SBA’s $349 Billion Business Relief Program Is Off to a Bumpy Start
When the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law by President Trump just over one week ago, many businesses were hopeful that the CARES Act’s Paycheck Protection Program (the “PPP”) would provide them with quick access to urgently needed cash. The PPP went live on Friday, April 3, and thousands of businesses throughout the country tried submitting their loan applications to participating banks. However, banks were not given sufficient time to implement this new program, causing confusion and delays. Complicating matters, the agency administering the PPP, the U.S. Small Business Administration (the “SBA”), did not provide formal guidance until late in the day on Thursday, April 2, when it issued its interim final rule (the “Rule”) implementing the PPP. While the Rule clarifies some provisions of the PPP, it also raises questions that will be resolved only after the SBA provides further guidance.
The following addresses the most relevant provisions of the Rule in a friendly Q&A format, pointing out where it supplements or deviates from the terms of the PPP contained in the CARES Act, as well as identifying the key unresolved issues. For a description of the PPP, please see “Stroock’s Guide to the CARES Act’s Business Loan Lifeline,” (March 30, 2020) (the “Prior Bulletin”). Please note that this format does not describe many of the technical provisions of the Rule or the PPP and is qualified in its entirety by the terms of the CARES Act and the Rule. For further information or if you have any questions, please reach out to one of the authors.
Am I still eligible for a loan?
The Rule reiterates that during the “covered period” (February 15, 2020 – June 30, 2020), virtually all businesses and nonprofit organizations with 500 or fewer employees that were in operation on February 15, 2020, as well as sole proprietors, self-employed workers and independent contractors, will be eligible for loans, which may be forgiven under certain circumstances. Businesses and nonprofit organizations with more than 500 employees also may be able to qualify if they satisfy the size standard (which relates to number of employees) established by the SBA for the industry in which such business or not-for-profit organization operates.
However, the Rule goes on to say that even if an applicant satisfies the above criteria, it will not be eligible for a PPP Loan if:
- It is engaged in any activity that is illegal under federal, state or local law;
- It is a household employer (individuals who employ household employees such as nannies or housekeepers);
- An owner of 20 percent or more of the equity of the business is incarcerated, on probation, on parole; presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last five years; or
- It, or any other business owned or controlled by the applicant or any of its owners, has ever obtained a direct or guaranteed loan from the SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government.
Finally, while not contained in the CARES Act or other guidance previously released by the SBA, the Rule provides that certain businesses that are not eligible to receive loans under the SBA’s 7(a) loan program also will not be eligible to receive PPP loans. However, nonprofit organizations (including religious corporations) authorized to receive PPP loans under the CARES Act will remain eligible, even though they otherwise would not qualify for an SBA 7(a) loan.
Based on the above, the following entities are not eligible to receive PPP loans:
- Financial businesses primarily engaged in the business of lending, such as banks, finance companies and factors;
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds;
- Life insurance companies;
- Businesses located in a foreign country;
- Pyramid sale distribution plans;
- Businesses deriving more than one-third of their annual gross revenue from legal gambling activities;
- Businesses engaged in any illegal activity;
- Private clubs and businesses which limit the number of memberships for reasons other than capacity;
- Government-owned entities (except for businesses owned or controlled by a Native American tribe);
- Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
- Businesses with an affiliate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
- Businesses in which the lender or any of its affiliates owns an equity interest;
- Businesses which present live sex performances or derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;
- Unless waived by the SBA for good cause, businesses that have previously defaulted on certain federal loans or federally assisted financing;
- Businesses primarily engaged in political or lobbying activities; and
- Speculative businesses (such as oil wildcatting).
Regarding passive businesses owned by developers and landlords, the SBA’s guidelines provide the following:
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds generally are not eligible.
- Businesses primarily engaged in subdividing real property into lots and developing it for resale on its own account are not eligible.
- Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible. For example, shopping centers, salon suites, and similar business models that generate income by renting space to accommodate independent businesses that provide services directly to the public are not eligible.
- Businesses that lease land for the installation of a cell phone tower, solar panels, billboards or wind turbine also are not eligible. However, the business operating the cell phone tower, solar panel, billboard, or wind turbine is eligible.
- Businesses that have entered into a management agreement with a third party that gives the management company sole discretion to manage the operations of the business, including control over the employees, the finances and the bank accounts of the business, with no involvement by the owner(s) of the applicant business, are not eligible.
- Apartment buildings and mobile home parks are not eligible.
- Residential facilities that do not provide healthcare and/or medical services are not eligible.
Based on the above, real property owners may not be eligible to receive a PPP loan, and it is not clear how the apartment building/residential facilities exclusion will be interpreted. However, although in the absence of guidance the matter is not free from doubt, these exclusions would appear not to apply to affiliated management companies or construction companies.
Do I have to include the employees of my affiliates in determining if I have 500 or fewer employees?
We are waiting for further guidance from the SBA. As described in the Prior Bulletin, the SBA’s affiliate aggregation rules may require applicants to include the number of employees of affiliated entities. The CARES Act waives, until June 30, 2020, the SBA’s affiliate aggregation rules with respect to eligibility for a loan for any business concern (i) with not more than 500 employees that has an NAICS code beginning with 72 (i.e., accommodation and food services), (ii) operating as a franchise that is assigned a franchise identifier code by the SBA and (iii) that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.
The Rule states that the SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules to PPP loans.
Does the Rule change the formula for determining the amount I may borrow, or the permitted use of loan proceeds?
No, these remain the same as described in the Prior Bulletin.
Does the Rule change the way loan forgiveness is determined?
Yes, this has changed slightly. The CARES Act provides that, subject to certain limitations described in the Prior Bulletin, the portion of the loan proceeds used for the following purposes during the eight-week period starting on the loan origination date will be forgiven: (i) payroll costs, (ii) interest on mortgage loans originated before February 15, 2020, (iii) rent obligations under a leasing agreement in force before February 15, 2020, and (iv) utility payments (gas, water, transportation, telephone or internet access).
The Rule adds a requirement that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.
What are the terms of the portion of my PPP loan that is not forgiven?
The PPP loan will bear interest at a rate of 1.0% per annum (this is a change from the previously reported rate of 0.5% per annum) and have a maturity of two years. Interest may be deferred for six months following the date of loan disbursement but the interest will continue to accrue during the deferral period. The PPP loan may be prepaid at any time without penalty.
May I apply for more than one PPP loan?
No. The Rule states that no eligible borrower may receive more than one PPP loan. Therefore, if you apply for a PPP loan, you may want to apply for the maximum amount for which you are eligible.
What happens if I use PPP loan funds for unauthorized purposes?
The Rule states that in this instance the SBA will direct you to repay those amounts. However, if you knowingly use the funds for unauthorized purposes, you will be subject to additional liability. If one of the shareholders, members or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against them.
Is there anything else I should know about PPP loans?
While not mentioned in the CARES Act or the Rule, the form of PPP loan application posted on the SBA’s website requires the applicant to certify that “to the extent feasible, I will purchase only American-made equipment and products.”
Also, as many loan documents and credit facilities contain covenants restricting or limiting a borrower’s ability to incur additional debt, each potential borrower of a PPP loan must conduct its own diligence to determine if any third-party consents are needed.
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This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.