protection expenditures. Note that payroll expenses now also include group life, disability, vision, or dental insurance benefits. These changes apply to PPP loans made both before and after December 27, 2020.
Operations expenditures include payments for business software or cloud computing services that facilitate business operations, product or service deliveries, processing, payment or tracking of payroll expenses, human resources, sales and billing, accounting or tracking of supplies / inventory / records, etc.
Eligible property damage costs are those related to vandalism or looting from public disturbances in 2020 not covered by insurance or other compensation.
Covered supplier costs are expenditures made for goods that were essential to the operations of the entity when the expenditure was made and made pursuant to a contract, order, or purchase order in effect at any time before the covered period for the applicable loan. For perishable goods, the relevant time period extends to any time before or during the covered period for the applicable loan.
Eligible worker protection costs are those required to adapt business activities to comply with state and local government requirements or guidance (from March 1, 2020, until the national emergency declared with respect to COVID-19 expires) related to maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirements related to COVID-19. Such expenses include, for example, installation of drive-through windows, ventilation and filtration systems, or physical barriers, and such things as health screening for employees and costs associated with new work-from-home arrangements.
Impermissible Uses: The Economic Aid Act also clarifies that PPP loan proceeds expressly cannot be used for lobbying or election activities of any nature, including lobbying expenditures related to state or local elections, or intended to influence enactment of legislation, appropriations, regulation, administrative actions, or executive orders proposed or pending before Congress or state or local legislative bodies.
Forgiveness Procedures: The Economic Aid Act further revises the loan forgiveness procedures as follows, which revisions apply retroactively to prior PPP loans:
(a) Covered Period: A PPP borrower can now decide the length of its forgiveness covered period, which may be between eight and 24 weeks after the date of the loan disbursement.
(b) Simplified Forgiveness Application: For PPP loan amounts of $150,000 or below, the Economic Aid Act has provided for a simplified forgiveness application process under which the borrower signs and submits a certification to the lender meeting the following requirements: (i) the application cannot be more than one page in length; (ii) the borrower need only provide a description of the number of employees the borrower was able to retain because of the loan, estimated loan amount spent on payroll costs, and total loan value; and (iii) the borrower must attest that it has accurately provided the certification, complied with SBA requirements, and retained proper records, as more specifically set forth in the Economic Aid Act.
(c) Deduction of Economic Injury Disaster Loan (EIDL) Advance Amounts: The Economic Aid Act repealed the EIDL advance deduction under the CARES Act, which previously required borrowers to deduct the amount of EIDL advances from PPP loan forgiveness amounts. Borrowers that already took such a deduction in their forgiveness application will be notified by their PPP lender when the SBA has made a reconciliation payment for the deduction (together with interest) and will have their loans re-amortized or paid in full (as applicable), or if the amount remitted to the applicable lender by the SBA exceeds the remaining principal balance of the PPP loan, the PPP lender will remit the excess amount to the borrower.
Audits: No later than February 10, 2021, the Economic Aid Act requires the SBA to establish an audit plan detailing its policies and procedures for conducting forgiveness reviews and PPP loan audits, as well as to release the metrics it will use to determine which covered loans will be audited.
Changes to Interest Rates: Interest rates on PPP loans are now calculated on a non-compounding, non-adjustable basis. Thus, the interest rate will be 100 basis points or one percent, calculated on a non-compounding, non-adjustable basis. This new calculation is applicable after December 27, 2020, and may apply to prior PPP loans upon the agreement of the applicable lender and borrower.
Reapplication for and Increases to Existing PPP loans: In limited circumstances, if a borrower did not apply for the full amount of PPP loan for which it is now eligible, or did not accept the full amount of the PPP loan for which it was approved, it now may apply for an increased loan amount. Any loan increases must be made by the "Lender of Record," which is the current owner of the loan.
Second Draw Loans
A significant feature of the Economic Aid Act is the new program for "second draw" PPP loans. Borrowers that meet the eligibility requirements below, and that have used or will use the full amount of their initial PPP loan (including any increases) by the expected date of disbursement, may apply for a "second draw" PPP loan. Second draw PPP loans are generally guaranteed by the SBA under the same terms, conditions, and processes as first draw PPP loans. The eligibility criteria and certain key terms differ, however, as described below.
Eligibility: A smaller subset of PPP borrowers are eligible for a second loan than were eligible for the first draw. First, such borrowers must have 300 employees or fewer, including all affiliates.1 Second, the prospective borrower must have had at least a 25% reduction in revenue year-over-year from 2019 to 2020. Borrowers may demonstrate this revenue reduction by showing a more than 25% reduction in gross receipts for one quarter in 2020 as compared with the corresponding quarter in 2019 or an overall reduction of 25% or more. Annual tax forms will be used to substantiate revenue decline.
Maximum Loan Amount: The maximum loan amount under a Second Draw Loan is calculated as the lesser of $2,000,000 or 2.5 times the average monthly payroll costs for 2019 or 2020 (as selected by the borrower). This formulation varies for seasonal employers, new entities, and NAICS code 72 entities. The latter can use a multiplier of 3.5 versus 2.5. Small businesses that are a part of a single corporate group (i.e., businesses that are majority owned, directly or indirectly, by a common parent) are capped at $4,000,000 of second draw PPP loans in the aggregate.
Additional SBA Actions to Help Underserved and Special Businesses: To implement the Economic Aid Act, the SBA also issued guidance addressing steps it is taking to better serve smaller businesses and underserved and disadvantaged communities, as well as to provide assistance to minority, underserved, veteran, and women-owned businesses that can encounter difficulties in obtaining PPP loans. To accomplish these goals, the SBA has set aside certain funds for specific types of community financial institutions, and will also only open the PPP program to those entities for an initial period before reopening to all lenders. The specifics of these set asides include:
- $15 billion across first and second draw PPP loans for lending by community financial institutions;
- $15 billion across first and second draw PPP loans for lending by Insured Depository Institutions, Credit Unions, and Farm Credit System Institutions with consolidated assets of less than $10 billion;
- $35 billion for new first draw PPP borrowers;
- $15 billion and $25 billion for first draw and second draw PPP loans, respectively, for borrowers with a maximum of 10 employees or for loans less than $250,000 to borrowers in low-or moderate-income neighborhoods. SBA has determined that at least 25% of each of those set-asides will go to each one of the groups: loans to borrowers with a maximum of 10 employees and loans less than $250,000 to borrowers in low- or moderate-income neighborhoods.
In addition, the SBA will only accept applications from community lenders for at least the first two days when the PPP loan portal reopens, and will set aside dedicated hours to process loans from the smallest PPP lenders. The SBA has also expanded its community outreach programs, and has asked lenders to do the same, especially in underserved communities.
Lender Liability: The Economic Aid Act codifies prior SBA guidance that permits PPP lenders to rely on the certifications of PPP loan applicants and the authenticity of documentation submitted by an applicant for a PPP loan, so long as the submission is made in accordance with applicable statutory requirements, rules, and guidance. Any lender that follows all applicable statutory and regulatory requirements and acts in good faith relating to the loan origination or forgiveness cannot be subject to any enforcement action or penalties.
1 Exceptions to this limitation apply to entities with the NAICS Code 72 and news organizations with multiple locations.
Originally Published by Morrison & Foerster, January 2021
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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