Are you done with PPP? Yeah, you know … no, no, not me. Sigh. In recent weeks, we have seen a significant uptick in SBA rejections of forgiveness applications among clients, portfolio companies and acquisition targets. We are also seeing SBA inquiries that expressly indicate SBA is leaning toward whole or partial rejection unless a borrower is able to provide further information that will persuade SBA otherwise. Many borrowers, like their advisers who are already both sprinting and slogging through literally the busiest M&A year ever (Peak M&A indeed), are confused about how to respond while also wondering “What took so long?”

To answer that, it may be useful to explain how we got here.  Explain!?  No, there is too much.  Let me sum up:

· The implementation of the PPP in mid 2020 was beset by delays, system crashes and confusing and contradictory rulesfrom SBA.

·       Throughout multiple PPP extensions and upsizes, SBA prioritized new loan applications to get money out to beleaguered borrowers, successfully funding more than 11 million PPP loans for almost $800B.  At the same time, SBA was tasked with implementing the RRF and SVOG, leaving it with little-to-no resources to process forgivenessapplications.

·       By this summer, PPP and RRF were out of money and SBA was able to divert resources from processing new loan applications to (finally) reviewing PPP forgiveness applications.  Through the summer and fall, we saw a great number of client and target loans forgiven with little, if any, follow up inquiry from SBA.  This was cause for optimism that SBA seemed to be forgiving virtually all of even the larger PPP loans.  Many of us were finally able to close the browser tab with the PPP rules that had been constantly open for 18 months.

·       However … well, in case you’ve forgotten with PPP, there is ALWAYS a however … 

 

·       Many other forgiveness applications languished for long periods with no response whatsoever.  We now believe that SBA had identified problems with many of these loans, but deferred acting on them.  The SBA’s original proposed rule on the PPP appeal process had drawn significant commentary and criticism.  Based on conversations with industry and government contacts, we believe that SBA decided to postpone issuing most denials of forgiveness until it could issue a revised rule with an improved appeal process.

·       In September, SBA issued its final rule on PPP appeals.  Shortly thereafter, we began to notice a dramatic increase in more detailed SBA inquiries and, eventually, denials of forgiveness.

 

In our work with PPP borrowers and their prospective buyers and investors, we have noticed a few trends in these SBA inquiries and decisions:

 

·       One of the more common issues to date is the treatment of 1099 contractors, whom some borrowers had improperly treated as employees for PPP purposes.

 

· Borrowers are entitled to use the rules in effect when they applied for their PPP loan. Given the number of changes in these rules, it can be challenging to determine exactly what those rules were on the date of that application. In addition, many rules changed between the first round and second round, most notably the treatment of foreign employees. Borrowers who properly excluded foreign employees in their first round application have been surprised to learn that they were no longer permitted to exclude such employees when applying for their second round loan thus driving their employee count above 500 and possibly rendering them ineligible for their second draw PPP.

·       Somewhat surprisingly, most of the issues have involved front-end eligibility for the loan itself rather than more nuanced accounting-driven issues regarding the use of proceeds.  It is unclear whether SBA is not digging as deeply into those issues or … whether SBA has just further deferred loans with those issues to being even lower in the priority stack.

·       In many cases, SBA appears not to be properly applying its own rules.  For instance, there is significant confusion both with borrowers and within SBA itself as to the difference between the affiliation rules which applied for size eligibility and the concept of the “corporate group” which applied to limit the aggregate amount of PPP loans among borrowers who have a single parent entity.  Loans among borrowers that are merely affiliated but that do not have a single common parent are not aggregated for purposes of the loan limit.

 

· That said, it is hard to discern a true pattern because the decisions seem to be wildly inconsistent. In many cases, PPP first round loans were approved for forgiveness while second round loans under nearly identical applications and facts are being denied (or vice versa). In addition, some borrowers are receiving inquiries or denials on loans where we are aware of other borrowers who successfully obtained forgiveness on virtually the same facts.

 

So, where does that leave us? First and foremost, there is still lots of good news here. SBA data indicates that it has approved almost 8.9 million (97%) of the 9.1 million filed forgiveness applications. Remember though that the overwhelming majority (8.3M of 11M) PPP loans were for less than $50k and thus subject to virtually no forgiveness scrutiny. Thus, it’s worth noting that the 200,000 forgiveness applications which have not yet been approved are for loans that are on average almost 20% larger than those already forgiven.

 

As we move forward, borrowers should pay close attention to SBA requests and think strategically about how to respond (if at all).  We have seen several borrowers successfully persuade SBA to grant forgiveness by thoroughly and thoughtfully responding to the SBA inquiry. 

·       The most successful responses have included both financial information and a narrative description that helps SBA understand the borrower’s circumstances.  Our advice has generally been to not just paint the picture for SBA, but to “paint it in crayon” so that it is easy to understand.

·       Borrowers may want to request confidential treatment under FOIA of sensitive financial information contained in any PPP submission, including its responses to SBA inquiries. 

·       Finally, of a borrower receives a final negative decision, it has within 30 days to file an appeal.  

 

A key takeaway here is sadly that no news is probably not good news.  Even for more recently filed forgiveness applications, our anecdotal experience indicates that forgiveness approvals are coming quickly, while denials or detailed inquiries still come much more slowly.   Thus, potential buyers and investors may be increasing skeptical of assurances from a target PPP borrower that its long-ago-filed forgiveness application is highly likely to be forgiven.  In any event, all parties to such a transaction should take care to follow the now well-established SBA PPP change-of-control guidelines (escrowing the PPP amount, etc.).  Even with the increase in forgiveness denials, PPP issues impacting deals seem to thankfully be settling into a relatively market position on reps and indemnities, absent the occasional issue around state tax deductibility and/or accounting treatment of loan amounts or forgiveness.

 

And on that hopefully final, final note on the PPP saga, I’ll say to all a good night.  Wishing all of you the best during this Holiday (and deal madness) Season.  I hope that you are able to get a break to enjoy time with your friends, family and loved ones.  Onward and upward in 2022!



It appears that PPP Loan necessity questionnaires are no longer required to be submitted to SBA, as SBA is “eliminat[ing] the loan necessity review” for loans of $2M and up. We have not seen an official public statement from SBA, but I have confirmed with multiple contacts that SBA sent the email below email last Friday (July 2) to its lender network. Assuming it is accurate, which I believe it to be, this is great news for PPP borrowers, as well as their investors and potential acquirers.

In what is likely closely-related good news, we have received many reports over the past few weeks of SBA approving forgiveness on PPP loans of all sizes, including many loans above $2 million.  We originally thought that this primarily due to SBA reallocating resources after formally closing the portals for both new PPP loans as of May 31 and for new RRF applications, as of June 30. 

Again, this is great news for PPP borrowers … but it of course would not be the PPP program without a little final dose of confusion thrown in.  The email below refers to “Loan Necessity Questionnaires (SBA Form 3510 and 3511)”.

·       Form 3509 is the loan necessity questionnaire for for-profit borrowers.

·       Form 3510 is the loan necessity questionnaire for non-profit borrowers.

·       Form 3511 is the “affiliation worksheet” for borrowers.

From the context of the email, it seems clear (by PPP standards of clarity) that the above is likely just a typo and mistaken reference.  Nothing in the email appears to distinguish between non-profit and for-profit borrowers, so I believe that the actual intent is to do exactly what the email says:  “eliminate the loan necessity review” for all borrowers.    That interpretation is also consistent with the limited information that has previously been available on this.  The news seems to have been first mentioned in a June 23 tweet from the Associated General Contractors of America, which had filed suit against SBA to halt its use of the forms.  AGC noted that in the course of settlement conversations with SBA, AGC “learned of SBA’s decision to completely withdraw the questionnaire.”  The AICPA’sJournal of Accountancy reported that at least one SBA district office appeared to confirm this decision.  

Despite what is hopefully just a typo, the email below seems to be further confirmation of this decision, subject of course to final rulemaking, which we will hopefully see soon. It remains to be seen what level of review, if any, SBA will undertake with respect to the necessity of PPP loans independent of whether these forms are required. Stay tuned, as we will provide an update if/when we see one on that.

Kudos to Brandy Sargent on our team for first picking up the scent that this was happening.

By now, you’ve probably seen the news that the PPP is out of money.  Here are some quick thoughts on what that means for PPP borrowers and their lenders, investors and potential acquirors, as well as initial thoughts on the interplay with the RRF:

 

·         SBA has not made a formal announcement, but we have confirmed it with numerous people who have heard from SBA that all funds will be exhausted by applications already in the queue, other than about $8B left in the set aside for CDFIs, which serve underserved markets and borrowers.  The news caught many off guard, as SBA had been approving ~$7-10B of new loans per week.  As of Sunday night, SBA reportedhaving approved only $258B of 2021 PPP loans, leaving ~$34B of $292B appropriated for 2021 funding.  The average 2021 loan size is under $50,000.   Based on those numbers, SBA is dealing with a huge backlog of applications, which will likely take some time to clear.

 

·         While this news comes as a bitter disappointment to borrowers waiting for loans (especially those who had to make a difficult calculus of whether to apply for either PPP or RRF), it does at least provide some clarity and hope for existing PPP borrowers and the many private equity and strategic buyers who are or soon will be considering acquiring or investing in a PPP borrower:

o   We can now estimate a timeline on when the last borrowers will be through their forgiveness periods, which gives us some clarity on what future M&A timing might look like for PPP borrowers, which are challenging to acquire while still using PPP proceeds during their forgiveness periods.  If the last loans are approved and funded by May 31, then:

§  The minimum 8-week forgiveness period will end sometime around August 1, 2021.  This means the very last PPP borrowers can then apply for forgiveness, even if they have not used all of their PPP funds

§  The maximum 24-week forgiveness period for the very last PPP borrowers will expire around November 15, 2021.  Again, all such borrowers can apply for forgiveness.  Amounts used after that point generally won’t impact forgiveness.

§  As of this time every single PPP borrower will (finally) be eligible to apply for forgiveness, which also means that every single PPP borrower will be at least potentially eligible to comply with the SBA safe harbor for consummating a change of control transaction without SBA consent (e.g., having applied for forgiveness and putting PPP loan amount into escrow). 

 

o   It also frees up SBA resources to focus on PPP forgiveness applications.  SBA’s priority in 2021 has been to get new PPP loan applications processed, which has relegated SVOG, RRF and even PPP forgiveness to a bit of a lower priority. 

§  We still are not seeing any material progress on forgiveness applications for most PPP loans of $2M+,which are all subject to automatic “review” by SBA.  (IF YOU ARE SEEING PROGRESS ON THESE LOANS, PLEASE LET ME KNOW).  It has become clear that SBA is taking that review seriously, in particular asking questions of borrowers who have public company or private equity ownership.  Once SBA works through the backlog of new applications, it will be able to reallocate its bandwidth to PPP forgiveness … and the other programs.

§  Expect SBA to continue prioritizing getting money out the door, which means that forgiveness may still take a back seat to SVOG and RRF applications, with RRF comprising the vast majority of the required work.  The National Restaurant Association recently estimatedthat TTM restaurant sales were off by $280B, which is roughly 10x the $28B RRF appropriation, although:

·         Much of that decline is attributable to restaurants who are too big (>20 units) for RRF or are among the 110k estimated to have permanently closed; and

·         Some of the demand would be reduced by a portion of the $39B of prior PPP loans that has going to food, beverage and hospitality borrowers, as PPP amounts must be netted against RRF fundings.

§  It is too early to tell when RRF will run out of money (but it does appear to be a when and not an if) or whether Congress will allocate more funds to RRF, but if no further funds are added, SBA may be able to fully shift away from RRF applications and thus devote significantly more resources to PPP forgiveness applications sometime in June or July, hopefully unclogging the logjam of pending applications.

 

o   Despite the lack of progress on larger loans, we have seen smaller loans forgiven in as few as 3 days and they seem to be progressing through the forgiveness process fairly easily.  SBA reports that it has approved forgiveness on 2.9M PPP loans that were borrower in 2020 (almost 60% of the 5.2M 2020 PPP loans).

§  $242B has been forgiven and only $0.8B “not forgiven.”  We don’t know if that means SBA denied forgiveness of that $0.08B or if borrowers self reported that they were not eligible for forgiveness of that amount. 

·         But either way, this means that less than 0.3% of PPP borrowing amounts for which a forgiveness decision has been made have been determined to be ineligible for forgiveness. 

·         That makes some sense, as the smaller loans are moving through the system more quickly and under much more relaxed standards than apply to larger loans.  Thus, I expect that “not forgiven” percentage to rise, perhaps significantly.

§  183k loans, with a principal amount of $84.3B, are “under review by SBA.  That’s an average loan size of $460k, well below the $2M threshold for automatic review.  There were only about 29k loans of $2M+ in 2020, so that means that there are more than 150k loans under $2M currently pending SBA forgiveness review, although this number also may include smaller loans that will be forgiven quickly, but for which applications were submitted shortly before the report was tabulated.  (It would be helpful if SBA would define “under review” and/or clarify how many loans are currently undergoing a more formal “audit”-like process.)

 

·         The White House issued an RRF Fact Sheettoday announcing that:

o   182,600 “eligible businesses” have applied for funding (it’s not clear whether that means that an eligibility determination has been made on that number or whether it’s just a drafting quirk using the “eligible business” term from the regs; I’d bet on the latter).

o   97,600 (53%) came from businesses owned by women, veterans and/or economically disadvantaged individuals, whose applications will be prioritized in the first 21 days of the program.

o   61,700 (33%) came from businesses with under $500k of revenue ($5B is set aside for these restaurants).

o   SBA did NOT publish information on requested RRF funding amounts.

o   No word yet on approvals, but President Biden celebrated tacoTuesday Wednesday(?) at what he announced was the first restaurant to receive RRF funding.

 

·         Businesses that applied for RRF funding were required to withdraw any pending PPP application.  This may explain why SBA has now determined that PPP was out of money.

o   Before the PPP deadline had been extended from March 31 to May 31, SBA had previously said that it would only open the RRF after PPP was finished.  With the extension, that wasn’t feasible and SBA began accepting applications on May 3 … just one day before it informally announced that PPP was essentially out of money.

o   It seems likely that SBA was able to determine that there were not enough PPP funds left to cover pending PPP applications, even after giving effect to those that would be withdrawn by RRF applicants.  We understand that SBA is using applicant and owner EINs to cross check applications across the various stimulus programs, including PPP, SVOG and RRF. 

 

With any luck, this will be the last one of these that I need to send.  Despite my criticisms of the rule-making around the program, it’s important to remember that in 2019, SBA processed 63THOUSAND 7(a) loans.  In the 14 months leading up to May 31, 2021, they will have processed more than 11 MILLION PPP loans, with an aggregate principal amount of more than $800 billion, of which at least $480 billion(60%) will have been used to pay workers and support their families.  That’s tremendous accomplishment.

It’s been a while since I’ve sent one of these and although I certainly haven’t missed the late nights (on non-deal work), I have missed the great responses and interactions from and with so many of you.  Thanks for your support and encouragement, especially during those frantic days one year ago at this time, when the rules seemed to change every night.  (Ironically, the program was announced to run out of money on May (the) Fourth, exactly one year after the height of public company and PE-backed borrowers returning PPP loans (AKA:  These are not the loans you’re looking for) before the original return safe harbor deadline of May 8, 2021.) 

I hope you, your teams and your families are safe and healthy, and vaccinated, so that we can hopefully resume traveling and connecting in person soon. The first round is on me.

Ok campers, rise and shine and … what’s that?  You’re longing for a Groundhog Day update on where we are in the seemingly endless loop of PPP questions?  Well, I got you, babe.  Sit down, grab an entire carafe of coffee and let’s get after it.

1.       As politicians in DC debate new stimulus measures and economists debate whether the PPP program was actually helpful, SBA released yesterday updated loan data:

Loan Type

Count

Funded

2021 First Draw Loans

226,336

$  4.8 B

Second Draw Loans

664,708

$68.0 B

Total

891,044

$72.7 B

2.       Behind that data though, PPP lenders and SBA are struggling to simultaneously process both new loan apps and forgiveness apps at the same time.

a.       Many lenders have only one portal or the other open.  Most are leaning toward having the portal open for new loans because:

                                                   i.      Idealist view: Their customers/borrowers need access to the PPP capital before it runs out in order to keep people employed.

                                                 ii.      Cynical view:  Banks get fees for new loans and not for forgiveness.

                                               iii.      Goldilocks (realist) view:     Some of the FinTech and other service providers who enabled the huge volume of loan applications are not providing support for the forgiveness portal.  Banks are doing what they can and applications are much easier because they already have systems set up to process new loan applications whereas forgiveness is much, much harder, so they are focusing on what is possible.   

b.       SBA has scrapped the e-Tran system for a new system that much morethoroughly vets applications on the front end.  

                                                   i.      The original goal of the program was to get the money out to borrowers and their employees ASAP. 

                                                 ii.      Now that SBA has had time to stand up a system, they are being more cautious.  This means many loan application reviews are taking longer due to the front-end vetting, perhaps due to an SBA OIG report identifying 43,000 PPP loans totaling $11.7B that exceeded the maximum properly borrowable amount by ~$3.7B.

                                               iii.      This has led to sometechnical glitches and capacity issues, but SBA is proactively communicating procedures to resolve these issues.

                                               iv.      At the risk of being the guy who states the obvious (I got you, babe), both borrower and lenders should take care to ensure that their applications are accurate, both for new loans and for forgiveness.  “Data mismatches” are raising red flags at SBA and causing delays in both processes.

3.       New First and Second Draw PPP Loans:  

a.       It is becoming increasingly common for lenders to require information re loan applications above and beyond what is required in the statute, both in order to avoid the dreaded “data mismatch” and for enhanced BSA/KYC screening.

b.       Even with a 25% revenue decline, second draw borrowers still must make the “necessity certification” that, at the time of the second draw funding “current economic uncertainty makes the loannecessary to support the ongoing operations of the borrower.”

c.       The above delays in forgiveness approvals are significantly stalling second draw loan processing for “unresolved borrowers”, as noted in the ABA letter to SBA.  

                                                   i.      The second draw IFR provides that the SBA will not approve a loan to any borrower whose first draw loan is “under review by SBA.”

                                                 ii.      SBA appears to be interpreting this broadly to mean any loan for which a forgiveness application has been submitted and not approved by SBA, even if SBA has not formally “flagged” the loan for review.  

                                               iii.      SBA had previously been rejecting application from such borrowers, but now will flag them as pending and keep them in a queue, as contemplated by the IFR.

                                               iv.      We had heard that some banks were not allowing borrowers to apply for second draw loans prior to submitting a forgiveness application for their first draw loan, but it sounds like this has been resolved as SBA has clarified that borrowers of second draw loans of more than $150k need to apply for first draw forgiveness not later than simultaneously with applying for second draw forgiveness, even if the first draw forgiveness amount is zero.  This implicitly means that they need not apply for first draw forgiveness before applying for the second draw loan in the first place.

d.       Potential mismatches in employment levels for payroll-cost borrowing base periods vs. employee-count measurement periods are kicking out otherwise valid loans, with SBA imposing a $30k / employee cap on second draw loan amounts and rejecting those applications, as also noted in the ABA letter to SBA.

                                                   i.      The $30K limit appears to be based on 3.5X the $100k per employee borrowing cap / 12 months.

                                                 ii.      This comes as a surprise to many borrowers because the EAA and recent SBA IFRs allow borrowers to use 2019, 2020 or for entity borrowers the current TTM period to measure payroll costs for their PPP borrowing base.  However, FAQ 14 remains in effect which does not require PPP borrowers to match their employee count measurement periods to that same payroll period. 

                                               iii.      Thus, borrowers who have had a significant headcount reduction in 2020 may want to get the best of both worlds by using their lower 2020 headcount to fall below the 300 employee limit for second draw loans while simultaneously using theirhigher 2019 payroll amountsas borrowing base, only to have SBA reject the loan entirely because the lower headcount numbers cause the requested loan amount to exceed $30K per employee.

NOTE:  SBA has issued several consolidated IFRs, but has not yet meaningfully updated its FAQs after passage of the EAA.  On Friday (29 Jan), SBA added three new FAQs that clarified FinCEN and BSA requirements for second draw loans and to clarify that college-owned radio stations need not include employees of their owner college or university when determining PPP second draw availability.  However, re remainder of the FAQs remain unchanged and are thus still applicable unless they have been superseded.  The online FAQs now contain a header that they are “in the process of being revised” to reflect changes under the EAA.

e.       Many borrowers who obtained first draw loans under early versions of SBA regulations are now finding that the “grandparenting” of their first draw eligibility does not apply to a potential second draw loan, thus finding themselves ineligible.  This is most notable for borrower with foreign affiliates who relied on the initial exclusion of foreign employees, which was later reversed and then ”clarified” to uphold the reversal.

f.        The same affiliation rules applicable to first draw loans apply both to the second draw employee count andthe second-draw 25% revenue decline threshold, leading to some odd results regarding both.  It can be especially challenging for borrowers with affiliates to calculate their revenues for purposes of showing the decline.  In some instances, confidentiality concerns are effectively keeping private equity portfolio companies from applying for second draw loans (which frankly, from SBA’s perspective, may be a feature and not a bug).

g.       Borrowers and lenders alike seem to have some confusion on loan amounts:

                                                               i.      No borrower can get afirst draw loan of more than $10M.

                                                             ii.      No borrower can get asecond draw loan of more than $2M.

                                                           iii.      Affiliated borrowers who are part of a “corporate group” (majority owned by a common parent) cannot get more than $20M in the aggregate of first AND second draw loans.

                                                           iv.      Affiliated borrowers who are part of a corporate group cannot get more than $4M in second draw loans, which amount is reduced if that corporate group received more than$16M in first draw loans (i.e., 16 + 4 = $20), such that the $4M second draw cap is effectively as sublimit within the aggregate $20M cap.

h.       Confusion reigns regarding calculation of revenue declines for borrowers who bought and sold other businesses during 2019 or 2020.  To grossly oversimplify the apples-to-apples comparison that the regs try to create:

                                                   i.      Businesses bought via a stock acquisition should be included for all of 2019 and 2020 including any pre-acquisition periods;

                                                 ii.      Businesses sold via stock dispositions should be excluded for all of 2019 and 2020, including any pre-disposition period (i.e., you can’t sell a subsidiary to create a 25% revenue decline);

                                               iii.      Businesses bought or sold as a “segregable division” in an asset deal, are included for the period of ownership.  (This is nuanced though).

i.         The EAA was clear that the Save our Stages (SOS) Shuttered Venue Operator Grants (SVOG) are not available to borrowers who obtain a PPP loan in 2021.  However, entities who even apply for a 2021 PPP loan are not eligible due to “how the PPP loan system operates.” Presumably this means that once an application is approved, the SBA systems are inadequate to determine whether such loan has actually been funded, as we had previously seen where applicants who had declined PPP loans, were nonetheless mistakenly listed in SBA disclosures as having received loan.

4.       Forgiveness Process Updates

a.       Forgiveness on loans under $2Mseems to be flowing relatively smoothly, *if* the borrower has fully and accurately completed the application.

b.       Forgiveness on loans over $2M is lagging well beyond the 90-day stated review period.  In fact, based on inquiries as recently as Friday, we have not heard of any borrowers yet receiving forgiveness on loans above $2M.

                                                   i.      SBA is carefully vetting bothdirect and indirect ownership, including looking at TINs.

                                                 ii.      Lenders and SBA have indicated that many of the forgiveness delays are being caused by those data mismatches, often caused by minor typographical errors (such as inconsistent loan amounts or maturity dates in the SBA system vs the forgiveness application), arithmetic errors by borrowers or missing information. 

                                               iii.      SBA has said that this is being exacerbated byborrower delays in correcting those, even when asked.  Our contacts at SBA have said that if a borrower doesn’t respond within 2-3 business days, the loan file goes back into the general stack and may not get picked up for a while and likely may then be handled (randomly) by a different reviewer.  In the unlikely event someone again needs to state the obvious (I got you, babe),if SBA or the lender ask you a question or point out an error, respond quickly and accurately.

c.       The enhanced review threshold for PPP loans above $2M *appears* *FOR NOW* to be applied by SBAseparately to first and second draw loans (e.g., a PPP borrower with a first draw loan of $1.1M and a second draw loan of $1.1M does not currently appear to be treated as a $2M borrower and thus automatically subject to enhanced review).  This essentially leads to a complex wedding cake-tiered PPP classification:

                                                  i.      Loans of $2M or more:  Are getting the “Full Monty” review, including submission of theForm 3509 (or 3510 for nonprofits) and a detailed review by SBA. NOTE that the $2M is tested in the aggregateacross affiliated borrowers.

                                                 ii.      Loans up to $2M:  are presumed to have made the “necessity certification” in good faith.

                                               iii.      Second draw loans >$150k:  borrowers must apply for forgiveness on their first draw loans not later than simultaneously with their application for second draw forgiveness, even if their first draw forgiveness amount is zero.  

                                               iv.      Loans of >$50k to $150K: may use the simplified forgiveness application and still need to certify, but do not need to demonstrate compliance with the FTE and salary/wage maintenance requirements.  Second draw borrowers of up to $150K also need not provide evidence of the 25% revenue reduction at the time of applying for the second draw loan, but must provide such evidence upon applying for forgiveness.

                                                 v.      Loans of $50k or less:  are not subject to reduction in forgiveness for FTE or salary/wage reductions.  (NOTE: this is calculated withoutaggregating PPP loans if affiliates.)

d.       Many leveraged lenders amended credit agreements to exclude PPP loans from debt for purposes of their financial covenants.  However, some of those (non-PPP) lenders to PPP borrowers are surprised to learn that under GAAP the borrowers are recognizing the forgiveness amount as income (or as an elimination of the related payroll, etc. expenses), either of which could EBITDA for covenant compliance purposes.  Whether this amount is actually includable in EBITDA of course requires a close read of the specific EBITDA definition in the credit docs.

5.       Two quick forgiveness substance updates, based on the consolidated forgiveness and loan review IFR that came out, perhaps ironically, on January 19:

a.       SBA is requiring employment levels to be restored to pre-pandemic levels in order to achieve forgiveness on 2021 first and second draw loans.

b.       The safe harbors to cure FTE reductions and/or salary/hourly-wage reductions must be restored prior to the end of a 2021 PPP loan’s forgiveness period (whereas for 2020 loans, the restorations could be made any time in 2020).

The good news is that the rewritten IFRs are, with the benefit of time and public comment, much better written and that both SBA and the lenders are doing their best.  Unfortunately neither SBA nor most banks (especially smaller ones) have the resources for a task this size, and it’s unfair to expect perfection at this point.  At the risk of being a broken record, we have to remember that the PPP lenders and SBA have pumped nearly 6 million loans through a system that did 67 thousand loans the year before.  For SBA it’s even more challenging because they also have had the pending Save our Stages (SOS) Shuttered Venue Operator Grant (SVOG) program thrown on their plate.   That portal is not open yet, but is expected to open very soon.  If you’re looking for information on that, well  I (we) got you, babe.  We’ve formed a team to cover that program and have an alert in process.  Stay tuned for that shortly.

In the meantime, here’s hoping that Phil does NOT see his shadow, that the vaccines and other measures work and that this long, dark literal and figurative winter quickly comes to a end.

Both the House and Senate have now passed the $900M stimulus bill that includes $285 Billion for first and second draw PPP loans, and it heads to the president for signature.  It is not clear when that will happen, or when SBA will reopen the PPP application portal as the Act gives them 10 days to issue implementing regulations for the new provisions here.  

The high level summary is that:

•          Expenses paid with PPP proceeds are (finally) deductible.

•          The PPP program is funded for applications through March 31, 2021.

•          For first time borrowers the eligibility requirements, process and loan terms generally remain the same, with some additional flexibility around the length of the covered period and seasonal employers get some additional flexibility.

•          The bill creates a new “Second Draw PPP” facility allowing second PPP loans of up to $2.0M for borrowers who:

o got a first PPP loan and have used “or will use”(?) all of that first PPP loan,

o   have less than 300 employees,

o   can demonstrate a 25% decline in revenue for any quarter in 2020 vs the same quarter in 2019 (or vs. Q1 2020 for newcos), and

o   aren’t engaged in lobbying, and aren’t affiliated with China.

•          Creates simplified applications and forgiveness for loans under $150k.

•          Expands affiliation waiver an loan availability for news organizations.

•          Creates grants of up to $10M for live venue operators, promoters, theatrical producers, museums, movie theaters and talent representatives, subject to some pretty detailed eligibility requirements described below.

The full text of the bill is linked above.  The House Democrats released a helpful summary of the key provisions (Yes, I just used “House Democrats” and “helpful” in the same sentence unironically).  I’ve pasted their relevant PPP summaries below, which I’ve lightly edited for clarity and brevity and to which I’ve added a few explanatory and editorial notes.  

Note that we are still digesting some of this, so stay tuned for updates.  We are planning at least one webinar on this, but probably will wait until after the first of the year when the SBA implementing regulations come out and dealflow returns to a more survivable pace.   In the meantime, please let us know if you have questions on any of this.

SUMMARY OF KEY PPP PROVISIONS

Sec. 276. Clarification of tax treatment of Paycheck Protection Program loans.

The provision clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a Paycheck Protection Program (PPP) loan. This provision also clarifies thatdeductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven, and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. The provision is effective as of the date of enactment of the CARES Act. The provision provides similar treatment for Second Draw PPP loans, effective for tax years ending after the date of enactment of the provision.

Sec. 278. [Provides the same treatment as above foremergency EIDL grants, certain loan repayment assistance, Targeted EIDL advances and Grants for Shuttered Venue Operators.]

Title III – Continuing the Paycheck Protection Program and Other Small Business Support

Section 301; 302: Short Title; Definitions.

Section 303: Emergency Rulemaking Authority.

• Requires the SBA Administrator to establish regulations to carry out this title no later than10 days after enactment of this title.

(TRG: This makes the holidays challenging for the SBA regulation drafting team.)

Section 304: Additional Eligible Expenses.

• Makes the following expenses allowable and forgivable uses for Paycheck Protection Program funds:

o Covered operations expenditures. Payment for any software, cloud computing, and other human resources and accounting needs.

o Covered property damage costs. Costs related to property damage due to public disturbances that occurred during 2020 that are not covered by insurance.

o Covered supplier costs. Expenditures to a supplier pursuant to a contract, purchase order, or order for goods in effect prior to taking out the loan that are essential to the recipient’s operations at the time at which the expenditure was made. Supplier costs of perishable goods can be made before or during the life of the loan.

o Covered worker protection expenditure. Personal protective equipment and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent State and local guidance related to COVID-19 during the period between March 1, 2020, and the end of the national emergency declaration. 

• Allows loans made under PPP before, on, or after the enactment of this act to be eligible to utilize the expanded forgivable expensesexcept for borrowers who have already had their loans forgiven. (TRG: Many of the new provisions apply retroactively to all PPP loans, while a few (like this one) apply retroactively to all loans except those already forgiven.  This means that SBA may shut down their forgiveness process for some period of time while they adapt to these new provisions.)

Section 305: Hold Harmless.

• Provides that a lender may rely on any certification or documentation submitted by a borrower for an initial or second draw PPP loan and that no enforcement action may be taken against the lender and the lender shall not be subject to any penalties relating to loan origination or forgiveness if (1) the lender acts in good faith relating to loan origination or forgiveness; and (2) all relevant federal, state, local and other statutory and regulatory requirements are satisfied. 

Section 306: Selection of Covered Period for Forgiveness.

• Allows the borrower to choose a covered period of anywhere from 8 to 24 weeks after origination.

TRG:  This is helpful change that eliminates an ongoing ambiguity about whether FTE and comp measures had to be maintained by Borrowers wanting to use a shorter forgiveness period  (i.e., this means that they do NOT need to be maintained through the prior 24-week period).

Section 307: Simplified Application.

• Creates a simplified application process for loans under $150,000 such that:

o A borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the covered loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. (TRG: it appears that this estimated total amount could be less than 60% of the loan amount.)

·         The borrower must also attest that borrower accurately provided the required certification and complied with Paycheck Protection Program loan requirements.

·         SBA must establish this form within 24 days of enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. 

·         Additionally, borrowers are required to retain relevant records related to employment for four years and other records for three years.

·         The Administrator may review and audit these loans to ensure against fraud.

o Applies to loans made before, on, or after the date of enactment, including the forgiveness of the loan.

Section 308: Specific Group Insurance Payments as Payroll Costs.

• Clarifies that other employer-provided group insurance benefits are included in payroll costs. This includes, group life, disability, vision, or dental insurance.

• Applies to loans made before, on, or after the date of enactment, including the forgiveness of the loan.

Section 310: Clarification of and Additional Limitations on Eligibility.

• Clarifies that a business or organization that was not in operation on February 15, 2020 shall not be eligible for an initial PPP loan and a second draw PPP loan.

• Prohibits eligible entities that receive a grant under the Shuttered Venue Operator Grants from obtaining a PPP loan.

Section 311: Paycheck Protection Program Second Draw Loans.

• Creates a second loan from the Paycheck Protection Program, called a “PPP second draw” loan for smaller and harder-hit businesses, with a maximum amount of $2 million.

• Eligibility. In order to receive a Paycheck Protection Program loan under this section, eligible entities must: o Employ not more than 300 employees; (TRG:  There is no specific guidance on how (or when) the employee counts will be measured.  We need the implementing regs for this, but it seems likely that this may be measured as of the date of the original PPP loan application which was calculated using the average over the 12 months preceding that original application.)

o Have used or will use the full amount of their first PPP; and (TRG: “will use” creates significant ambiguity here…)

o Demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter.

·         Provides applicable timelines for businesses that were not in operation in Q1, Q2, and Q3, and Q4 of 2019.

·         Applications submitted on or after January 1, 2021 are eligible to utilize the gross receipts from the fourth quarter of 2020.

·         (TRG: basically a 25% reduction YOY for any quarter in 2020 vs the corresponding quarter in 2019 OR for new business vs Q1 2020.)

• Eligible entities must be businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives. (TRG: same as the original PPP eligibility, subject to the new exclusions below.)

• Ineligible entities include: entities listed in 13 C.F.R. 120.110 (TRG: same exclusions (and exceptions therefrom) as apply to initial PPP loans) subsequent regulations except for

·         entities involved in political and lobbying activities including engaging in advocacy in areas such as public policy or political strategy or otherwise describes itself as a think tank in any public document, 

·         entities affiliated with entities in the People’s Republic of China;

·         registrants under the Foreign Agents Registration Act; and

·         entities that receive a grant under the Shuttered Venue Operator Grant program.

• Loan terms. In general, borrowers may receive a loan amount of up to 2.5Xthe average monthly payroll costs in the one year prior to the loan or the calendar year. No loan can be greaterthan $2 million. 

o Seasonal employers may calculate their maximum loan amount based on any 12-week period beginning February 15, 2019 through February 15, 2020.

o New entities may receive loans of up to 2.5X the sum of average monthly payroll costs.

o Entities in industries assigned to NAICS code 72 (Accommodation and Food Services) may receive loans of up to 3.5X average monthly payroll costs.

o Businesses with multiple locations that were eligible entities under the initial PPP requirements [are still eligible if they have no more than] 300 employees per physical location.

o Waivers of affiliation rules that applied during initial PPP loans apply to a second loan. (TRG: NAICS 72, franchises, SBIC, etc.)

o An eligible entity may only receive one PPP second draw loan.

o For loans of not more than $150,000, the entity may submit a certification attesting that the entity meets the revenue loss requirements on or before the date the entity submits their loan forgiveness application and non-profit and veterans organizations may utilize gross receipts to calculate their revenue loss standard.

• Loan forgiveness. Same as the original PPP, including the 60/40 split.

• Churches and religion organizations. Expresses the sense of Congress that the Administrator’s guidance clarifying the eligibility of churches and religious organizations was proper and prohibits the application of regulations otherwise rendering ineligible businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs. Codifies that the prohibition on eligibility in 13 CFR 120.110(k) shall not apply for initial or second draw loans.

• Forgiveness Reductions.  Specifically, applies the rule of reducing loan forgiveness for the borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25 percent. Extends existing safe harbors on restoring FTE and salaries and wages. 

·         Allows the SBA and Treasury Department to jointly modify any date in section 7A(d) consistent with the purposes of the Paycheck Protection Program. (TRG: Not entirely sure what this means, but I think it’s just a housekeeping change that hopefully won’t result in mischief or confusion.)

Section 312: Increased Ability for Paycheck Protection Program Borrowers to Request an Increase in Loan Amount Due to Updated Regulations.

·         Requires the Administrator to release guidance to lenders within 17 days of enactment that allows borrowers who returned all or part of their PPP loan toreapply for the maximum amount applicable so long that they have not received forgiveness.

·         Additionally, this section allows borrowers whose loan calculations have increased due to changes in interim final rules to work with lenders to modify their loan value regardless of whether the loan has been fully disbursed, or if Form 1502 has already been submitted. 

Section 313: Calculation of Maximum Loan Amount for Farmers and Ranchers under the Paycheck Protection Program.

• Establishes a specific loan calculation for the first round of Paycheck Protection Program loans for farmers and ranchers who operate as a sole proprietor, independent contractor, self-employed individual, who report income and expenses on a Schedule F, and were in business as of February 15, 2020. These entities may utilize their gross income in 2019 as reported on a Schedule F. Lenders may recalculate loans that have been previously approved to these entities if they would result in a larger loan. 

• Applies to PPP loans before, on, or after the date of enactment, except for loans that have already been forgiven.

Section 314: Farm Credit System Institutions.  [OMITTED]

Section 315: Definition of a Seasonal Employer.

• Defines a seasonal employer to be an eligible recipient which: (1) operates for no more than seven months in a year, or (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.

• Applies to any loan made before, on or after enactment including the forgiveness of the loan.

Section 316: Housing Cooperatives.

• Extends PPP eligibility to housing cooperatives defined in section 216(b) of the Internal Revenue Code of 1986 and which employ no more than 300 employees.

Section 317: Eligibility of News Organizations for Loans under the Paycheck Protection Program.

• Makes eligible FCC license holders and newspapers with more than one physical location, as long as the business has no more than 500 employees per physical location or the applicable SBA size standard; and makes eligible section 511 public colleges and universities that have a public broadcasting station if:

o The organization certifies that the loan will support locally focused oremergency information. 

• Waives affiliation rules for newspapers, TV and radio broadcasters, and public broadcasters, as long as the organization has no more than 500 employees per physical location or the applicable SBA size standard. 

• Waives the prohibition against publicly-traded news organizations from being eligible if the business certifies that the loan will support locally focused or emergency content. TRG:  Interestingly, this section also refers to subsidiaries of public companies, but the actual prohibition in 342 below does NOT seem to apply to subs.

Section 318: Eligibility of 501(c)(6) and Destination Marketing Organizations for Loan Under the Paycheck Protection Program.

• Expands eligibility to receive a Paycheck Protection Program loan to include the following organizations:

o 501(c)(6) organizations if: 

§ The organization does not receive more than 15 percent of receipts from lobbying;

§ The lobbying activities do not comprise more than 15 percent of activities;

§ The cost of lobbying activities of the organization did not exceed $1,000,000 during the most recent tax year that ended prior to February 15, 2020 and

§ The organization has 300 or fewer employees.

§ Professional sports leagues or organizations with the purpose of promoting or participating in a political campaign or other political activities are not eligible under this section.

o Destination Marketing Organizations if: 

§ The organization does not receive more than 15 percent of receipts from lobbying;

§ The lobbying activities do not comprise more than 15 percent of activities;

§ The organization has 300 or fewer employees; and

§ That destination marketing organization is registered as a 501(c) organization, a quasi-government entity, or a political subdivision of a state or local government.

Section 319: Prohibition on Use of Loan Proceeds for Lobbying Activities.

• Prohibits any eligible entity from using proceeds of the covered loan for lobbying activities, as defined by the Lobbying Disclosure Act, lobbying expenditures related to state or local campaigns, and expenditures to influence the enactment of legislation, appropriations, or regulations.

Section 320: Bankruptcy Provisions. 

• Establishes a special procedure in the bankruptcy process if the Administrator determines certain small business debtors are eligible for Paycheck Protection Program loans. It requires court approval for Paycheck Protection Program loans to these debtors and requires any such loan be given a superpriority claim in the bankruptcy process, providing additional protection to taxpayers and participating banks. The provisions in this section would take effect only upon a written determination by the Administrator that certain small business debtors are eligible for Paycheck Protection Program loans and would sunset two years from the date of enactment.

TRG:  Note that the superpriority provisions only appear to apply to PPP loans incurred by a debtor already in a bankruptcy proceeding at the time the PPP is incurred, and thus do NOT appear to PPP borrowers who filed for bankruptcy protection after incurring the loan.

Section 321: Oversight. 

• Requires the SBA to comply with GAO requests no later than 15 days, and requires the SBA to submit a detailed justification to Senate and House Small Business Committees if they are unable to comply with the request. It also would require the Secretary of the Treasury and SBA Administrator to testify within 120 days of enactment of this Act and not less than twice per year for the next two years to the Senate and House Small Business Committees. 

Section 322: Conflicts of Interest.

• Requires the President, Vice President, the head of an Executive department, or a Member of Congress as well as their spouse that has received a PPP loan to disclose this status at forgiveness or 30 days thereafter. It would also prohibit the covered individuals from receiving a loan in the future.

Section 323: Commitment Authority and Appropriations.

• Extends the time of the program to March 31, 2021.

• Sets the authorization level for PPP at $806.5 billion. 

• Separates regular 7(a) and PPP loans to ensure the continued operation of the 7(a) program by setting an authorization level of $75 billion and clarifies the 7(a) program level and secondary market cap. 

• Direct appropriations:

o $284.45 billion for PPP, including the following set-asides:

§ Lenders: 

  o $15 billion for PPP loans (initial and second draw) issued by community financial institutions, including community development

financial institutions (CDFIs) and minority depository intuitions (MDIs);

o $15 billion for PPP loans (initial and second draw) issued by certain small depository institutions.

§ Borrowers: 

o $35 billion for first-time borrowers, $15 billion of which for smaller, first-time borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas;

o $25 billion for second draw PPP loans for smaller borrowers with 10 or fewer employees, or loans less than $250,000 in low-income areas.

§ After 25 days, the SBA Administrator may adjust the set-asides as necessary.

o $25 million for the Minority Business Development Centers program under the Minority Business Development Agency (MBDA);

o $50 million for PPP auditing and fraud mitigation purposes;

o $20 billion for the Targeted EIDL Advance program, of which $20 million for the Inspector General;

o $57 million for the Microloan program as described in section 29;

o $1.9 billion to carry out sections 26, 27, and 28;

o $3.5 billion for the Debt Relief program as described in section 25;

o $15 billion for grants for live venues as described in section 24.

Section 324: Grants for Shuttered Venue Operators.

• Authorizes $15 billion for the SBA to make grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25 percent reduction in revenues.

(TRG:  Each of the above categories has detailed definitions and eligibility limitations (such as charging a ticket, cover or admission fee) that would likely exclude most restaurants, bars and other venues that only occasionally host live performances or movie nights and excludes operators that:

•          Are subs of public companies;

•          That operate in more than 1 country, more than 10 states and have more than 500 employees (in each case with affiliates);

•          Receive a PPP loan after this Actis enacted (so it appears than entities who got a prior PPP loan may be eligible); or

•          Present live performances, depictions or displays of a “prurient sexual nature.”  

• There is a set-aside of $2 billion for eligible entities that employ not more than 50 full-time employees, and any amounts from this set-aside remaining after sixty days from the date of implementation of this program shall become available to all eligible applicants under this section.

• The SBA may make an initial grant of up to $10 million dollars to an eligible person or entity and a supplemental grant that is equal to 50 percent of the initial grant. 

•          In the initial 14-day period of implementation of the program, grants shall only be awarded to eligible entities that have faced 90 percent or greater revenue loss.

•          In the 14-day period following the initial 14-day period, grants shall only be awarded to eligible entities that have faced 70 percent or greater revenue loss.

•          After these two periods, grants shall be awarded to all other eligible entities.

• Such grants shall be used for specified expenses such as payroll costs, rent, utilities, and personal protective equipment.

Section 325-330[OMITTED; THESE APPLY TO EIDL AND NON-PPP 7(a) LOANS]

Section 325: Extension of the debt relief program.

Section 326: Modifications to 7(a) Loan Programs.

Section 327: Temporary Fee Reductions.

Section 328: Low-Interest Refinancing.

Section 329: Recovery Assistance under the Microloan Program.

            Section 330: Extension of Participation in 8(a) Program.

Section 331: Targeted EIDL Advance for Small Business Continuity, Adaptation, and Resiliency.

Section 332: Emergency EIDL Grants.

Section 333: Repeal of EIDL Advance Deduction.

Section 334: Flexibility in Deferral of Payments of 7(a) Loans.

Section 335: Documentation Required for Certain Eligible Recipients.

• Allows more flexibility for the Administration to accept documentation beyond those enumerated in the CARES Act to determine eligibility for sole proprietors and the self-employed. 

Section 336: Election of 12-week Period by Seasonal Employers.

• Expands the seasonal period to any 12-weeksbetween February 15, 2019 and February 15, 2020.

• Applies to loans before, on, or after the date of enactment, except for loans for which the borrower has already received forgiveness.

Section 337: Inclusion of Certain Refinancing in Nonrecourse Requirements.

• Ensures applicants cannot be held liable if they didn’t understand they had recourse against them at the time they took the PPP and EIDL loans after a refinancing. (TRG: There’s no “didn’t understand” requirement here.  This simply reinforces that PPP loan proceeds that were used to refinance a prior 7(a) loan incurred from Jan 31, 2020 until the start of the original PPP program are nonrecourse, just as if they were used for any other permitted purpose.)

Section 338: Application of Certain Terms through Life of Covered Loan.

• Clarifies that (1) fee waivers; (2) personal guarantee waiver; and (3) deferral eligibility continues past the covered period and attaches for the life of the PPP loan. 

Section 339: Interest Calculation on Covered Loans.

• Clarifies the interest rate on PPP loans is non-compounding and non-adjustable for all new initial Paycheck Protection Program loans and second draw loans.

•          TRG: It’s not immediately clear what “non-adjustable” means here, but I believe it is meant to essentially mean “fixed” and not “floating” … unless it is meant to mean that a default rate wouldn’t apply to “adjust” (i.e., increase) the applicable interest rate.  Also, it’s a little jarring to see the reference to the 4% interest rate here in the statute, which SBA lowered to 1% in its implementing regs.

Section 340: Reimbursement for Processing.

• Provides for PPP lender reimbursement by SBA for new PPP loans.

• Establishes a tiered reimbursement rate for PPP loans: (1) Loans of less than $50,000 that is equal to the lesser of 50 percent of the loan principal or $2,500; (2) loans of more than $50,000 and not more than $350,000 equal to five percent of the loan principal; (3) loans of more than $350,000 and less than $2,00,000 equal to three percent of the loan principal; and (4) loans of more than $2,000,000 equal to one percent. 

• Clarifies lender reimbursement by SBA may be made no later than 5 days post-disbursement.

• Clarifies PPP borrowers who knowingly retained a loan agent may not pay agent fees out of the PPP proceeds. This applies to PPP loan before, on, or after the date of enactment, including during forgiveness of such loan. 

Section 341: Duplication Requirements for Economic Injury Disaster Loan Recipients.

• Permits certain EIDL borrowers to also apply for a PPP loan.

Section 342: Prohibition of Eligibility for Publicly Traded Companies.

• Excludes publicly traded companies from PPP eligibility.

TRG: This does NOT apply retroactively and seems to:

·         only apply to the public issuer itself and not to any of its wholly-owned subsidiaries (though don’t be surprised if SBA applies this to those subs via the implementing regs); and

·         NOT apply to Second Draw PPP Loans (perhaps through a drafting quirk), such that public companies would not be eligible for a first PPP loan, but would be eligible for *second* PPP loan if they had already received and used a first PPP loan (but again, SBA may expand that via the implementing regs).

Section 343: Covered Period for New PPP Loans.

• Extends the covered period for all PPP loans through March 31, 2021.

• Applies to loans made before, on, or after the date of enactment, including the forgiveness of such loan.

TRG:  This is pretty confusing, but should just mean that borrowers can apply for these first and second draw PPP loans through March 31, 2021.

Section 344: Covered Period for Other Purposes.

• Clarifies the applicable period for employee’s salaries of $100,000 on an annualized basis as prorated during the period in which compensation is paid or incurred.

Sections 345-348 OMITTED:

Section 345: Extension of Waiver of Matching Funds Requirement under the Women’s Business Center (WBC).

Section 346: Clarification of Use of CARES Act Funds for Small Business Development Centers (SBDCs).

Section 347: GAO Report

Section 348: Effective Date; Applicability.

Further information;

Following yesterday’s announcement of a bipartisan, bicameral agreement on COVID-19 relief, Congressional leaders have released the legislative text of the $900 billion agreement, which they attached to the FY2021 government funding omnibus legislation. The release of the more than 5,500 pages of combined text comes after Congress announced the agreement on Sunday and passed a 24-hour continuing resolution to avoid a government shutdown and give staff time to finish drafting the text. A copy of the government funding legislation with the COVID-19 relief agreement is available here. Joint explanatory statements for each of the 12 annual appropriations divisions for FY2021 are available here. In addition, House Democrats released the following section-by-section summaries of appropriations, COVID-19 relief provisions, and authorizing matters.

Given that the current continuing resolution keeping the government funded expires at midnight, the House attached a week-long stopgap funding bill to its rule for the package, which would give more time for the Senate and the President to approve the measure. As of this afternoon, Democratic and Republican leaders anticipate that they have the votes necessary to approve it, though it is worth noting that some members have expressed concerns about having insufficient time to review the package.

The K&L Gates Responding to COVID-19 resource center, which includes a variety of updates from across the firm’s platform, can be found here. Thank you.

IRS has issued new guidance that provides significant flexibility allowing buyers of PPP borrowers to continue using the Employee Retention Tax Credit (ERTC) in most structures currently being used in the market today.   It’s always a beautiful day for the deal community when IRS actually does something to help M&A deals, so let’s cherish the day* and dive in.

Recall that the ERTC is not available to PPP borrowers and to other companies that are part of that PPP borrower’s “Aggregated Employer Group,” because they are all treated as a single employer for purposes of ERTC eligibility.  This had previously left significant uncertainty regarding ERTC eligibility for buyers who acquire a PPP borrower in a stock deal, and thus become treated as a single employer with that PPP borrower because the acquisition makes them part of the same Aggregated Employer Group.

The weight of that uncertainty has been at lastlifted by the new guidance.  So you don’t have to lose yourself reading the new FAQs 81a and 81b, we will summarize them here:

·        In stock deals, the  buyer (referred to in the new FAQs as the “Acquiring Employer”) of a PPP borrower (the “Target Employer”) may continue using the ERTC across all of its Aggregated Employer Group, other than the PPP Borrower Target Employer, for both pre- and post-closing periods, as long as no other member of that group has received a PPP loan and as long as the Acquiring Employer otherwise meets the eligibility requirements (i.e., partially or fully suspended operations due to governmental lockdown orders due to COVID-19, or has a significant decline in gross receipts vs. 2019), and no prior ERTC amounts are subject to recapture.  This applies to all legacy buyer entities, even if the PPP Borrower Target Employer does not pay off the loan or fit in the safe harbor described below.

·        In a stock deal, the PPP Borrower Target Employer itself becomes eligible to use the ERTC “on and after the closing date” as part of the buyer’s Aggregated Employer Group if, and only if, prior to closing of the stock acquisition, it has “fully satisfied” the PPP loan or fits in the SBA safe harbor by submitting a forgiveness application and establishing an “interest-bearing escrow account” in the amount of at least the PPP loan balance, as described in the SBA’s October 2 notice, as summarized in our email below.  

o   To clarify, if the PPP Borrower Target Employer does not either pay off its PPP loan or comply with the safe harbor described below, then that entity (and the buyer’s Acquiring Employer Aggregated Employer Group) cannot claim the ERTC for “wages paid to any employee of the Target Employer before or after the closing date.” 

o   Our tax team is further analyzing this, but to a mere corporate lawyer like me it’s not immediately clear wither the “before or after” clause modifies “wages” or “employee”, such that a buyer could transfer target employees to a buyer entity immediately after closing and thus claim the ERTC for wages paid by the other entity.

·        In asset deals, a somewhat similar rationale applies.  The Acquiring Employer can continuing claiming the ERTC for all of its legacy employees even if it assumes the PPP loan in connection with the asset deal.  However, if the Acquiring Employer does assume the PPP Borrower Target Employer’s PPP loan, then it cannot claim the ERTC for any wages paid “after the closing date to any individual who was employed by the [PPP Borrower] Target Employer on the closing date.”  (This structure has not been used much, if at all, in our experience).

Prior to this guidance, it had been challenging to structure the purchase of a target with a large PPP loan by a buyer had made or intended to make signficant use of a PPP loan in situations where an asset deal was not ideal due to regulator, third-party contractual consent or other issues.   Most of us were not expecting something this helpful, so the times, they are a-changin’.  This approach provides significant flexibility to buyers and should faciliate a risinglevel of these and other M&A transactions involving PPP borrowers by eliminating the buyer’s potential loss of the ERTC, and by (surprisingly?) bestowing a halo on the acquired PPP borrower and allowing it to begin utilizing the ERTC after the sale.

(But, don’t say the the thrill is gone just yet.  Should we stay tuned for clever tax practitioners to create acquisition structures designed to facilitate use of the ERTC? Only in America. At least until IRS or SBA changes its approach and for that, there’s always tomorrow.)

*The songs underlined above are found on President Obama’s Promised Land playlist,which he announced (perhaps ironically?) in a tweet on Monday. We intend no political statement here; just noting there’s some pretty good music on there. (Though I have to say, I would have expected Dreams instead of Rhiannon, but maybe he figured that had been recently taken. Either way, the Fleetwod Mac renaissance continues.)

Yes, SBA streamlined forgiveness for loans under $50k, but the IFR also tries to clarify how to handle a borrower whose payroll and non-payroll costs exceed its loan amount. This is getting much less attention, but it applies to borrowers with loans of ANY SIZE and is important and helpful, so let’s Jump in.

1.       Once PPPFA extended the covered period to 24 weeks, we began to get questions from borrowers about whether they could use forgiveness costs that exceed their PPP loan amount so that when such amounts were reduced by the FTE and salary/wage reduction requirements the borrowers could still get full forgiveness.  Let’s look at the math briefly. 

a.       A borrower with a $1M PPP loan who cut its FTE number (and thus payroll cost) by 50% , may only have $500k of payroll expense for an 8 week period, which under the 60% rule allows for another $333k of non-payroll costs, totaling $833k of forgivable expenses.  But, because the FTE count is reduced by 50% that borrowercan only achieve $416.5k of actual forgiveness.

b.       By extending to a 24 week period, that same $1Mborrower now has $1.5M of payroll expense, $1M of non-payroll costs for $2.5M of forgivable expenses.  Applying the 50% FTE reduction now yields a maximum forgiveness of $1.25M  Obviously, it can’t get more than its full loan amount forgiven, but the full original $1M is now forgivable under this approach.

However, it was not clear whether a borrower could actually use that full $2.5M amount as the starting point, because it is in excess of the loan amount.  The new IFR asks the question “What should a lender do if a borrower submits documentation of eligible costs that exceed a borrower’s PPP Loan Amount?” and “answers” it by saying :

“The amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.  … [A] lender should confirm receipt of the documentation … verifying payroll and nonpayroll costs … up to the amount required to reach the requested Forgiveness Amount.” 

Would it have killed them to actually ANSWER their own question by adding “even if such costs exceed the PPP loan amount”??  However, even with SBA’s usual suboptimal drafting and without the clarifying language, the bold language above *seems* to be a pretty clear indication that, yes, the borrower can use the higher amount ($2.5Min the example above) because that is the amount required to be used to reach the full requested ($1M) forgiveness amount.  Despite me nitpicking the language, this is to some extent the Best of Both Worldsand actually a very good result for borrowers and hopefully removes any uncertainty around this approach.

2.       Turning to the headline story, the streamlining for loans under $50k primarily consists of:

a.       Allowing those borrowers to ignore the FTE and salary/wage reductions.

b.       Eliminating any requirement for the lender to verify such a borrower’s forgiveness data or calculations.  The lender need only confirm that the borrower has made the necessary certifications and submitted supporting documentation.

The first part of the rule is pretty close to a nothing burger. Out of 5.2 million PPP loans, 3.57 million are under $50k and 1.7M of these reported zero employees, so this “streamlining” doesn’t affect them at all, but SBA needed a “hook” on which to tell congress to Beat It, so that SBA could take the streamlining into its own hands.  The latter is really the key driver here.  Many banks have said “I’ll Wait” and have held off on opening their forgiveness portals because of the costs and headaches involved in processing each forgiveness application.  This new rule eliminates most of the processing requirements for more than 60% of the PPP loans (3.5M / 5.2M), which is what the banks have been demanding.   

SBA notes that the remaining cohort of 1.87M loans under $50k represents only 9% of the PPP principal balance probably wouldn’t be impacted by the FTE or salary/wage reductions because … SBA doesn’t think that they reduced FTEs or wages and if they did, well, by golly, they probably fall into one of the safe harbors.  SBA cites exactly ZERO data in making this assertion, but it’s frankly hard to give SBA much grief for this. Keep in mind that SBA’s hands are largely tied by the CARES Act and Congress’s inability to reach agreement on a legislative fix for smaller loans.  (Though you could argue that there are plenty of areas where SBA has simply made up PPP law on its own, here they seem to be trying to creatively color within the statutory lines).  Absent congressional action, this seems to be a reasonable fix, even though it may not be what the banks and smaller borrowers were fully hoping for.  It will be interesting to see whether this change is Good Enough and, when combined with the recent change of control rule noted below, will put pressure on banks to open their forgiveness portals Right Now.  

Also, in a mini flashback to the Eruption of IFRs and FAQs from early summer, SBA also added a new FAQ (#52) on Wednesday night.  It didn’t add anything substantive, merely clarifying that borrowers and lenders do NOT need to modify their PPP notes to reflect the 10 month post-covered-period deferral period implemented by the PPPFA.  That deferral applies regardless and overrides anything in a PPP note to the contrary.

For those who missed our PPP M&A webinar, you can watch the on-demand recording here.  For those who did, I apologize for recycling many of the Eddie Van Halen tributes above.

Happy Trails and have a good weekend.

Please join us for a webinar on M&A deals involving PPP borrowers. We will cover economic, legal, tax, finance and practical issues, including SBA’s recent guidance.

COVID-19: Buying and Selling PPP Borrowers | HUB | K&L Gates
— Read on www.klgates.com/COVID-19-Buying-and-Selling-PPP-Borrowers-10-7-2020

SBA has issued a policy notice (attached) that outlines when SBA consent is required for changes of ownership and asset sales involving PPP borrowers and the limited conditions under which lenders may consent to such transactions without SBA consent.  The policy notice is at best a mixed bag and is summarized in detail below.  

The key takeaways are moderately good news for PPP borrowers who have submitted applications for full forgiveness (or can quickly do so) but are decidedly suboptimal for everyone else:

1.      SBA consent to an M&A deal (whether stock or asset) is required unless, at or prior to closing:

a.      The PPP borrower is has fully utilized the PPP proceeds; and

b.      The PPP borrower has submitted a forgiveness application to its lender; and

c.      The parties escrow the loan balance (in an account in the control of the PPP lender).

2.      The SBA consent process is likely to beVERY unpalatable for most middle market and institutional buyers because:

a.      Transaction documents must be submitted to SBA, which makes them subject to FOIA (although confidential treatment may be requested; it is not clear if it would apply to these types of deal docs).

b.      In asset deals, the buyer must assume the PPP loan.  This is exactly the opposite of what most buyers want and how virtually all PPP borrower asset sales are currently being structured.

c.      SBA has a 60-day review period for any requested consent.  It of course is not clear if SBA will take the full 60 days, but this puts a long potential delay in deals that may not even require HSR approval.

3.      Even for stock deals NOT requiring SBA consent, the identities and ownership percentages of all new equity owners must be disclosed to SBA, as well as the identity and EIN of all owners of at least 20% of the equity of the buyer.

The practical effect of all of this is that:

A.     Virtually all buyers and sellers will likely wait to close transactions until the borrower has fully used its PPP proceeds AND has applied for forgiveness, absent a compelling need to close earlier, and will establish an escrow equal to the loan balance.

B.     Many buyers may not want to disclose their ownership to SBA, and thus these buyers may demand to treat the PPP loan simply as outstanding debt that must be repaid in full at closing.

C.     This may ramp up pressure on lenders to open their forgiveness portals, as a failure to do so could prevent their borrowers from executing M&A transactions.

We are in the process of updating our article covering this, which should come out early this week.  We have also scheduled a Webinar (see the attached invite) on this new M&A guidance, which will also cover updates on market treatment of these deals and other recent PPP developments:

Buying and Selling

PPP Borrowers

Wednesday, October 7
1 p.m. – 2 p.m. ET

Before taking a deeper dive into the new policy notice, here are a couple other quick hits coming from Mnuchin’s interview with House Ways & Means Committee Member Tom Reed (R-NY)  (PPP discussion starts ~3:50):

·        The Secretary defends the decision not to make expenses paid with forgiven loan proceeds deductible (tax indifferent).  This may cause more borrowers to delay forgiveness applications until 2021 (unless of course they are contemplating a sale transaction).

·        He also says the Administration is working to figure out a way to allow a slightly streamlined loan forgiveness feature for loans of $50,000 or less.  This administrative route seems to be an acknowledgement that legislation to streamline the process is unlikely.  This would simplify, but not eliminate, the process for 3.5M of the 5.2M PPP loans.

On to the policy notice:

Covered Transactions.  This rule applies to:

·        “Sales and other transfers” of “at least 20%of the common stock or other ownership” of PPP borrower, in one or more sales in the aggregate since the date of approval of the PPP loan, including to affiliates or existing owners.

o   For public company borrowers, this only applies to transfers that result in one person or entity holding more than 20% of the equity.

o   It is not clear whether “sale or other transfer” would also apply to aprimary issuance of new equity.  It does not appear that this is intended to capture new issuances, but there’s also no exemption for it.

o   But there is also no reference to voting equity, so transfers of non-voting equity may fall within this safe harbor.

·        Sales of more than 50% (by FMV) of the assets of the PPP borrower, in one or more sales in the aggregate since the date ofapproval of the PPP loan.

When Lender May Consent *without* SBA consent.

·        If the loans has been “fully satisfied” (either via payoff, or a final forgiveness decision and SBA’s remittance of funds, or a combination of the two.  (Extremely helpful to know that no consent is required with respect to a loan that is … no longer outstanding).

·         If the equity sale/transfer is for less than 50% of the PPP borrower’s equity, taking account all other transfers since the date of approval.

o   There is no guidance whether this is a fully-diluted calculation, so it will be safest to assume that this applies only to outstanding equity.

o   But there is also no reference to voting equity, so transfers of non-voting equity may fall within this safe harbor.

·        In both stock and asset deals, SBA consent is not required if:

o   The borrower “completes a forgiveness application reflecting its use of *all* of the PPP loan proceeds and submitsit to the PPP lender.”

§  The notice does *NOT* require that either or both of the above actions be completed prior to closing of the transaction.  It is not clear whether this is just the usual poor drafting from SBA or whether it is intended to allow borrowers and lenders to retroactively “fix” deals which have already closed with SBA consent … or if there is some other thinking here. That said, the safest approach is to read this as if it actually does require these to be completed by the M&A closing.

§  “All” proceeds appears to mean that borrowers whose PPP loans would not be fully forgiven cannot avail themselves of this safe harbor.

§  Some lenders have not yet opened their PPP portals. Their borrowers are not eligible to use this safe harbor.

o   An “interest-bearing escrow accountcontrolled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan.”

§  It is not clear if SBA meant for the interest-bearing concept to match the interest rate applicable to the PPP loan (1%), but there is no minimum interest rate specified, so any minimal amount here is probably ok.

§  It’s not fully clear how SBA expects the PPP lender to control the escrow account, and could require the PPP lender to be essentially in the role of a payment or disbursement agent, but it seems reasonable to think that the PPP lender could simply either hold the money in a depository account that it can sweep (i.e., control within the meaning of the UCC), or be a party to an escrow agreement (along with the buyer and seller) with a third party escrow agent.

§  The escrow must be in amount equal to the “outstanding balance” of the PPP loan.  This does not say “principal balance”, so it seems like SBA intends for this escrow account to cover interest accrued through the date of the closing of the M&A transaction.

·        This amount will not, of course, be enough to cover the actual repayment amount if the SBA fully rejects the borrower’s PPP application, which is unlikely for most borrowers, but would be the case if SBA determined that the borrower were ineligible to have received the PPP loan(whether due to an improper “need certification” or otherwise).

·        Thus, buyers may want the escrow account to include some additional interest accrual amount, to cover some reasonable forgiveness determination period.

o   Upon receipt of SBA’s final forgiveness determination (including any appeal), the escrow account must first be disbursed to the PPP lender to pay “any remaining PPP loan balance plus interest.”

SBA Consent Requirements.  In all other covered M&A deals not in the above safe harbor, SBA consent is required.

·        The parties must submit to the PPP lender for submission to the SBA the following:

                 i.          the reason that the PPP borrower “cannot fully satisfy the PPP Note … or escrow funds (This is such a weird way to phrase this and doesn’t seem to account for borrowers who could have most but not all of their loans forgiven and/or who have a lender who hasn’t opened its forgiveness portal, because even in such cases, a full escrow would not fit the borrower in the safe harbor.  The use of “cannot” is especially curious and could potentially indicate an SBA policy position that it will not approve transactions where the PPP borrower “can” use the sale proceeds to pay off the PPP loan, but chooses to instead try to retain those via an application for partial forgiveness now or for future forgiveness in the future.  However, this seems inconsistent with the requirements below regarding segregation and documentation of multiple buyer and seller PPP loans.))

                ii.          details of the requested transaction

               iii.          a copy of the executed PPP Note;

               iv.          any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;

                v.          disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number; and

               vi.          a list of all owners of 20 percent or more of the purchasing entity.

·        As noted above, in asset deals, the BUYER MUST ASSUME  the PPP loan, which his likely to be a deal killer in many situations.

·        “If deemed appropriate, SBA may require additional risk mitigation measures as a condition of its approval of the transaction.”  It is not clear what these might be, but we already see most buyers and sellers escrowing an amount equal to the PPP loan balance (perhaps plus some expected interest amount).  If the PPP lender is a beneficiary of (or controls) that escrow account, it does not seem likely that SBA would ask for much more.

Other Transaction Requirements.  In all deals where the loan is not fully repaid at or prior to closing, the following requirements also apply:

·        In stock deals, the borrower remains subject to all PPP obligations AND the new owners become subject to recourse to SBA if they (the new owners) use the proceeds for any unauthorized purpose.  This will increase the signficiant of due diligence reviews to ensure that anticipated uses of PPP proceeds after closing are permissible.

·        The following requirements appear to be drafted only to apply to stock deals:

o   If any buyer entity has an existing PPP loan, the buyer and its owners must ensure that the proceeds and uses of each PPP loan are fully segregated and documented. 

§  This may be especially challenging if a PPP borrower merges into another PPP borrower.

§  It seems as though this would likely apply to asset deals as well (though SBA may assume that PPP borrowers are not likely to be buyers?).

o   The PPP lender must notify SBA of:

§  The identity of the new equity owners;

§  The new owners’ ownership percentage;

§  EINS for any owners of at least 20% of the equity.

·        In all deals, the PPP lender must notify the SBA of the location and amount of any required escrow account within 5 business days of the closing of the M&A transaction.

·        Note that there are other requirements that apply if the buyer is using a non-PPP SBA 7(a) loan to buy the PPP borrower, but those are not likely to be relevant to most of you, so I’m omitting them.  Let our team know if you have questions about these.

Finally, note that this policy notice is directed at PPP Lenders, and is not an IFR, though it does provide that

“Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.”.

We are reviewing the legal impact of this because, despite that language, it is not clear what the impact of a failure to comply with this notice is on:

A.     PPP borrowers or their lenders with respect to M&A transactions that have already been completed and don’t meet these requiements (although we had recently been seeing SBA essentially enforcing something very similar to this in response to lender requests for consent to PPP M&A deals), or

B.     PPP borrowers who close an M&A transaciton without notifying their lender and/or obtaining any consents that would be required by this notice.