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On Dec. 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, an omnibus stimulus and budget act that includes the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (HHSB Act). The HHSB Act makes significant amendments to the CARES Act impacting the Paycheck Protection Program (PPP).
These changes establish a second-draw loan option for certain existing PPP borrowers who meet new size and revenue loss tests, and permit a supplemental draw on existing PPP loans for certain existing PPP borrowers who were unable to draw the maximum amount in their first PPP loan draw due to changes in rules or return of funds that could not be used at the time of the first draw.
The HHSB Act also expands covered expenses that are eligible for forgiveness and makes other changes to forgiveness requirements, as well as expanding availability of first-time PPP loans for certain specified applicants. A total of $284.45 billion in the aggregate has been authorized for second-draw, supplemental-draw and first-time PPP loans, with numerous set-asides for underserved communities. These new, second-draw and supplemental PPP loans will be available until March 31, 2021.
Launch of availability of new PPP loans and revised forgiveness requirements will likely be delayed until the Small Business Administration (SBA) and the U.S. Department of the Treasury issue new rules and guidance regarding implementation of the HHSB Act revisions, so details about the mechanics of these changes are still to come.
Pending necessary regulatory guidance, below is a summary of the key changes to PPP under the HHSB Act.
Forgiveness Revisions. Key revisions to the forgiveness requirements for new PPP loans and existing PPP loans, which apply to existing PPP loans in most cases except where forgiveness has already been determined, include permitting a flexible forgiveness period of between eight and 24 weeks, at the election of the PPP borrower, although any forgiveness period must commence on the date the PPP loan was originated.
In addition, forgivable non-payroll expenses were expanded to include certain operations expenditures, supplier costs and worker protection expenditures to the extent resulting from changes necessitated by COVID-19, as more fully described in the HHSB Act, as well as the costs of repairing property damage from civil unrest in 2020 that insurance did not cover.
Notwithstanding the expansion of covered non-payroll costs for purposes of forgiveness, the HHSB Act retained the requirement that at least 60 percent of the forgiven amount be payroll costs. Safe harbors for curing reductions in employee head count or reductions in employee compensation were extended for PPP loans made after the enactment of the HHSB Act to permit cure by the end of the relevant covered period (rather than by Dec. 31, 2020).
The forgiveness application process for PPP loans of $150,000 or less was simplified to a one-page application to be promulgated by the SBA in the coming weeks. The statute limits required certifications and documentation, although borrowers of a second-draw PPP loan of $150,000 or less who only certify revenue loss at the time of application for the second-draw PPP loan also must provide evidence of that revenue loss prior to or as part of the application for forgiveness for that loan.
SBA guidelines will be required to determine whether PPP borrowers with existing PPP loans may wait to apply for forgiveness of their original PPP loans and supplemental or second-draw PPP loans at the same time, or will need to apply for forgiveness separately for each PPP loan.
PPP Loan Applicant Expansions, Limitations and Exclusions. The HHSB Act clarified that only an applicant in business on Feb. 15, 2020, is eligible for any PPP loan, including a supplemental or second-draw PPP loan or new PPP loan. The HHSB Act also makes eligible for new PPP loans certain news organizations, housing cooperatives, 501(c)(6) organizations (so long as lobbying activities comprise no more than 15 percent of receipts or activities) and destination marketing organizations (so long as lobbying activities comprise no more than 15 percent of receipts or activities), and it provides expanded calculation and eligibility guidance for farmers and ranchers.
After enactment of the HHSB Act, public companies, entities listed in 13 CFR 120.110 (other than certain nonprofits and religious organizations), recipients of SBA shuttered venue grants established by the HHSB Act, applicants primarily engaged in lobbying activities, Foreign Agents Registration Act of 1938 registrants, and applicants with 20 percent or more direct or indirect ownership by a Chinese company or with one or more board members resident in the Peoples Republic of China are expressly made ineligible for PPP loans.
Second-Draw PPP Loans. Most existing PPP borrowers (subject to new exclusions noted above) that (a) have used all their existing PPP loans no later than the date of disbursement of their second-draw loans, (b) have 300 or fewer employees and (c) can demonstrate a 25 percent or more loss of gross revenues in any quarter of 2020 compared to the same quarter of 2019 (with flexible alternative comparison periods for PPP borrowers that were not in business all or any portion of 2019) will be eligible for second-draw PPP loans.
The maximum loan size for a second-draw PPP loan in most cases will be the lesser of 2.5 times average monthly payroll for one of two periods (at the election of the PPP borrower) and $2 million. PPP borrowers with an NAICS code 72 (mostly in the restaurant and hotel industries) may borrow up to the lesser of 3.5 times average monthly payroll and $2 million. In addition, existing PPP borrowers who qualified under the more-than-one-location exemption will continue to qualify only for each location that can demonstrate that it satisfies the requirements regarding 300 or fewer employees and 25 percent gross revenues reduction.
Only one second-draw loan is permitted per existing PPP borrower.
Supplemental PPP Loans — Returned or Rejected Funds. Supplemental PPP loans will be available to certain existing PPP borrowers that have not yet received forgiveness on their existing PPP loan, and either (a) returned all or part of a covered loan for which it was approved or (b) did not accept the full amount of a covered loan. Based on the heading of Section 312 of the HHSB Act, it appears this is intended to include PPP borrowers who could have borrowed more at the time of their PPP loan applications, had rule changes subsequently announced by SBA been in effect at the time the PPP borrower applied for the PPP loan, but that concept is not described in the statute itself. The maximum amount of the supplemental PPP loan will be the difference between the maximum PPP loan for which the PPP borrower was eligible and the amount actually drawn (less any amount returned, if applicable). It is not clear from the statute whether a PPP borrower could obtain both a supplemental and a second-draw PPP loan. The HHSB Act requires SBA to establish further details for these supplemental loans within 17 days of enactment of the HHSB Act.
PPP Lenders. Any PPP lender previously eligible to make a PPP loan continues to be eligible to do so, though there is no express requirement that any PPP lender provide additional PPP loans under the PPP loan programs implemented by the HHSB Act. There are other changes relevant to PPP lenders, including limitations on review of forgiveness applications of $150,000 or less and a restatement of the hold-harmless provision of Section 1006 of the CARES Act to cover origination and forgiveness, though it seems to cover only second-draw PPP loans and not existing or new PPP loans due to a drafting error that presumably will be corrected by regulation or otherwise.
For all the revisions effected by the HHSB Act, further guidance from the U.S. Treasury Department and the SBA will be critical to the implementation and availability of the additional PPP loan programs. McGuireWoods will be monitoring and analyzing such guidance as it becomes available over the next several weeks and beyond.
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