Round Two: Reauthorization of the Paycheck Protection Program
On December 27, 2020, H.R. 133 – the Consolidated Appropriations Act, 2021 (the “CAA 2021”) was signed into law. The CAA 2021 not only provides an omnibus spending bill for the 2021 fiscal year, it also contains provisions for economic aid to businesses facing continuing financial hardships caused by the ongoing COVID-19 pandemic. Among other things, Title III (the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act) of the CAA 2021 (the “Economic Aid Act”) reauthorizes the Coronavirus Aid, Relief, and Economic Security Act, as amended by H.R. 266 – the Paycheck Protection Program and Health Care Enhancement Act and H.R. 7010 – the Paycheck Protection Program Flexibility Act of 2020 (together with guidance issued by the U.S. Small Business Administration and the U.S. Treasury, collectively, the “CARES Act”) in the amount of $284.45 billion. These funds are not only available to new borrowers under the Paycheck Protection Program (the “PPP”), they are also available, subject to satisfaction of certain conditions precedent, to existing PPP borrowers as Second Draw Loans (“Second Draw Loans”), through the application deadline of March 31, 2021. In addition, the Economic Aid Act also expands what is deemed to be an eligible expense under the PPP and simplifies the loan forgiveness process for certain borrowers.
New PPP Borrowers
Those small business concerns that did not take advantage of the loans made available pursuant to the PPP under the Cares Act last year, may do so now pursuant to the Economic Aid Act. Beginning on January 11, 2021, these borrowers are able to apply for a PPP loan subject to compliance with the terms and conditions, including, without limitation, the eligibility requirements of the Cares Act. The loan amount is determined pursuant to the criteria set forth in the Economic Aid Act (see below) with the maximum loan amount remaining at $10 million. Those seeking a PPP loan for the first time should be mindful of the permitted uses of the loan proceeds (as modified by the Economic Aid Act) as well as guidance released during the duration of the initial PPP loan program and thereafter, including, without limitation, the FAQs. A copy of the FAQs can be found here.
Second Draw Loans
Beginning on January 13, 2021, certain small business concerns can apply for a Second Draw Loan pursuant to Section 311 of the Economic Aid Act which temporarily adds the “Paycheck Protection Program Second Draw Loans” to the SBA 7(a) Loan program. To be eligible for a Second Draw Loan, the borrower must satisfy the following conditions:
The borrower must have received an initial PPP loan pursuant to the Cares Act (the “First Draw Loan”);
- The borrower must have completely utilized the proceeds of its First Draw Loan for eligible expenses or will completely utilize the proceeds of its First Draw Loan for eligible expenses on or prior to disbursement of the Second Draw Loan;
- The borrower must have 300 or fewer employees;
- The borrower must have experienced revenue reduction of 25% or greater in 2020 relative to 2019;
- The borrower must not have permanently closed its business; and
- The borrower must not have previously received a Second Draw Loan.
The same affiliation rules from a First Draw Loan apply, except that the Economic Aid Act provides for certain waivers and/or exemptions for eligible news organizations and religious organizations, and lowers the maximum number of employees as set forth above. Furthermore, if a business was not eligible to receive a First Draw Loan then it is not eligible for a Second Draw Loan. This includes, for example, businesses that received disbursements of a First Draw Loan but were later determined to be ineligible. The Economic Aid Acts also amends the list of ineligible businesses by adding the following categories of businesses:
- “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 (22 U.S.C. 612);
- a person or entity that receives a grant for shuttered venue operators under section 324 of 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 (15 U.S.C. 78f).” See the IFR, pages 11 to 12.
Second Draw Loans are generally subject to the same loan terms contained in the CARES Act, such as the following:
- Collateral is not required;
- personal guarantees are not required;
- the interest rate is 1%;
- the Second Draw Loan term is five years; and
- at least 60% of the proceeds must be used towards Payroll Costs as defined in the Cares Act.
A notable difference is that the maximum loan amount for a Second Draw Loan is now limited to the lesser of 2.5 months of the borrower’s average monthly payroll costs or $2 million. The methodology for determining a borrower’s monthly average payroll costs has also changed. The Economic Aid Act provides that for a Second Draw Loan, it is “either the twelve-month period prior to when the loan is made or calendar year 2019.” See the IFR, page 13. In addition, the covered period will now be not less than eight weeks and not more than twenty-four weeks measured from the date that the Second Draw Loan is disbursed to the borrower.
Expansion of Eligible Uses of PPP Proceeds
In additional to the eligible uses permitted pursuant to the CARES Act, the Economic Aid Act expands eligible uses for both First Draw Loans and Second Draw Loans, to include:
- Covered Operations Expenses: payment of “any business software or cloud computing services 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;” See CAA 2021, page 2046.
- Covered Property Damage Costs: costs attributed to “property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.” See CAA 2021, page 2046.
- Covered Supplier Costs: expenditures made by a business to a supplier for goods that are “essential to the operations of the entity at the time at which the expenditure is made; and 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.” See CAA 2021, page 2046-2047.
- Covered Worker Protection Expenditures: “operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act … with respect to the Coronavirus Disease 2019 (COVID-19) expires related to the standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.” See CAA 2021, pages 2047–2048.
- Certain Group Insurance Payment: payments made for group life, disability, vision, and dental insurance benefits. See CAA 2021, page 2061.
Second Draw Loan Application Process
The application process for a Second Draw Loan remains basically the same as for a First Draw Loan, provided that if borrower applies for the Second Draw Loan with the same lender from which it obtained its First Draw Loan, and borrower used its 2019 figures to determine both the amounts of its First Draw Loan and its Second Draw Loan, then the borrower will not have to submit additional documentation of its payroll costs unless requested by lender for a good-faith review. In addition, for loans that are greater than $150,000, at the time of application the borrower must submit documentation that demonstrates the required 25% decline in revenue. For loans of $150,000 or less, this documentation must be submitted at the time the loan forgiveness application is submitted upon the request of the SBA.
It is important to note that if a borrower’s First Draw Loan is being reviewed by the SBA for eligibility (for either receipt of the First Draw Loan or the amount received), the SBA will issue notice to the lender when it applies to the SBA for the guaranty of the Second Draw Loan. Until the issues related to the First Draw Loan are resolved to the satisfaction of the SBA (which the IFR provides will be resolved “expeditiously”), the borrower will not be able to obtain a Second Draw Loan. Per the IFR, “these procedures do not disqualify an eligible unresolved borrower from receiving a Second Draw PPP Loan, in recognition that many flags will be resolved in the borrower’s favor. … SBA will set aside available appropriations to fund Second Draw PPP Loans applied for by unresolved borrowers in the event they are approved.” See IFR, page 18.
Simplified Loan Forgiveness Application for Loans of $150,000 or Less
To the joy of many PPP borrowers and lenders, the Economic Aid Act provides that the SBA will release a single page certification form to be completed by borrowers of PPP loans of $150,000 or less. This will greatly expedite the loan forgiveness application process for over 86% of First Draw Loan borrowers by reducing the paperwork, time, and expense that borrowers (and lenders alike) have to spend on the forgiveness application. The SBA has to release this single page certification form on or before January 20, 2021. For those borrowers with loans greater than $150,000 the loan forgiveness process remains unchanged.
As with the initial Paycheck Protection Program, we anticipate guidance to be issued on a rolling basis and we will continue to monitor this continually developing area and will keep our clients updated. We encourage our clients to reach out not only to us, but also to their local lenders with any questions that they may have regarding the economic assistance programs available.
If you have any questions regarding eligibility for or interpretation of the CAA 2021, please feel free to reach out to our Commercial Finance and Secured Lending attorneys, Christine H. Price at (516) 265-1176 or email@example.com, Brett P. Garver at (516) 880-7266 or firstname.lastname@example.org and Brian P. Boland at (516) 880-7239 or email@example.com.
For businesses with a NAICS code beginning with 72, the same 300 or fewer employee limit per physical location applies as do the other eligibility requirements pursuant to the Economic Aid Act. See Small Business Administration, Interim Final Rule, 13 CFR Parts 120 and 121, Docket No. SBA-2021-0002, RIN 3245-AH63, Business Loan Program Temporary Changes; Paycheck Protection Program Second Draw Loans. (the “IFR”)
 This is calculated by comparing the borrower’s quarterly gross receipts for a quarter in 2020 with the gross receipts from the corresponding quarter in 2019. In addition, if a borrower was in operation for all four quarters of 2019, it can also demonstrate a reduction in its annual receipts of 25% or greater by submitting copies of its annual tax forms from 2020 and 2019 to confirm such decline. See the IFR pages 6-7.
 See the IFR for additional information that is outside the scope of this article. A copy can be found here.
 There are exceptions to this new maximum loan amount for certain business entities. See the IFR page 13-15.
 The Economic Aid Act provides for different methodologies for specific borrower categories, such as new entities that do not have 12-months or prior payroll costs, seasonal businesses and borrowers assigned a NAICS code starting with 72. For more info, please see subsection (f) of the IFR.
 U.S. Small Business Administration, Paycheck Protection Program (PPP) Report Approvals through 6/30/2020.