The team at Acara Partners is working actively to monitor changes to legislation that impact our clients’ PPP loans. We’ve received another update from our attorneys: Brenner, Saltzman & Wallman LLP (BSW), who have pulled together the below synopsis.
As you may know, a bill to amend the law applicable to PPP loans has been passed by the House and Senate. It is expected that President Trump will sign the bill into law soon.
In short this bill:
1. imposes some new PPP requirements,
2. gives PPP borrowers some flexibility,
3. clarifies some points that were uncertain under the existing law and guidance,
4. introduces some new uncertainties, and
5. seems to have some unintended consequences.
Overall, the amendments effected by this bill are generally positive for most (but not all) PPP borrowers, especially those that have disproportionately large non-payroll expenses (such as rent or utilities) or whose staff has been sidelined due to the closure or significant curtailment of borrower’s operations in order to comply with federal guidelines. If the bill becomes law, my office will be issuing a full client alert. In the meantime, here are some highlights of this bill as well as some initial takeaways and practical considerations and implications.
Borrowers must spend 60% or more of the entire PPP loan on payroll costs.
The positive from this amendment: up to 40% of a PPP loan can be used for non-payroll costs. The negative: the 60% threshold for payroll costs now applies to the entire PPP loan amount (not just the portion of the loan amount for which forgiveness is requested, as provided in prior SBA guidance). If less than 60% of the PPP loan is spent on payroll costs, there is no forgiveness for any portion of the PPP loan. In addition, the bill clearly states that it applies retroactively to the date the PPP program came into effect and, thus, to pre-existing PPP loans. This retroactive change seems quite unfair to PPP borrowers who relied on the existing law and guidance which, at worst, only required that at least 75% of the amount of the requested loan forgiveness (i.e. not 75% of the entire PPP loan) be spent on payroll costs. Indeed, it isn’t immediately clear that such a retroactive rule change could be imposed on existing loans since borrowers deep into their 8 week covered period may be unable to retroactively comply. In addition, it is unclear how this amendment will apply to borrowers that voluntarily repaid a portion of their PPP loan (for example, after applying the liquidity/access to capital test): Will the 60% threshold apply to the original PPP loan amount or only to the reduced PPP loan amount after the voluntary repayment? Hopefully, there will be further guidance from the Treasury Department that addresses these issues.
Borrowers have more time to spend PPP money and still qualify for loan forgiveness.
This bill extends the “covered period” to spend PPP money from 8 weeks after the PPP loan proceeds were received to the earlier of: (a) 24 weeks after the PPP loan proceeds were received, or (b) December 31, 2020. This extended covered period applies to all new PPP loans. If this extended period applies, a borrower will need to maintain the requisite FTE and wage levels for the remaining 16 weeks not funded by the PPP loan proceeds or else face a significant potential reduction in loan forgiveness. Importantly, while this extended covered period also applies to an existing PPP loan, an existing PPP borrower may elect to use the original 8 week covered period. This election may help some existing borrowers, but it may not be advantageous to others.
The measuring date under one of the safe harbors for avoiding loan forgiveness reductions based on reductions in FTEs is extended from June 30th until the end of 2020.
Under the existing law and guidelines, one of the methods to avoid a reduction in loan forgiveness is for a PPP borrower that reduced the number of FTE employees or wages for continuing employees between February 15, 2020 and April 26, 2020 to restore “no later than” June 30, 2020, the number of FTEs and the wages of continuing employees to at least 75% of their wages as of February 15, 2020. This bill extends that restoration deadline from June 30, 2020 until December 31, 2020. Curiously, the December 31st date applies even if a borrower with an existing loan elects the option to continue with an 8 week covered period and not utilize the 24 week period to calculate loan forgiveness expenses. The impact of this amendment should be evaluated by any existing borrower that might need to use this alternative method to calculate the loan forgiveness reduction based on the level of FTEs. Note that it still remains unclear whether a borrower is required to maintain its restored level of FTE employees and wages for any specific period of time prior to the applicable deadline.
For new PPP loans only, a borrower will have at least 5 years to repay the portion of a PPP loan that is not forgiven.
Contrary to some commentary you may have seen, this new maturity date only applies to PPP loans made after the bill becomes law. This extended period to repay does not apply to the current maturity date of 2 years for existing PPP loans, unless the PPP lender otherwise agrees to extend the existing maturity date (and such extension is documented in an amendment to the loan documents).
Proportional reductions in loan forgiveness due to FTE reductions can be avoided under 2 new safe harbors.
The bill provides that loan forgiveness will not be reduced due to a reduction in FTEs if:
1. A borrower is able to document it attempted to rehire laid off or furloughed staff but was unable to do so and was not able to hire similarly qualified individuals by December 31, 2020; or
2. A borrower (such as restaurant) is able to document that it was unable to return to its pre-COVID-19 level of business activity due compliance with federal guidelines for sanitization, social distancing or other safety requirements related to COVID-19. Please note this safe harbor only applies to certain federal guidelines and is not available if a business activity was reduced to due compliance with state restrictions or guidelines or governmental orders, which in some states may be more restrictive than the federal guidelines.
Don’t wait to do your forgiveness projections.
Although we expect that the SBA’s form Application for loan forgiveness may change, the amendments effected by this bill reinforce the importance of taking the time to calculate projected loan forgiveness in detail by following the instructions in the Application. The option for existing PPP borrowers to use the original 8 week covered period to calculate forgiveness or extend to 24 weeks, and the change in the measuring date for the safe harbor to restore a borrower’s workforce, each could have a significant impact on loan forgiveness. A pro forma projection of forgiveness as of the end of the 8 week period as well as the end of the 24 week period should be done by every existing PPP borrower so it is better informed when deciding whether to elect a 8 or 24 week covered period. Based on our conversations with PPP borrowers, it appears that many have not yet done an initial projection of loan forgiveness and many of those that have done their projections were surprised to see that their initial understanding of the loan forgiveness amount was inaccurate due to their failure to fully understand the nuances of the loan forgiveness rules as implemented by the Application. Some of those misunderstandings were underestimating forgivable expenses and others were including some expenses that were not forgivable or miscalculating the FTEs. We continue our prior recommendation that all borrowers “do the math” and project their expected loan forgiveness now.
Some of the amendments in this bill are inconsistent with some of the existing SBA rules related to forgiveness of PPP loans.
That means the Application for Loan Forgiveness and SBA guidance on certain forgiveness topics should be updated. If past is prologue, those updates may raise new questions and uncertainty.
