PPP 2.0 Opens, Guidance in Calculating PPP Loan Amounts, Sound and Fury Continues

Good morning – SBA will reopen its PPP portal at 10:30 a.m this morning. Round 1 was “chaotic” and “demand [remains] off the charts.” Chase is reportedly advising its customers that funds “could” (i.e., will) “run out again quickly”, and the banks already have a large volume of applications in the queue to be submitted. Bank of America CEO Brian Moynihan said yesterday that he wants to take away the “foot race” aspect by having Congress allocate more PPP money. Secretary Mnuchin instead says that “the sooner the money is disbursed the better” because it will get into workers hands more quickly and will help the economy bounce back more swiftly.

SBA has reportedly told lenders that it will “pace” the amount of applications and/or approvals, and further impose caps so that larger banks cannot originate more than $60B of PPP loans. That cap is more than four times the $14B originated by JPMC the leading PPP 1.0 lender. I’ve had a running debate with several of you as to whether this funding will go much faster than 1.0 because we have a huge number of number loans teed up in the queue or whether it might last a little longer because SBA will slow down the applications and because you won’t see as many companies borrowing $10M or more because of the public scrutiny. I certainly don’t mean to make light of the pandemic, or the human and economic toll that it is exacting, but since we all missed March Madness this year, I’ll start a friendly pool on this as a distraction. Email me by midnight tonight with your prediction for when the PPP 2.0 funding will be exhausted (date and time (ET)) and a tiebreaker guess at the total PPP loan dollars originated by the two largest PPP lenders. I’ll buy the winner a nice bottle of an adult beverage and make a $100 donation to a COVID-19 charity in your name.

Updates on the ongoing furor over the program are below, but first we turn to still more updated guidance from SBA on loan calculations and other technical aspects of the program. Most significantly, SBA on Friday evening issued guidance on “How to Calculate Maximum Loan Amounts”, which answer some questions but create others.

  • Perhaps most notably, the calculation seems to reverse ground on whether non-cash fringe benefits are counted against the $100k compensation cap. We had previously advised, consistent with the exact answer in FAQ #7, that the $100K limit “applies only to cash compensation, not to non-cash benefits.” However, the new calculation guide refers simply to “line 5c” of the borrower’s IRS Form 941, which appears to require taking into account non-cash taxable benefits. FAQ #32 added on Friday seems to also take this approach by saying that a “housing stipend or allowance” can be included in payroll costs, but also then refers to such amounts as “cash compensation paid to employees”, which is the language used in FAQ #7 to bring such amounts within the $100k cap. If that is correct, then in an example where an employee makes $100K cash compensation, but receives taxable non-cash fringe benefits worth $5K:
    • The prior FAQ suggests that the allowable payroll cost is $105K, both for borrowing and, on an annualized basis, for forgiveness; but
    • The 941 approach in the calculation guide suggests the $5k of fringe benefits are excluded from payroll costs due to the cap.
  • The calculation guide confirms the prior statements that individual partners of partnerships with self-employment income are not eligible for PPP loans and that their self-employment income should be included on the partnership’s PPP loan application. The guide also adds “that PPP loan forgiveness amounts will depend, in part, on the total amount spent during the eight-week [forgiveness] period.”
    • As we suggested previously, this means that partnerships that pay draws at less than 100% of annualized compensation will only be able to claim forgiveness for the draws actually paid.
    • Unfortunately for partnership applicants, the guide also refers to calculating such amounts from the partnership’s 2019 K-1 and requires that the 2019 K-1 “must be provided to substantiate the applied-for PPP loan amount.” Unfortunately, many partnerships have *not* yet completed (especially in light of the IRS extension) and it is not clear that there is an alternative solution.
    • Unfortunately for partnership applicants, the guide also refers to calculating such amounts from the partnership’s 2019 K-1 and requires that the 2019 K-1 “must be provided to substantiate the applied-for PPP loan amount.” Unfortunately, many partnerships have *not* yet completed (especially in light of the IRS extension) and it is not clear that there is an alternative solution.
  • On the other hand, S-corporations may only borrow against taxable wages paid, and not against distributions to employee owners.

Meanwhile, the storm continues to rage over who is getting the PPP loans. LendingTree has an interesting survey showing that just 5% of PPP applicants have received their loans, while a whopping 61% are still waiting to hear on the status of their application. Presumably, these are many of the businesses whose applications will be submitted as soon as the portal reopens:

CNBC now seems to have the most extensive list of public company PPP borrowers, citing this FactSquared sortable chart of more than 200 companies who “applied for” more than $850 million of PPP loans.  As you probably saw in theWSJ this morning, at least 13 public companies have received loans totaling $170M.  Other borrowers remain steadfast in keeping their PPP money amid a “backlash to the backlash,” citing fiduciary duties to their companies to take funds to which they are legally entitled and arguing either that their companies are not well capitalized and/or that they are eligible under the plain text of the CARES Act and that they are in fact using the proceeds to keep workers employed.  

For companies who are willing to withstand the “headline risk,” the key questions seem to be whether Treasury legally has the authority to impose a tighter standard than the CARES Act and, if so, where exactly the standard lies between the waiver of “no credit elsewhere” and the “ability to access other sources of liquidity.”  It seems likely that legal challenges on such authority and the applicable standard are forthcoming.  The program has already been embroiled in litigation, with many banks being sued over their lending practices, as we noted earlier.  Other lawsuits have challenged whether SBA can exclude bankrupt borrowers from the program, with at least one judge, in Texas, issuing a TRO prohibiting a bank from excluding a borrower in Chapter 11.

Our PPP team is planning to host a webinar this week on the updated eligibility standards and the forgiveness guidelines … but we need to see those forgiveness guidelines first. Stay tuned. In the meantime, I know many of you are interested in what the “Grand Reopening” of America will look like. You may want to join the Virtual Town Hall hosted by our Policy team with senior government officials from several key states that have developed task forces to address the issues.

And off we go. Have a great week.

P.S.  For those tracking the nitty gritty of the FAQ:  SBA again updated the FAQ document on Friday and over the weekend, adding numbers 32-36.  #32 is addressed above. 

  • FAQ 33 clarifies that when counting US employees, applicants are to use the IRS “principal residence” standard under 26 CFR § 1.121- 1(b)(2).
  • FAQ 34-35 clarify that agricultural producers, farmers, ranchers and cooperatives are eligible borrowers if they meet the size and other standards.
  • FAQ 36, added last night, clarifies that for purposes of employee-based size standards, applicants do not use an FTE standard and must count ALL employees (including those employed on a “part-time, or other basis”). But the answer also notes that the workforce reduction fraction in the forgiveness calculation will be based on FTEs.