SBA PPP: New IFR on Related Parties Creates SNAFU for Middle Market PPP Borrowers

The more guidance we come across, the more problems we see.  SBA today released a newIFR  today that so amazingly misunderstands the nature of the ownership of today’s small businesses that it creates a remarkable cluster [situation] even by SBA PPP standards.  It may effectively render rent and mortgage interest payments nonforgivable for most borrowers because it remains stuck in a 1960s-era understanding of small business ownership.

The IFR is so bizarre that I had to put it down and step away for a day to come back and read it again.  In the meantime, a manager on our Matter Planning and Pricing Team (and who is one of the brightest young minds in our firm) inadvertently flagged an old article for me entitled “The Difference Between a SNAFU, a ****show, and a Cluster[Situation].”   One of the partners who mentored me as a young lawyer frequently described problematic deals as “cluster … situations,” so I’ll use that term here.  (I hope those of you old enough to remember Hank are smiling.)  The article itself does NOT mince words, so read at your own peril.  

Before diving into the details of the IFR, a couple quick situational updates:

·         The forgiveness portal is open, but manybanks still have not begun accepting applications and even borrowers who are able to apply are holding off.  It seems both groups are still hoping for a legislative or regulatory solution that will simplify and streamline the process, perhaps even providing some automatic forgiveness.

·         M&A deal flow involving PPP borrowers is charging ahead, with parties adopting some of the structures outlined in ourNote.  One challenge is that most RWI insurers are taking fairly broad exclusions for COVID-related matters, including CARES Act stimulus programs like PPP.  However, there are new insurance products coming online specifically providing coverage for PPP and other risks.  Stay tuned for a webinar from us on these topics in the near future.

So, on to the analysis of IFR 24, though it’s hard to know where to begin in critiquing this thing.

·         First, it applies the ownership compensation limits to all owners of any equity of a business, except for owners of less than a 5% “ownership stake” of a C-corp or an S-corp.

o   Yes.  That means that an owner of literally ANY interest in an LLC or partnership is subject to the owner compensation limits.  (Your regional deputy VP has a 0.0001% profits interest in the LLC?  Too bad, she’s an “owner” and subject to the comp limits)

o   No, there is absolutely no guidance on what an “ownership stake” means.  So we don’t know whether it is calculated on a fully-diluted basis, whether it would include just management options or even indirect ownership through a holding company, partnership, trust or other vehicle.  So, no we don’t know to whom this applies.

o   The ownership comp limits are fairly complicated, but they generally limit the forgivable amount to $15,385 per “owner” to a borrower using an 8-week forgiveness period (8/52 of $100k) or $20,833 for a borrower using a 24-week period (2.5/12), or the same fraction of the owner’s 2019 comp, if lower, with additional limits on the treatment of health insurance and other benefits.

·         Borrowers are not permitted to deduct expenses relating to subleased space, with the IFR using the example of a borrower who subleases 25% of its rented space being able to get forgiveness for only 75% of its lease expense or mortgage interest.  Although that fraction is to be calculated on the FMV of the subleased space, it apparently doesn’t matter whether the sublessor is paying significantly more or less than the borrower’s actual pro rata rental cost or mortgage interest on such space.

·          If you’re working from home, sorry, you cannot count any “household expenses” toward forgiveness.

·         The owner rules are terribly drafted and the sublease/household rules are at best curious, but they are actually the least objectionable parts of the new IFR.  The new limits on related-party expenses are … well, they are very model of a modern major cluster situation.  

o   Before analyzing them, it may be helpful to pause for a moment and remember that SBA in many aspects is still stuck in the 1960s.  They still think of small businesses as being owned by Ozzie and Harriett, and never seem to have progressed out of that mindset to recognize that many of today’s small businesses are in fact middle market companies that participate in modern and complex debt and equity financing structures in order to help such businesses grow and thrive.  By and large, SBA regulations have been slow to adapt, if they have adapated at all, to this new reality.  Keep in mind that it was only a few years ago that SBA relaxed the “double-holdco rule” that prohibited SBICs from financing businesses that had more than one holding company above the operating company(ies), because such holding companies were deemed “passive.”  (You can now have two holdcos … but not three.  Oh, and don’t even think about forming a blocker corp for an SBIC without SBA permission.)

·         Turning to the new related-party rules, the IFR provides that a business can get forgiveness for rent payments to such a “related party” only if the rent is no more than the amount of mortgage interest owed by the related-party landlord (to its lender(s)) on the applicable property during the covered period.  However, “mortgage interest payments to a related party are not eligible for forgiveness.”

·         We’ve all done deals where the business owners separately own the business’s main operating or office facility through a separate vehicle.  So, at one level, the intent of these rules is understandable, presumably seeking to prevent small businesses from getting forgiveness for above-market payments to related landlords or landers.  But the IFR does NOT focus on ABOVE-MARKET payments.  Rather rent and interest payments are limited even if they are at or below market rates.  This is somewhat foolhardy, but could be perhaps rationalized by the goal of having simple rules that don’t require market studies, etc. 

·         Of course, if you’re a business owner who has had such an arrangement in place for years and has paid off your mortgage, that’s too bad.  No rent forgiveness for you.  The logic here seems to follow the 2008-era stimulus rules that many said rewarded the least prudent borrowers.

·         However, that’s still not the worst of it.  the SBA shows its Ozzie and Harriet roots and time-capsule thinking when it declares “Any ownership in common between the business and the property owner is a related party for these purposes.”  Aside from being grammatically challenged, this rule is an interpretative and operational disaster.  “Any ownership in common.”  … “ANY ownership” … “ANY”!?!  This is, truly, a cluster situation.

o   We noted below the Forgiveness FAQ #4 seems to allow forgiveness of interested on debt secured by traditional liens on personal property (using the “auto loan”) example, which opens the door for forgiveness on debt owned by many PE portfolio companies.  However, it is not uncommon for the providers of such debt to also make a minority equity coinvestment in the portfolio company.  IFR 24 renders interest on such debt unforgivable because of the “ownership in common.” 

o   But it gets still worse.  Approximately 400 public companies and an untold number of companies backed by PE, VC or other institutional investors received and retained PPP loans.  Picture such a business that rents office space in a building owned by an unaffiliated (in any reasonable interpretation of the word) large commercial REIT or other institutional investor.  It is literally impossible for those business to even know if they have any “ownership in common”with their landlords, or what portion of the landlord’s mortgage interest might apply to their leased space.  Too bad.  If there is ownership in common, such rent is now not forgivable.

o   The same issue applies to businesses with true arm’s-length debt.  Any business with institutional ownership likely has one or more investors who hold a small equity position in the bank or other lender providing such debt.   Too bad.  The interest on such debt is now not forgivable.

o   Now, to be fair, the rule is not clear that it applies to an indirect ownership in common.  However, the rule would also capture a family-owned business.  Imagine two businesses, one with a lease in a local office building owned by, say Cousins Properties (I mean the REIT, not the uncle’s kids), and one which owns its facility, subject to a mortgage loan from, say, JP Morgan Chase.  If any one of the business’s family owners owns even one single share of the millions of shares of publicly-traded CUZ or JPMC stock … too bad, the rent or mortgage interest is not forgivable.

·         You will be shocked, shocked to hear that this has not been well received. 

o   Forbes has called the rule both shocking and “unforgivable” (well, okalmost unforgivable”):

“Many borrowers will be shocked to find out that expenses paid pursuant to arm’s length lease or debt arrangements with related parties that have been in place for many years will now not be counted towards forgiveness.”

o I don’t know whether they intentionally were channeling Biggie (with tax lawyers/accountants one can never know), but the first sentence of this email was inspired by an article on TaxNotes entitled “More Guidance, More Problems for PPP Borrowers.” It’s behind a paywall, but it strikes the same chord as this email, albeit more politely and eruditely.

Interestingly, the second Forbes article suggests that rather than continuing to wait for help from Congress as noted above, borrowers may now want to apply forgiveness sooner rather than later, before SBA can make a further mess out of this.  However, this clearly is not, CANNOT be, what SBA intended.  Yet, somehow it is what they not only wrote, but actually published.  I’ve generally tried to avoid politics in this column, but this tweet regarding a US Supreme Court decision earlier this year has resonated throughout the PPP process, but never more appropriately than now:

Despite that, I have to believe that this interpretation based on ownership structures from the Ozzie & Harriet era will get “clarified” soon to fix this issue.  I mean, it has to, right?  In the words of Terence Mann “You’re from the sixties …. Out!  Back! There’s no place for you here in the future.”

Sigh. Once again, stay tuned.

SBA PPP Return of the FAQ and Main Street Update

Hello friends and welcome back.  It’s been a while, but don’t call it a comeback.  I’ve been here, but there just hasn’t been much to say on the PPP regulatory front.  By far the most common challenge that we’ve been dealing with lately is assisting clients with the legal, economic and tax (especially ERTC) implications of buying and selling PPP borrowers.  

But since we’re far from the shallow now, let’s dive back in as this is a more momentous week, including new PPP FAQ for the first time in more than a month, the closing of the PPP window (maybe?) and the opening of the PPP forgiveness portal:

Down on Main Street.  But first the dog that didn’t bark.  The Fed released its first report on Main Street Lending Program volume this week.  The MSLP opened six weeks ago, and just a few days after SBA reported that the 5 millionth PPP loan had been funded, the Fed reported that lenders had funded a total of eight (yeseight (8)MSLP loans (5 priority, 3 new, 0 expanded).  

·        The loans total $80.9M of original principal.  The $77M being reportedelsewhere is the 95% participation percentage purchased by the Fed SPV.  One of those loans was $50M, so the other 7 total $30.9M. 

·        Our finance team has had a LOT of conversations about the MSLP, but have yet to see a deal closed.  While there was a flurry of enthusiasm for the program, once we worked through the program requirements with our clients, we found that it is almost impossible to structure a MSLP loan for a borrower that has any meaningful existing leverage, due to both those program requirements and what the existing lenders will require.

·        So this data is consistent with our experience as well as the perspectives of both Chairman Powell (“not getting a ton of interest” in the MSLP) and Bob Seger (he was “down” on Main Street) (Yeah, I know, that one was terrible – I’m out of practice.).

Return of the FAQ.  After issuing 19 IFR and 49 FAQ through June 25, SBA went radio silent and didn’t issue any meaningful guidance for more than a month, perhaps sleeping off a hangover from IFR #19.  Although the August 4 FAQ on Loan Forgiveness mainly retreads familiar ground, there are a few interesting points:

·        A key open question has been whether interest on loans secured by traditional liens on personal property is forgivable, which turns on whether such loans meet the standard of being secured by a “mortgageon real or personal property.”   Good news:  FAQ #4 seems to say that such yes, such interest is forgivable.  “Payments of interest on business mortgages on real orpersonal property (such as an auto loan)are eligible for loan forgiveness.”  

o   This seems to mean that that interest on all secured debt is now forgivable … unless they are referring to an auto loan because it has a written certificate of title where liens need to be recorded, which is more akin to a “mortgage”??  (I certainly have not missed these mental gymnastics) (Return of the FAQ, Come on … Return of the FAQ, Oh my God, … here I am … once again.) 

o   Oh, and note that I’m referring to the second FAQ #4, which is on page 7 of the PDF.  Rather than simply adding these to the end of the existing FAQ, they’ve started a new document … with a new numbering system that starts over on each topic.  Perhaps the one thing that wasn’t broken with the existing FAQs was the numbering system.  So… of course they “fixed” it.

·        Another lingering question was whether borrowers would be obligated to pay interest on forgiven PPP amounts, because the CARES Act provides that the forgiveness amount will not exceed principal.  SBA neatly avoids this limitation by simply not referring to such interest as being forgiven.  Instead, SBA cleverly says that the borrower was never “responsible” for such payment, so there is nothing to forgive per FAQ #3 on pp 1-2 (credit where credit is due, this is well done by SBA):

“If the loan is fully forgiven, the borrower is not responsible for any payments. … The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.” 

·        We also finally have an answer to what the constitutes “transportation” in the context of being a forgivable “utility” payment under the CARES Act.  Some commentators had wrongly speculated that this covered fuel for company vehicles, but alas, it instead refers only to “transportation utility fees [TUFs]assessed by state and local governments.”   Oh.  Of course.  

o    TUFs were charged by all of 34 cities around the US, encompassing a whopping 1.5 million residents, according to a 2016 article cleverly – and accurately – titled “A TUF Sell …” which is linked by the Federal Highway Administration on its TUF Resources Page.)

o   (Do we think SBA just decided this on their own because they didn’t know what Congress meant and settled on TUFs out of thin air… or that TUFs are in fact exactly what Congress intended and someone at SBA just recently pulled out the Final Jeopardy answer out of a hat?)

The End of the Beginning.  After four tumultuous months, the PPP 2.0 application period is set to expire tomorrow night (Friday, August 8).  After approving the entire $349B initial allocation in less than two weeks, SBA approved only about $180B over the remaining three and one half months, leaving nearly $130B of the second funding allocation unclaimed. 

·        Originally designed as a bridge through hoped-for short term economic disruption, the PPP was beset by problems from the start and has been criticized as a “Band-Aid on a bullet wound” and a “bridge to nowhere.”   

·        Debates around the next phase of the stimulus continue in Congress, with both parties seeming to support an extension of at least a modified PPP 3.0, though it is not clear that there is much appetite among businesses for additional debt-like programs.

·        Despite its flaws, the program has funded more than 5.1M loans in four months through an SBA 7(a) program that funded all of 63,000 loans in all of 2019.  A preliminary study by MIT and Fed researchers estimates that PPP loans saved between 1.4 and 3.2million jobs through early June, while another study by the National Bureau of Economic Research indicated that taking a PPP loan increased businesses’ “expected survival” by 14-30%.

Application Portal Set to Open.  The SBA has announced that the application portal is scheduled to open this coming Monday, August 10th.  The initial loan portal suffered from numerous technical glitches, so both borrowers and lenders are hoping this will go more smoothly.  However, borrowers have 10 months from the date of their loan to apply for forgiveness, and it appears that many may wait to apply in the hope that one of the many measures pending in Congress will provide additional flexibility, perhaps including automatic forgiveness for loans below a threshold of $100-250k, which is supported by banks and Secretary Mnuchin, though such a measure of course faces opposition.  Stay tuned.

I hope that all of you, your teams and your loved ones are staying safe, healthy and sane.

SBA PPP – Extended(?) Amid Low Demand for Both PPP and Main Street; PE in Crosshairs Again

Just as the PPP program is being extended, the DOJ has outlined its enforcement priorities, which includes an ominous warning to PE sponsors of PPP borrowers.  The House and Senate have now both passed a bill extending the PPP lending period from June 30 to August 8, which now heads to the president.  If all of this sounds a bit familiar, you’re not wrong.  Keep in mind that the Senate and House are now extending from June 30 to August 8 the PPP “covered period” that was originally set to expire on June 30, … which the PPPFA had ALREADY EXTENDED TO DECEMBER 31 … but which Treasury and SBA decided would end on June 30 anyway, notwithstanding that PPPFA.  I believe this is the equivalent of the House and Senate *strenuously* objecting to the June 30 deadline.

For now the SBA website still notes that the deadline has lapsed:

The extension comes with more than $132B still available, which is almost incredible after the initial onslaught of demand.  For the first few weeks of June, PPP demand had slowed to $2-3B per week, but surged in the last 10 days of the program as SBA approved more than $6B of loans from June 21-30.  While still a far cry from the original numbers, the ongoing (or in some states, restarting) shutdowns are impacting small businesses for significantly longer than originally expected when the CARES Act was passed in March.  Stay tuned for more on this and other stimulus measures being considered.

At the same time, the Fed’s Main Street program is “not getting a ton of interest” according to Fed Chairman Powell.  This matches our experience, where our finance team is having dozens of conversations per week with lenders, prospective Main Street Borrowers and their PE sponsors, but not seeing deals gain traction.  While well-intentioned and clearly based on the lessons learned from TARP and other programs in the 2008 crisis, the programs guidelines simply don’t fit most borrowers who already have leveraged-loan style credit facilties.  Stay tuned for more on this from us next week.  It will be interesting to see how this plays out over the coming weeks, as many (if not most) middle market borrowers who have not already amended their covenants are likely to trip their June 30 covenants.  

On the enforcement side, last Friday, the “second-in-command” of the DOJ’s Civil Division, which overesees the Civil Fraud Section, gave a speech to the U.S. Chamber of Commerceoutlining their False Claims Act (FCA) enforcement priorities, includind with respect to PPP.  David Rybicki, who recently joinded us from DOJ, notes the following highlights with respect to PPP:

PPP enforcement initiatives will be a priority:  “Going forward, the Civil Division will make it a priority to use the False Claims Act to combat fraud in the Paycheck Protection Program.”

·         DOJ singles out PE firms: “Our enforcement efforts may also include, in appropriate cases, private equity firms that sometimes invest in companies receiving CARES Act funds.  When a private equity firm invests in a company in a highly-regulated space like health care or the life sciences, the firm should be aware of laws and regulations designed to prevent fraud.  Where a private equity firm takes an active role in illegal conduct by the acquired company, it can expose itself to False Claims Act liability.  A pre-pandemic example is our recent case against the private equity firm Riordan, Lewis, and Haden, where we alleged that the defendants violated the False Claims Act through their involvement in a kickback scheme to generate referrals of prescriptions for expensive treatments, regardless of patient need.” 

NOTE:  While the RLH claiminvolved TRICARE kickbacks, it included a $21M settlement which may prove enticing to the DOC and the FCA plaintiff’s bar to at least allege direct involvement by PE sponsors in their portfolio companies’ PPP borrowings.   This reinforces the importance of our previous advice to keep meticulous records documenting both the approval process for PPP loans, the usage of PPP process and the forgiveness application.  All of those matters should be handled primarily, if not exclusively, by portfolio company officers, with customary oversight by the company’s board of directors (or LLC managers).  PE sponsors who are more directly invovled in the operations of a portfolio company’s business may expose themselves to risk for liabilty for such operations, under the FCA or otherwise. 

·         FCA efforts to target only “actionable fraud:”  “If a company is eligible for a loan and submits certifications in good faith, that company will have nothing to fear from the Civil Division.  We are concerned only with actionable fraud.  In selecting enforcement targets, we will follow the law, and we will not pursue companies that access CARES Act programs in good faith and in compliance with the rules.”

·         Brand Memo redux: “You might anticipate some qui tam actions based on alleged deviations from those non-binding guidance documents.  But as you know, it is the Department’s position that noncompliance with guidance documents cannot by itself form the basis of an FCA case.”

We will continue to monitor the situation for updates on both PPP and Main Street (our primary teams for those are copied above).  Please let us know if you have questions that you’d like us to address. 

In the meantime, have a happy and safe Independence Day weekend.

SBA PPP – IFR 19 Allows Early Forgiveness Application; Raises Still More Questions

IFR 19
 amends IFR 14 (the First Loan Forgiveness Rule) and IFR 15 (the First Loan Review Rule) to implement changes required by the PPPFA, for use in connection with the updated forgiveness application, but also throws in a few other confusing quirks.  With the release of IFR 19, we are two IFRs away from them reaching the legal drinking age, but after spending a few hours trying to parse the intent of IFR 19, one has to wonder if it has a fake ID stashed somewhere, because it is a bit wobbly.

·         Perhaps the biggest – and most confusing change – is that IFR 19 now allows borrowers to apply early for forgiveness prior to the end of their covered periodonce the borrower has used all of its PPP proceeds.  This is good news and will allow banks and borrowers – theoretically – to spread out the flow of forgiveness applications.  HOWEVER, APPLYING EARLY DOES NOT END THE “COVERED PERIOD.”  The CARES Act, all prior applicable IFRs, the loan application and even IFR 19 itself still require the borrower to run the FTE Reduction and Salary/Wage Reduction calculations for the full 8-week or 24-week forgiveness “covered period”.

o   IFR 19 addresses merely one aspect of this by requiring borrower who have then made salary or wage reductions, to account for those salary/wage reductions as if they continue for the balance of the full 8-week or 24-week covered period.

§  For example, say you have reduced an employee’s salary from $1,000 per week to $700 per week, which is $50 in excess of a permitted $250 (25% of $1000) decrease.

§  Even if you apply for forgiveness after 10 weeks, you have to include $50 x the full 24 weeks = $1,200 as your forgiveness reduction amount (rather than including only $50 x the 10 weeks in which you used your PPP proceeds).

§  It appears that would apply even if you later raised her compensation back to something more than $750, as there is not (yet) a process for amending an application.

o   It DOES NOT however say the same thing with respect to FTE reductions, even though … logically(?) … those should be treated precisely in the same manner as a salary wage reduction.  Thus, we DO NOT KNOWhow a borrower applying early for forgiveness should treat an FTE reduction that exists at the time of that early application.

o   An even more challenging question arises as to what, IF ANYTHING, happens if a borrower reduces FTE, salaries or wages for its employeesAFTER applying early, but BEFORE the end of the covered period.  The application forms still refer to reductions as of the end of the Covered Period.  Is that now meant to be a negative covenant that the borrower WILL not reduce FTE, salaries or wages from the date of its application until the end of the covered period?  If so, presumably SBA will require some sort of certification or reaffirmation of the original forgiveness application to ensure no such reductions happened, which negates some of the benefit of applying early.

o   IFR 19 also does nothing to clear up the question of what it means to “eliminate” any reduction in FTE, salaries or wages that occurred between February 15 and April 26 for purposes of fitting in the corrective safe harbor.  IFR 19 still simply provides that if the “borrower eliminates any reductions” on or before December 31, it is exempt from such reduction.    It is unclear how long such elimination must be maintained before such reductions could be reinstated without impacting forgiveness.  Some have theorized that a one-day elimination is sufficient, but that seems directly opposed to the goal of paycheck protection.  Absent guidance to the contrary however, there is still no clear answer.

o   This concern is mitigated somewhat for borrowers who are eligible to use the new PPP-EZ forgiveness application form (and instructions), because those borrowers must certify that they have not made any reduction in FTE, salaries or wages, though the same question applies as to whether that then effectively becomes a negative covenant prohibiting such borrowers from making a reduction prior to the end of their covered period.

·         IFR 19 provides that borrowers may apply for forgiveness on or before the maturity dateof their PPP loan.  This imposes, for the first time, a forgiveness application deadline.  It also clarifies that, yes, a borrower can still apply for forgiveness up to that maturity date even if it has not done so in the first 10 months and has thus started making payments on their PPP loan.  While this is helpful to spread the timing load of the forgiveness applications, it also extends the duration of potentially problematic economic negotiations between buyers and sellers of PPP borrowers.  (See our M&A alert on “Buying and Selling PPP Borrowers” for much more detail on these M&A issues, including the important implications on a buyer’s employee retention tax credits.For instance, is PPP loan for which forgiveness may still be applied treated as “debt” in calculating the cash-free, debt-freepurchase price?)

·         IFR 19 also formally implements a lower limit on “owner compensation” that was first introduced in the revised application forms.

o   For employees who are not owners and not self-employed, forgivable compensation amounts are capped at the lesser of:

§  For an 8-week covered period:  $15,385 per individual, which is 8/52 of $100k, or

§  For a 24-week covered period: $46,154 per individual, which is 24/52 of $100k.

o   For owner employees and self-employed individuals, it gets more complicated.

§  For an 8-week covered period:  the per-individual cap is the lesser of the $15,385 or 8/52 (15.38%) of such owner’s 2019 compensation (on the theory that such owner should not be getting a raise from a borrower taking a PPP loan).

§  For a 24-week covered periodthe per-individual cap is the lesser of $20,833 or 2.5/12 (20.83%) of such owner’s 2019 compensation (on the theory that the borrower was only able to include 2.5 months of payroll in calculating its PPP loan amount, and to allow more could create an incentive to layoff other workers to pay such owner).

NOTE:  This limit applies in the aggregate across ALL businesses in which that owner has an interest.

·         There are also some more detailed and complicated limits  on benefit amounts that are beyond my comprehension, but I’ve pasted a summary from Randy Clark on our tax team at the bottom of this email. (Please email Randy, not me with questions on those nuances, because he can actually answer them, unlike me.)

·         IFR 19, together with the updated forgiveness application and instructions, also clarifies that borrowers are still eligible to use the “alternative payroll covered period” which allows them to start their forgiveness covered period on the first payroll date after receipt of their PPP loan.  Helpfully, this is available for both 8-week and 24-week forgiveness periods. (Just a reminder that the 8-week forgiveness period is only available as an option for borrowers who had their loans before June 5.)

·         IFR 19 also implements the PPPFA’s other safe harbors exempting borrowers from FTE reduction limitations on their forgiveness.  These are detailed in the prior email below, and IFR 19 clarifies an ambiguity that we noted by exempting borrowers unable to return to their prior level of business capacity due to “directly or indirectly” complying with HHS, CDC, or OSHA guidelines.  This is intended to recognize that many borrowers were limited in their activities due to state and/or local shutdown orders, which SBA is expressly recognizing “are based in part on guidance from the three federal agencies.” This is a helpful clarification.  Borrowers should keep careful records documenting the applicable “requirements or guidance” for each of their locations.

Conformed copies of the Loan Forgiveness Rule and Loan Review Rule, each as modified by IFR 19 are attached; note that there are some issues with the formatting and footnotes, so be sure to check the actual rules online to confirm accuracy.


·         C corporation owner-employees (who are not technically self-employed, so the example addresses the normal compensation/benefits cap) are capped by their cash compensation plus retirement and health benefits, not their owner compensation replacement. 

·         S corporation owner employees are also not self-employed.  Their compensation for an S corporation owner already includes health insurance contributions so those can’t be double counted.

·         Both retirement and health insurance contributions for self-employed individuals, discussed below, are not counted in the forgivable owner compensation replacement because they are already taken into account in the self-employment income that formed the basis of the “owner compensation replacement” calculation.

·         Forgiveness for amounts paid to a Schedule C filer (sole proprietors reporting their income on Schedule C to their Form 1040) is capped at the applicable owner compensation replacement.

·         Schedule F is specific to self-employed farming income but it is conceptually the same as a Schedule C filer.

· For general partners, the formula for the forgivable amount generally takes self-employment income as reported on the 2019 K-1, reduced by some expenses that are not already taken into account in reaching that K-1-reported self-employment number but are real deductions to the partner, then multiplies it by 92.35% to take into account that a partner gets a deduction for the “employer’s” share of self-employment taxes on that income. That reduces the potentially forgivable “owner compensation replacement” but more closely approximates the wages that would be received by an employee and are not increased by the employer’s share of payroll taxes.

SBA PPP: BREAKING: Borrower Names to be Publicly Released

All, SBA and Treasury have announced that they will announce the identify of each borrower who received a PPP loan in excess of $150k, and the following information for each such borrower:

·         business name,

·         address (including ZIP code),

·         NAICS code, 

·         business type, 

·         demographic data, 

·         “non-profit information,” (presumably we will get an IFR or something that explains this in more detail) and

·         jobs supported.

They will not disclose the exact loan amount that a borrower received, but will instead indicate the size range of the loan, which correspond to the ranges used in SBA’s weekly PPP reporting package:

•             $150,000-350,000

•             $350,000-1 million

•             $1-2 million

•             $2-5 million

•             $5-10 million

They will also release aggregated data on loans below $150k, but not individual borrower names, as indicated in the press release below. 

This does NOT mean that specific loan amounts and/or the identies of individual borrowers of under $150k will be kept confidential in the face of FOIA requests for such information.   

As you may have heard, SBA and Treasury also released updated forgiveness forms and instrutioins, including a new PPP-EZ application form (and instructions) for borrowers who have not reduced their FTE counts or their salary and hourly wage amounts for covered employees.  We’ve been holding off emailiing on that, because we expected an updated IFR to come out shortly, perhaps in some sort of an after-dark Friday-night special.  Instead, we got this while the sun is still shining, which our intrepid policy partner Mary-Burke points out is probably because SBA forgot to factor in in the summer solstice.

In any event, stay tuned for an email update on those new applications, as well as any further info that comes out on this announcement.  Thank you.   

Press Releases

SBA and Treasury Announce Enhanced Transparency Regarding the Paycheck Protection Program

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June 19, 2020

Washington—The U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury have agreed with the bipartisan leaders of the U.S. Senate Small Business Committee to make public additional data regarding the Paycheck Protection Program (PPP). This agreement will ensure that the interests of both transparency and protections for small businesses are served.

“I am pleased that we have been able to reach a bipartisan agreement on disclosure which will strike the appropriate balance of providing public transparency, while protecting the payroll and personal income information of small businesses, sole proprietors, and independent contractors,” said Secretary Steven T. Mnuchin.

“We value transparency and our fiduciary responsibility to ensure American taxpayer funds are used appropriately. This responsibility goes together with the steps we are now taking to provide needed public information while protecting entrepreneurs’ personally identifiable information, such as a home address associated with their business loan,” said Administrator Jovita Carranza. “Small businesses are the driving force of our economic stability and are leading the way to allow our nation to rebound safely.”

SBA will disclose the business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, jobs supported, and loan amount ranges as follows:

·         $150,000-350,000

·         $350,000-1 million

·         $1-2 million

·         $2-5 million

·         $5-10 million

These categories account for nearly 75 percent of the loan dollars approved. For loans below $150,000, totals will be released, aggregated by zip code, by industry, by business type, and by various demographic categories.

View PPP data disclosed to date, including total dollars approved, loan sizes, lender sizes and types, loans approved by state, top lenders, loans by industry sector, and funds remaining.

SBA PPP – New IFR Implements (Some of) PPPFA

SBA and Treasury this morning released new application forms for borrowers and lenders and a new IFR 17 that amends the original IFR 1 to implement some of the changes required by the PPPFA.  I have attached a “conformed redlined copy” of the main sections of IFR 1, which shows how IFR 17 changes IFR 1.  

IFR 17 generally follows the terms outlined in last week’s press release, which is summarized in the email below.  It generally limits flexibilityfor borrowers in ways that many of us were hoping to avoid.  Also,  IFR 17 unfortunately does NOT address or modify the forgiveness rules created in IFR 14 or the provisions of the Forgiveness Application.  Thus, SBA will need to issue yet another IFR addressing the more detailed forgiveness mechanic.

·         IFR 17 does not extend the period during which PPP loans can be made.   However, nowhere in IFR 17 does it affirmatively impose a June 30 deadline.  Each remaining reference to June 30, is merely a passive reference to the deadline imposed under the original CARES Act.  This is pretty poor drafting by SBA, and leaves some ambiguity.

·         The biggest takeaway is that IFR 17 expressly states that there are only two options for a forgiveness period:

o   “the 24-week period beginning on the date your PPP loan is disbursed”; or

o   borrowers who had PPP loans before and who do not want to use the 24-week period, can elect to use “the eight-week period beginning on the date your PPP loan was disbursed.”

IFR 17 includes a footnote clarifying that no forgiveness period will extend beyond December 31, 2020 (which addresses our concern below).

·         Thus , IFR 17 notably does NOT include:

o   The “ “alternative payroll covered period that begins on the first day of the first payroll cycle in the covered period and continues for the following eight weeks” which IFR 14 (May 22, 2020) allowed borrowers to use.  It thus appears that such an “alternative” forgiveness period is no longer permissible.

o   Any ability to use “up to” 24 weeks.  The duration thus seems to be binary:  24 weeks or the original statutory 8-week period (either of which ends on the earlier of December 31, 2020).

·         As noted below, the “forgiveness cliff” that is created under a literal reading of the PPPFA has been abolished in favor of simply changing the former 75-25 approach to be a 60-40 approach, as described below.  To be clear, irrespective of whether a minimum of 60% of the loan is spent on payroll costs, borrowers can obtain forgiveness for 5/3 of the amount spent on payroll costs.  

·         PPP loans that receive a eTran number after June 5 will all have a five year maturity.   The maturity date of PPP loans approved before that day may be modified by mutual agreement of borrowers and lenders to be five years.  Again, this is a binary option.  Those existing loans can remain at two years or can be extended ONLY to five.

In short, IFR 17 seems to largely dash our hopes for an improved, more streamlined rulemaking approach for the PPFA “improvements.” So, stay tuned for still more updates.

SBA PPP – SBA and Treasury Announce Plans to Implement PPPFA

President Trump signed the PPPFA into law on Friday and two key provisions have already apparently been scrapped.  It appears that the “cliff” and the extended PPP lending period existed for all of 3 days, at least according to today’s joint announcement from SBA and Treasury regarding their plans to “promptly issue rules and guidance” and new loan and forgiveness applications implementing the PPPFA.

Key takeaways from the statement, and keep in mind that this could all change … again:

·         There will be no “forgiveness cliff”.  Despite the language in the PPPFA creating such cliff, the statement expressly says:

“If a borrower uses less than 60 percentof the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.”

This means that the forgiveness amount can be calculated in the same manner as had been contemplated by IFR 1, but with a 60-40 split instead of 75-25.  If so, thenirrespective of what percentage of the loan is spent on payroll costs, borrowers can obtain forgiveness for 5/3 of the amount spent on payroll costs.  Thus a borrower with a $1M PPP loan who uses $300k on payroll costs can apply for forgiveness for up to $500k, as long as it can document that it has spent up to $200k on forgivable non-payroll costs.

o   Under IFR 1, such borrower would have been eligible for $400k of forgiveness.

o   Under the PPPFA’s cliff provision, such borrower would be eligible for NO forgiveness.

·         PPP loan applications must (againstill?)be submitted by June 30, despite the PPPFA extending the loan period through December 31. 

o   While removing he cliff is a more technical fix that arguably fixes a drafting error, this change directly contradicts the language in the PPPFA.  While this appears to be in response to concerns expressed by Senator Johnson and others, it is NOT at all clear how Democrats will react to this change.  

o   Presumably because the application cutoff is reverting to June 30, the release does not track the PPPFA requirement that the forgiveness period end on theearlier of 24-weeks after disbursement or December 31, 2020.  Loans funded after July 182020 would have a 24-week forgiveness period that extends into 2021.  That date is only 12 business days after June 30, so based on what we had been seeing regarding timing of approvals and funding, some PPP loans could be funded after such date.  Presumably (hopefully?), the actual regulations will clarify how such a loan would be treated.

o   $130B of funding remains available.  Unless the PPPFA drives a significant spike in demand, it appears that a large portion of that amount will go unused by the new/original June 30 deadline.

·         The 5-year maturity will apply to PPP loans that are approved by SBA after June 5 (i.e.,this applies to loans that receive an e-Tran number after June 5).  It thus appears that loans that were approved prior to June 5, but are or will be funded after June 5 will still have the 2-year maturity.   There is no discussion of whether borrowers and lenders have the option to modify the maturity of those or any prior PPP loans.

·         The release does NOT contemplate a couple of changes that many of us have been hoping to see:

o   There is no mention of a modified, intermediate forgiveness period of “up to” 24-weeks, which would expedite forgiveness determinations for borrowers who use their PPP proceeds in less than 24 weeks.  This would also ease the burden on banks and SBA by spreading out the timing of when forgiveness applications are submitted.

o   There is no mention of a de minimis threshold below which smaller borrowers could apply on a “PPP-EZ” forgiveness application.

·         The other provisions of the release generally track the language of the PPPFA, which is summarized in the email below, and reflected in the “conformed copy” of the CARES Act sections attached.

In discussing this joint statement with our policy team, our thinking is that it reflects some behind-the-scenes horse-trading that was required to in order to obtain the Senate’s unanimous consent,  They also suggested that it was issued to address some of the time-sensitive issues (e.g.,when the 5-year maturity kicks in, and the deadline for applying for PPP loans) in order to buy time for SBA and Treasury to issue the new IFR and applications in a more deliberate and hopefully better-crafted manner.  Hope springs eternal.  Stay tuned.

P.S. In the interest of completeness, on Friday SBA also issued IFR 16 (the first in two weeks), which sweetly deems 501(c)(12) telephone cooperatives to each be “a business entity organized for profit” and thus eligible for a PPP loan if it meets the other PPP eligibility requirements.

Senate Passes PPFA

As you’ve probably heard, the Senate passedthe Paycheck Protection Program Flexibility Act(HR 7010) without any changes.  Attached is a “conformed copy” of the sections of the CARES Act that are modified by the PPFA bill, which now heads to the President for signature. 

Let’s start perhaps counter-intuitively with discussing three key tax consequences of taking a PPP loan, of which the PPPFA fixes exactly one:

·         One of the most common questions we are dealing with now relates to acquisitions of PPP borrowers.  You’ll see that the attached includes Section 2302 of the CARES Act relating to the employee retention tax credit (ERTC), which was NOT modified by the PPFA.  PPP borrowers and all employers who must be aggregated with the borrower are not eligible to claim the ERTC.  This aggregation provision is causing significant headaches for buyers looking to acquire targets who have a PPP loan.  If a buyer acquires a PPP borrower in a stock deal, then the buyer loses the ability to claim the ERTC for itself and all of its aggregated (essentially affiliated) employers entities.  Even worse, the CARES Act directs the IRS to draft regulations to recapture any ERTC claimed for prior periods.  These have not been published yet, so the intended scope of that recapture is unclear.    As a result, buyers of PPP targets are now generally forced to compare the tax and other costs of using an asset deal vs. the impact of losing its ERTC in a stock deal.  

·         The PPFA does not also address the hoped-for change to the IRS’s determination that amounts paid with the proceeds of a forgiven PPP are not deductible by the borrower.

·         It does however eliminate the prohibition on PPP borrowers deferring payroll taxes.  Previously PPP borrowers were eligible to defer such taxes until the loan was forgiven.  Now, they are able to continue such deferral even if their PPP  loan is forgiven.

Turning to what the PPPFA actually does re the PPP loans themselves, it:

·         Extends the PPP “covered period” during which loans may be made through December 31, 2020

o   It will be interesting to see if SBA further modifies and extends some of the provisions relating to seasonal employers, who are permitted to use any 12-week period between May 15 and September 15, 2019 as their base period for calculations. 

o   Who would have thought that this would have mattered given the initial rush of demand, but there is still more than $100B available in the PPP 2.0 fund.  Some commentators are now suggesting that these fixes will create a surge in PPP demand that will exhaust the balance, while others are saying that the fix comes too late for many businesses.


·         Creates a minimum term of 5 years for allNEW PPP loans made after the date PPFA becomes law, up from the two-year term created by SBA in IFR 1.  

o   The PPFA does NOT require PPP lenders and borrowers to extend existing PPP notes to 5 years, but appears to presumptively permit them to do so.  Many, if not most PPP notes, may need to be amended to provide for the extended deferral period below, so this may be a discussion point for borrowers and lenders.  

o   Note that the Loan Forgiveness IFR requires borrowers to maintain PPP records for 6 years after the loan is forgiven or repaid, so borrowers may now need to keep such records for 11 years. Hopefully, SBA will consider shortening that period to tie to the date of a forgiveness decision or perhaps loan origination for borrowers who do not apply for forgiveness.

·         Defers all P&I payments on each PPP loan until the forgiveness amount is remitted to the lender by SBA. 

o   This means that such forgiveness amount must have first been finally determined, which may not happen for nearly 11 months after the loan was disbursed (24 weeks of forgiveness = 168 days, plus 60-day lender review plus 90-day SBA review), and this can be extended if the borrower waits to apply for forgiveness.

o   As noted above, this may require modification of most, if not all, PPP notes, which provide for the 6-month period mandated by SBA.

·         Provides any borrowers who fails to apply for forgiveness within 10 monthsafter the expiration of its forgiveness period must start making payments of principal, interest and fees on its PPP loan on “the day” that is not earlier thansuch 10-month anniversary.

o   The CARES Act waived all borrower fees on the PPP loans, so it’s not clear to what fees the PPFA is referring here. 

o   It is not clear whether the use of “the day” above allows lenders to select a payment commencement date that is later than such 10-month anniversary, or whether the intent is that such date is “the” required payment commencement day. (Perhaps SBA will clarify this?)

o   Note that the PPFA does not prohibit a borrower from later applying for forgiveness, even after it has started making payments.  (I wouldn’t be surprised to see SBA regulations impose some absolute outside date on such applications.)

·         Eliminates the 75-25 split created by SBA and instead provides that in order to receiveany forgiveness, the PPP proceeds must be used at least 60% on payroll costs

o   Unfortunately, this creates what many commentators have referred to as a forgiveness “cliff,” such that a borrower will not be eligible for ANY forgiveness if it uses less than 60% (even up to 59% )of its loan proceeds on payroll costs. 

§  Under the prior rules, if a borrower has a $1M PPP loan and uses $590k (59%) on payroll costs during the forgiveness period, it would be eligible for up to ~$787k ($590k * 4/3) of forgiveness, so long as it (a) spent up to that $197k delta on permissible non-payroll costs during the forgiveness period and (b) spent at least $160k on payroll costs after the forgiveness period to get to $750k of payroll costs (i.e., 75% of its loan amount). 

§  Under the PPFA, such borrowerwould not be entitled to ANYforgiveness.

o   That same section of the PPFA also provides that in order for a borrower to receive loan forgiveness it “mayuse up to” 40% of its loan amount for covered mortgage interest (but not prepayments thereof), covered utilities and covered rent. 

§  The CARES Act also allows borrowers to use PPP proceeds to pay interest on other pre-existing non-mortgage debt.   Because the drafting is permissive (“may use”), it is not perfectly clear, but by not including permission for such non-mortgage interest payments in this section, the PPFA could potentially disqualify from forgiveness any borrower who uses PPP proceeds on any non-mortgage interest.  Again, the drafting there is not clear, so this may not be the intent.

§  SBA could make this easy on everyone by saying that a “mortgage on real orpersonal property” simply means traditional secured debt, including that secured by UCC filings, etc.  


·         Extends the forgiveness period until the earlier of 24 weeks from origination or December 31, 2020, but also allows borrowers who already have PPP loans today to elect to use the original statutory 8-week period.

o   This does NOT expressly allow borrowers to use the 8-week“alternative” forgiveness period created by SBA that starts on the first payroll date after loan disbursement.  Thus, it is not clear whether that alternative period would remain available as a third option for such borrowers.  It seems harsh to pull that away from borrowers who are already well underway in working through such an alternative period, so perhaps SBA will issue guidance allowing it.

o   This extension is intended to be beneficial by allowing borrowers a significantly longer period in which to use proceeds and thus achieve more forgiveness.  HOWEVER, (C’mon, you knew there would be a catch, right?) it does so by extending the defined “covered period” to mean that 24-week period.  This means that theforgiveness reduction tests are also applied throughout that entire longer period. Thus, borrowers wishing to use the longer forgiveness period, must also maintain FTE levels and base salaries and hourly wages for that full 24-week covered period, or fall within the applicable rehire or restoration safe harbor which is now measured as of December 31 (instead of June 30).

o   As noted above, this significantly extends the period during which PPP loans will be outstanding, because borrowers will not be able to apply for forgiveness until the end of that forgiveness period (because they must demonstrate compliance with the FTE and salary/wage maintenance requirements as of the end of such period)

o   This means that M&A and financing deals involving PPP borrowers will face an extended period in which the forgiveness amount will not be known.  Thus, the parties will need to reach some agreement on who bears the economic risk of the loan being unforgiven.  As to who deserves to bear such risk … as Clint said,deserve’s got nothing to do with it.  It will likely come down to bargaining power and the desire or need to get a deal done before such forgiveness amount is known vs the ability to wait it out.

o   We believe that this means that the current references in the rules and forgiveness application to $15,385 as the limit on forgivable compensation to individuals will be increased to $46,1384 ($100k x 24/52), for borrowers using the 24-week forgiveness period.

·         Creates several exemptions from the forgiveness FTE Reduction, by exempting employers:

o   Who are able to document that they cannot hire back the same employees or a “similarly qualified” replacement before December 31, 2020.  

§  As drafted, this is a total exemption from the FTE Reduction, but presumably it is intended only to apply to exclude those employees for whom replacements can’t be found and not, say, other positions that were eliminated by the borrower.

§  It is not clear what documentation would be required to meet this standard, so we will need SBA to provide their usual helpful clarity on this.

o   Who are able to document that they cannot “return to the same level of business activity” as they had on Feb 15, 2020 due to compliance with HHS, CDC or OSHA requirements or guidance issued from March 1, 2020 through December 31, 220 “related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

§  I think that the reference to “guidance” was meant to be expansive here, but the failure to expressly mention state and/or local laws and orders is puzzling and unhelpful.

§  The meaning of that “or” becomes pretty important.  As drafted, this does NOT appear to even implicitly pick up those state shelter-in-place orders unless the “or” is meant to mean HHS, CDC or OSHA requirements or guidance orany other worker or customer safety requirements.  However, that “or” is the first conjunction in the sentence (i.e., there is no “or” between “sanitation” and “social distancing”), so the broader reading would not seem to be grammatically correct.  Thus, borrowers who are closed due to state orders, will need to be able to document that such closure is due to (perhaps because the state order is based upon?) HHS, CDC or OHSA guidance.

We are continuing to monitor the other proposals pending in Congress, such as the HEROES Act, the RESTART Act and the bill proposed by the Community Bankers Association that wouldautomatically forgive all PPP loans under $150k, but we don’t currently have any clarity on what will develop there, especially in today’s ever-more-uncertain political climate.  If you have questions or suggestions about any pending or proposed legislation or regulation, please contact our Policy colleagues copied above.

I hope that you, your colleagues and your loved ones remain healthy and safe in these incredibly trying times.

SBA PPP – UPDATE!: House passes PPP fix! (but the Senate did not)

All, as you may have heard, the House resoundingly passed an updated version of its PPP “fix” bill, but the Senate did not act on it today. Please see the update below from our fantastic policy team in DC.

An update, the Senate held its pro forma session today and did not bring up their version of the PPP bill. They return to DC next week.  Given the overwhelming support for the House bill, the Senate may be more inclined to take up the House version which would save the need to reconcile the two bills and delay the President’s signature.  The dynamics over whether Republicans will honor the bill passed by the House in part by proxy (House Republicans have sued the Speaker, saying the process is unconstitutional) make this a more complicated situation than it might otherwise be. 

The House just passed the Paycheck Protection Program Flexibility Act, HR 7010, by a vote of 417-1.  (That hardly ever happens.)  This is the House stand-alone version of the PPP “fix.” It was passed under a procedure called suspension of the rules, which requires a 2/3 vote.  The overwhelming bi-partisan support is a good harbinger that the Senate will take similar action, although the pending Senate version differs from the House version.  HR 7010 is attached.

You may note that the number of the House bill has changed since it was introduced.  There are a couple of differences in HR 7010 compared to the prior version, HR 6886.  One of them is very significant:  

·        The amount of loan forgiveness will be determined without regard to the FTE Reduction fraction if the recipient is able to demonstrate an inability to return to the same level of business activity as the business was operating prior to February 15, 2020.  (This is helpful for employers, but it will of course raise questions around just what such a “demonstration” requires.)

In addition to the above, HR 7010 does the following:

·         Extends the loan period to 5 years (Note that PPP borrowers have already signed promissory notes that refer to a 2-year terms, so there would need to be some modification process here.)

·         Extends the PPP loan period throughDecember 31, 2020 (Who would have thought that this would have mattered given the initial rush of demand, but there is still more than $100B available in the PPP 2.0 fund.)

·         Extends the loan forgiveness period from the date of origination to the earlier of 24 weeks or December 31, 2020 (As noted previously, the Rubio version in the Senate provides for 16 weeks, so this would need to be reconciled unless the Senate adopts this approach as Mary notes.)

·         Exempts from the loan forgiveness computation employee reductions if the employer cannot hire back the same employee or a suitable replacement, or if operations are under the level prior to 2.15.20.

·         Eliminates the 75/25 requirement (If this passes, it will be interesting to see if SBA ratchets back some of the flexibility around what can be included as non-payroll costs, because they expressly noted that some of the latitude was due to the 25% limit.)

·         NEW:  Allows an election to choose the original 8 week period as the loan forgiveness period

·         Is effective as of date of enactment of CARES

Note that the House failed to pass HR 6782, the “Truth Act,” under suspension of the rules.  The Truth Act would require the SBA to disclose details identifying loan recipients, amounts, etc.  The Truth Act did not have broad Republican support.  (It would be easy to make the obvious joke here that they can’t handle the Truth …  so I OF COURSE will take that layup.  Stay tuned for updates next week.  Also, if you would like your voices heard on this, please contact your Congressional representatives and/or Senators.  Or feel free to reach out to one of the policy team members copied above.  They’ve been invaluable in this process.  I’ve come to learn that deep down in places I don’t like to talk about at parties … “You want them on that Hill.  You need them on that Hill.”)

Tune in next week!

SBA PPP: IFRs on Forgiveness and Loan Reviews

You know the old saying “if it ain’t broke, don’t try to fix it?”  Well, there are at least five different bills circulating in Congress that are, well, ”billed” as PPP fixes.   That pretty well captures the sentiment on how well Congress and others think the program is working.  More on that below, but first here are some additional notes on the two IFRs –Forgiveness and Loan Review – that came out on Friday. 

1.       As noted below, bonuses and hazard pay are now expressly included as payroll costs that will count toward forgiveness.  It appears that these amounts also count toward the cash compensation limit of $15,385 (8/52 of $100k).  Continuing SBA’s maddening inability to use consistent wording, the Forgiveness IFR references these as being subject to the total compensation limit of  “$100,000 on an annualized basis”.  Arguably, one-time amounts such as bonuses would not be “annualized” and arguably could be excluded from that $15,385 limit, but the application refers explicitly to the $15,385 amount so it seems that the bonus and hazard pay amounts must be included within such limit.  

2.       The Forgiveness IFR also provides clarity that amounts incurred prior to the forgiveness period, but paid during the forgiveness period are includable in the forgiveness amount.  The IFR also seems to imply that borrowers can prepay certain amounts that would not otherwise be due until after the forgiveness period, although the guidance could certainly be more explicit.

a. The IFR follows the CARES Act and both expressly prohibit prepayments of mortgage interest. Neither expressly prohibit prepayments of other amounts, but neither expressly permit prepayments either.

b.       The IFR provides an example of a borrower whose forgiveness period ends on July 26 and can include only “ the portion of its electrical bill through July 26” if it pays that electrical bill on the next regular billing date.  That’s not super helpful for the argument that prepayments are forgivable, but isn’t fatal either because it is an example of the second prong of forgiveness test which applies to amounts “incurred during” the forgiveness period and paid on or before such billing date.  The first prong relates simply to amounts “paid during” the forgiveness period, which doesn’t have that same “incurrence” limitation.  We may get further guidance on this, but because the non-payroll costs are capped at 25%, it seems that SBA may be comfortable allowing such prepayments.  

c.       Note that several of the “fixes” being contemplated would both extend the 8 week period to 16 weeks (House version) or 24 weeks (Rubio version) and/or eliminate the 25% cap on non-payroll costs (House version).  Stay tuned, of course.

3.       A couple of key points on the forgiveness reduction amounts:

a.       SBA had previously provided that borrowers could exclude from the FTE calculation employees who received offers to return to work on the same terms as their prior service.  The Forgiveness IFR, in addition to specifying record-keeping requirements around such offers, now requires borrowers to inform the applicable state unemployment office of such rejected offer, within 30 days of such rejection.  This, of course, is intended to prevent the employee from collecting unemployment payments for which he or she is rendered ineligible by virtue of having rejected a job offer.

b.       Also, SBA has clarified that a reduction in hours of an employee counts ONLY in the FTE reduction and does not also count as reduced wages for the Salary/Hourly Wage Reduction.  This is expressly done to avoid double counting such reduction.  Of course, as we noted before, if such employee were part-time during the base period and the borrower uses the alternative method of counting all part-time employees as 0.5 FTEs, then there would be NO REDUCTION in the FTE count, even if the employee’s hours were significantly reduced.

c.       However, it remains unclear how a borrower can avail itself of the FTE Reduction Safe Harbor by “restoring” the FTE count by June 30.  It is not clear how a borrower would demonstrate that average hours have been restored for its FTEs (i.e., what period of time must be used to demonstrate such restoration:  One day?  One week?  Other?)

d.       Finally, there is still no clarity on what if any impact there would be from a reduction in employees, hours, or compensation after the end of the forgiveness period or, if a borrower is using a safe harbor) on July 1.  To be clear, we still CANNOT answer the question as to whether borrowers could terminate all employees on July 1 and still receive full forgiveness.

4.       Timing is now much longer and may create payment issues:  Lenders make the initial forgiveness decision and report that decision to SBA within 60 days after the borrower applies forgiveness.  The 60-day period conforms to the CARES Act, which doesn’t specify to whom lenders must issue such decision.  

a.       SBA has given itself 90 days to review such decision.  The IFRs both say that SBA will “subject to any SBA review of the loan or loan application” pay any forgiven amount within 90 days after the lender’s decision.  The drafting is not clear that the “subject to” language is intended only to mean that SBA isn’t obligated to pay any loan which its review has determined ineligible  (or if it could be read to indefinitely extend the 90-day period for loans it is reviewing).  However, the Loan Review IFR later seems to clarify that this is meant to be a 90-day review period. 

b.       If SBA elects to review a loan at any time before or after the forgiveness application is submitted, it will notify the lender, who must notify the borrower within 5 business days after notice from SBA.  

c.       If the lender determines that a borrower is not entitled to forgiveness “in any amount” the lender must also notify the borrower in writing of that decision.  I am assuming (hoping?) that “in any amount” means “in whole or in part” and not that the borrower is not entitled to “any amount of forgiveness”, otherwise the borrower would not get notice of a partial rejection.   Assuming that is the case, then it seems that a borrower may assume that the lender has preliminarily approved full forgiveness of its loan unless the borrower had received, within ~60 days after submitting its forgiveness application, has received notice of (i) an SBA review or (ii) whole or partial rejection of forgiveness  decision.  However, that decision remains subject to at another 90 days of SBA review.

d.       Thus the forgiveness time table looks something like: 

                                                   i.      The forgiveness period is 8 weeks, ending 56 days after disbursement, or later if the borrower uses the alternative forgiveness period);

                                                 ii.      borrowers will likely need at least 1-3 business days to compile final payroll and payment records to submit with their forgiveness application (this will besignificantly longer if the borrower would be submitting cancelled checks as proof of payment – borrowers should probably use ACH or wire transfers whenever possibleto expedite payment verification);

                                               iii.      lenders have 60 days to review the forgiveness application forgiveness and issue a decision to SBA (note that this only starts when the borrower submits its “complete application” with all required documents);

                                               iv.      SBA has 90 days to review the application and, if approved, remit the forgiveness amount to the lender;

                                                 v.      the lender then must remit such amount to borrower, but there is no time period specified for this.

e.       That’s a total of at least ~257 daysfrom disbursement.   That’s not good.  It creates a payment issue for borrowers.  Principal and interest payments are deferred only for 6 months (180 days) from disbursement.  This means that even borrowers may have to make at leastone PAYMENT prior to receiving a forgiveness decision (and perhaps 2 or even 3 depending on the calendar of the payroll periods vs loan payment dates).   

                                                   i.      Most of the loan documents that we have seen provide for 18 equal monthly payments of principal in months 7-24 (i.e., after the deferment period ends.).

                                                 ii.      Many of the loan documents that we have reviewed are unclear whether the first 6 months of interested are effectively capitalized and added to principal and thus amortized over those last 18 months or if they are simply deferred and thus payable on the first payment date in month 7.  (see more on interest below)

                                               iii.      For those borrowers, because there will be no known forgiveness amount, their notes will likely require them to pay 1/18th of the full original principal amountplus at least 1 month of accrued interest (and perhaps as many as 7).  Multiply that by 2-3 depending on the calendar.  This could create significant cash flow issues for borrowers who are counting on having their loans fully forgiven.  Despite the potential hardships this could cause, SBA seems to be fully aware of it and notes that lenders may have to make repayments of forgiven amounts back to borrowers. 

f.        It also will have a much-longer than anticipated effect on future transactions involving PPP borrowers as buyers of, investors in and lenders to such companies will not have to deal with uncertain forgiveness and thus uncertain equity valuations and/or leverage multiples for such through the end of 2020 and, for later borrowers, well into Q1 of 2021.

g.       Borrowers are required to keep all records relating to the loan for a period of six years, which periodstarts on the date the loan is forgiven or repaid, which again further extends the “at-risk” period for PPP borrowers and their buyers, lenders and investors.

5.       As noted below, SBA is making  it clear that it is preserving the right to pursue all “other available remedies” against borrowers and potentially their equity holders.

a.       SBA may “pursue other available remedies” in addition to loan repayment.  Presumably, this does NOT apply to the certification issue and would apply only to borrowers who were ineligible due to the applicable size standards or ineligible under 120.110 which lists ineligible businesses (lobbyists, lenders, sin businesses, etc.) or had other defects in their application.  As I said on Saturday, they can’t be re-re-treading on the certification issue … right? (But I suppose that it’s worth noting that the prior guidance on that was only in an FAQ, and this IFR would theoretically supersede that.  Such borrowers would seem to have pretty strong reliance defenses though.)

b.       The Loan Review IFR also notes that the CARES Act nonrecourse provision does not apply to the equity holders of an ineligible borrower who fails to repay its PPP loan  (As noted below, it’s not immediately clear how SBA would propose to “pierce the veil” against such equity holders who certainly haven’t signed guarantees, but stay tuned).

6.       Not wanting lenders to feel left out of the full Flounder treatment for having trusted SBA, the Loan Review IFR now provides that lenders are not eligible for processing fees on loans to ineligible borrowers and:

a.       That for a period of one year after disbursement, SBA can claw backloan fees previously paid to the lender who made the loan to the ineligible borrower (despite the CARES Act and all prior IFR and FAQ basically exempting lenders from doing much of anything beyond BSA / KYC).  This determination however, will not impact the SBA guaranty of such a loan.

b.       SBA can also claw back WITHOUT ANY TIME LIMIT processing fees paid to lenders who failed to comply with the limited lender requirements in IFR 1 or the lender document collection and retention requirements AND SBA may also determine that such loan is not eligible for a guaranty.   

Our policy team is monitoring the various bills pending in Congress.  It sounds like the House may pay the extension version noted above (16 seeks of forgiveness) by “proxy” this week and that the Senate could potentially pass some version of the Rubio bill  (24 weeks of forgiveness) by unanimous consent.  Congress would then would have to reconcile such bills … if the Senate even agrees that a bill passed “by proxy” in the House was in fact validly passed.  (It seems a perfect commentary on this situation to note that while the entire country is working remotely, Congress can’t manage to agree whether there is some reasonable way for them to vote other than in person.)    

Note that Congress needs to act quickly on this, as the initial PPP borrowers are running out of time to adjust their use of proceeds.  According to early figures released by SBA, $36B of PPP loans were approved before April 6.  The statutory 8-week forgiveness periods for those loans could be expiring as early as next week, unless they opt for the alternative covered period. 

Stay tuned.