Economic Aid Act Provides Second Draw PPP Loans - Financing

Highlights

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), which was part of the Consolidated Appropriations Act, 2021 package, extends the Paycheck Protection Program (PPP) to include a second round of funding to certain businesses that received funding under the original PPP.
The Economic Aid Act's Second Draw PPP Loans are available through March 31, 2021.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), which was included in the Consolidated Appropriations Act, 2021, was signed into law on Dec. 27, 2020. The U.S. Small Business Administration (SBA) published a new Interim Final Rule (IFR) on Jan. 6, 2021, relating to the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as revised by the Economic Aid Act, in particular to implement Section 311 of the Economic Aid Act. Section 311 adds a second temporary program to the SBA's 7(a) Loan Program – Paycheck Protection Program Second Draw Loans – allowing certain existing PPP borrowers to make a second borrowing under the PPP. The SBA's authority to guaranty second draw loans expires on March 31, 2021.

The stated intent of Second Draw PPP Loans is "to provide expeditious relief to America's small businesses," just as it was for the original PPP and any first-time loans to be made under PPP during the new draw window (collectively, First Draw PPP Loans). Generally speaking, Second Draw PPP Loans are also guaranteed 100 percent by the SBA under the same terms and conditions as First Draw PPP Loans, and are also generally speaking subject to the Consolidated First Draw PPP IFR issued concurrently with the IFR discussed herein and summarized in a previous Holland & Knight alert. (See "PPP and the Economic Aid Act," Jan. 12, 2021.).

In reviewing the criteria below, please note that this Holland & Knight alert only addresses the key aspects of the Second Draw PPP Loans and that you should also refer to other previous alerts published by Holland & Knight (see Previous PPP Alerts below) to understand the full PPP program and the other rules that remain in effect for the PPP program in addition to those discussed herein.

Program Generally

Second Draw PPP Loans are generally subject to the same terms, conditions and requirements as First Draw PPP Loans, including but not limited to:

100 percent guaranteed by the SBA
no collateral
no personal guarantees
1 percent interest rate (calculated on a noncompounding, nonadjustable basis).
maturity of five years
loans to be processed under delegated authority to lenders, and such lenders will be permitted to rely on certifications of the borrower to determine the borrower's eligibility and use of loan proceeds

Certain Eligibility Requirements

In general terms, the eligibility requirements for Second Draw PPP Loans are narrower than those applicable to First Draw PPP Loans. Second Draw PPP Loans are only available to borrowers with 300 or fewer employees and that have experienced a revenue reduction in 2020 as compared to 2019 in certain specified periods. In addition, Second Draw PPP Loans can only be extended to borrowers that have used, or will use, the full amount of any First Draw PPP Loan prior to the expected disbursement date of the Second Draw PPP Loan (including any increase to a First Draw PPP Loan as permitted by the Economic Aid Act).

Second Draw PPP Loans are only available to borrowers that have experienced revenue reductions of 25 percent or greater in one quarter in 2020 as compared to the corresponding quarter in 2019. The IFR implements this rule by providing that if a borrower was in operation all four quarters of 2019, it may submit its annual tax returns substantiating the decline in annual receipts of 25 percent or more. This provides an identifiable method of ascertaining the required decline because if the annual receipts declined 25 percent or more, then necessarily quarterly receipts also declined 25 percent or more in one or more quarters. Borrowers that do not meet the foregoing test may nevertheless qualify by demonstrating loss for an applicable quarterly period. Note that demonstration of lost revenue as required by the IFR is not a substitute for the necessity certification. Among other things, all borrowers of Second Draw PPP Loans will still be required to certify that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant."

The Economic Aid Act did not otherwise include a definition of gross receipts, and therefore the SBA will use the same concept of gross receipts as employed in its size regulations set forth in 13 C.F.R. 121.104. Note that 2020 gross receipts exclude any forgiveness amount, which notably is consistent with the rule that forgiven PPP loans do not constitute taxable income generally speaking. The IFR also helps to clarify the treatment of certain affiliates with respect to gross receipts. Other than with respect to divisions, generally speaking, if the borrower acquired or disposed of an affiliate, gross receipts would be included (or excluded, as the case may be) for the entire period.

It is also notable that the Economic Aid Act permits Second Draw PPP Loans for borrowers with North American Industry Classification System (NAICS) Code 72 with no more than 300 employees per location (including restaurants and hotels) so long as such business meets the revenue reduction requirements and otherwise satisfies the eligibility criteria. The same standard applies to certain news organizations pursuant to Section 317 of the Economic Aid Act.

The affiliation rules applicable to Second Draw PPP Loans are the same as for First Draw PPP Loans, which generally speaking provides that a business is considered together with its affiliates to determine eligibility, except as waived by the CARES Act. The same waivers apply to Second Draw PPP Loans, and includes a waiver again for certain news organizations.

Certain entities are not eligible for Second Draw PPP Loans. Quite simply any entity that was not eligible to receive a First Draw PPP Loan (whether or not it received a loan) is also not eligible for a Second Draw Loan (as determined in accordance with the Consolidated First Draw PPP IFR), ensuring that borrowers that somehow received PPP loans despite being ineligible are not eligible for this round. The Economic Aid Act also prohibits the following entities from being eligible for Second Draw PPP Loans:

a business concern or entity primarily engaged in political activities or lobbying activities, including any entity that is organized for research or for engaging in advocacy in areas such as public policy or political strategy or that describes itself as a think tank in any public documents
certain entities organized under the laws of the People's Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People's Republic of China or the Special Administrative Region of Hong Kong
any person required to submit a registration statement under Section 2 of the Foreign Agents Registration Act of 1938 (22 U.S.C. 612)
a person or entity that receives a grant for shuttered venue operators under Section 324 of the Economic Aid Act
entities in which the President, Vice President, head of an Executive Department, or a Member of Congress, or the spouse of such person owns, controls or holds at least 20 percent of any class of equity
a publicly traded company, defined as an issuer, the securities of which are listed on an exchange registered as a national securities exchange under Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f)
any person that has already received a Second Draw PPP Loan, and
an entity that has permanently closed

Although it is clear that the intent of the program is to support businesses still in operation as only such businesses can retain employees (the primary purpose of the PPP), the IFR makes equally clear that a borrower that has merely temporarily closed or suspended its business is eligible for a Second Draw PPP Loan.

Maximum Loan Amount

The Economic Aid Act generally provides that the maximum loan amount for a Second Draw PPP Loan is equal to the lesser of 1) 2.5 months of the borrower's average monthly payroll costs and 2) $2 million. The relevant time period for calculating a borrower's payroll costs for a Second Draw PPP Loan is either the 12-month period prior to when the loan is made or calendar year 2019 (subject to other methodologies for certain categories of borrowers). Additionally, borrowers may use calendar year 2020 rather than the 12 months preceding the date the loan is made for simplicity. Importantly however, in addition to affiliation relief, business that have an NAICS Code 72 may apply for a Second Draw PPP Loan in an amount equal to 3.5 months of payroll costs in lieu of 2.5 months – the $2 million cap still applies, however. Additionally, a corporate group is limited to Second Draw PPP Loans in an aggregate amount not to exceed $4 million (whereas corporate groups are similarly limited to $20 million of First Draw PPP Loans).

Unresolved Borrowers

If a borrower's First Draw PPP Loan is under review or audit by SBA or the SBA has information in its possession indicating that a certain borrower may have been ineligible for some or all of such borrower's First Draw PPP Loan (i.e., an unresolved borrower), the SBA will notify the lender and will not issue its guaranty or an SBA loan number until whatever issue is giving rise to the unresolved borrower status is first resolved. However, the SBA stated that it will resolve issues related to unresolved borrowers "expeditiously." Importantly, these procedures are not intended to disqualify an eligible unresolved borrower from receiving a Second Draw PPP Loan – many "flags" that prompted the review may be resolved in the borrower's favor, per the SBA's IFR. Further, the SBA has stated that there will be a set aside of available appropriations to fund Second Draw PPP Loans for unresolved borrowers if, and when, they are approved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.