March 5, 2021

Volume XI, Number 64

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First Time PPP Borrowers: What Do I Need to Know about Applying for a First Draw PPP Loan?

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) became law. The Economic Aid Act extended the ability for eligible borrowers to apply for First Draw Paycheck Protection Program (PPP) Loans. On January 6, 2021, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) clarifying the terms and conditions for First Draw PPP loans. Eligible borrowers that have not previously applied for PPP funding may apply for a First Draw PPP Loan until March 31, 2021. In addition, borrowers that previously received PPP funds under the Coronavirus Aid, Relief, and Economic Security (CARES) Act but did not receive loan forgiveness by December 27, 2020, may (1) apply for a First Draw PPP Loan under the Economic Aid Act if they previously returned some or all of their borrowed funds of a CARES Act PPP Loan or (2) under limited circumstances, request to modify the amount of their First Draw PPP Loan if they previously chose not to accept the full amount for which they were eligible. Requests for loan increases by existing PPP borrowers should be submitted electronically via either a new online platform hosted by the SBA or through a new technical API system, commencing on January 11, 2021, for certain community financial institutions (CFIs). The request period lasts until March 31, subject to the availability of funds. The SBA will provide forthcoming guidance to lenders on how existing PPP borrowers can modify their First Draw PPP Loans received under the CARES Act.

Eligibility

Eligible small entities, together with their affiliates (if applicable), having 500 or fewer employees that were previously eligible for First Draw PPP Loans are still eligible for First Draw Loans if (1) they were in operation as of February 15, 2020, and (2) they paid salaries and payroll taxes for employees or independent contractors, unless they are a self-employed individual, independent contractor, or sole proprietorship with no employees. Entities with more than 500 employees in certain industries that meet the SBA’s alternative size standard or its size standards established by SBA 13 C.F.R. 121.201 for those particular industries can also qualify for eligibility. Eligible entities as defined in the IFR include:

  • A small-business concern (as established by SBA 13 C.F.R. 121.201 for each applicable industry or under the SBA alternative size standard).

  • An independent contractor, eligible self-employed individual, or sole proprietor.

  • A business concern, a tax-exempt nonprofit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), a tax-exempt veterans organization described in section 501(c)(19) of the IRC, and a tribal business concern described in section 31(b)(2)(C) of the Small Business Act that employs no more than 500 employees or, if applicable, meets the SBA’s size standards or alternative size standard.

In addition to the above list of previously eligible borrowers, the Economic Aid Act extends the category of borrowers eligible for First Draw PPP Loans to include:

  • A housing cooperative, an eligible section 501(c)(6) organization such as a social welfare organization, or an eligible destination marketing organization that employs no more than 300 employees.

  • A news organization that is majority owned or controlled by a North American Industry Classification System (NAICS) code 511110 (includes newspaper publishers) or 5151 (includes radio and television broadcasting) business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151 that employs no more than 500 employees, or, if applicable, meets the SBA’s size standards or alternative size standard.

  • Another type of entity specifically provided for by PPP rules.

In determining an eligible borrower’s size and number of employees, the SBA’s affiliation rules apply. However, the Economic Aid Act waives the SBA’s affiliation rules for the following entities:

  • Any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned an NAICS code beginning with 72 (including restaurants and hotels)

  • Any business concern operating as a franchise that is assigned a franchise identifier code by the SBA

  • Any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958

  • Any business concern that employs not more than 500 employees, or the size standard established by the administrator for the NAICS code applicable to the business concern, per physical location of such business concern, and is majority owned or controlled by a business concern that is assigned a NAICS code beginning with 511110 (includes newspaper publishers) or 5151 (includes radio and television broadcasting)

  • Any nonprofit organization that is assigned a NAICS code beginning with 5151

On the other hand, the category of ineligible borrowers under the Economic Aid Act was also extended to include (i) businesses not in operation on or before February 15, 2020; (ii) businesses that received a grant under the Shuttered Venue Operator Grant program; (iii) businesses where the president, the vice president, the head of an executive department, or a member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in the business; (iv) any business that is 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 USC. 78f); or (v) any business that is permanently closed. Other businesses that were previously ineligible to obtain a PPP loan remain ineligible.*

Terms and Conditions

Term

Summary

Retroactive Application to Current Borrowers, if Applicable

Term

·  5 years

 

Interest Rate

·  100 basis points calculated on a non-compounding, non-adjusting basis

Applies to loans made on or after December 27, 2020, but can be applied with respect to a PPP loan made before that date upon the mutual agreement of the lender and the borrower.

Payment Start Dart

·  Principal and interest must be paid starting 10 months after the end of the loan forgiveness period unless the borrower submits a loan forgiveness application to the lender within this period.

·  If loan forgiveness is denied, the obligation to make payments of principal and interest begin with the date that the lender notifies the borrower of such.

 

Maximum Loan Amount

·  The lesser of $10 million or an amount calculated using a payroll-based formula authorized by the Economic Aid Act, which equals the product obtained by multiplying the average total monthly payment for payroll costs incurred or paid during 2019 or 2020 (at the election of the borrower) by 2.5. As with prior PPP loans under the CARES Act, the Economic Aid Act excludes employee compensation amounts paid in excess of $100,000 and includes the amount of any Economic Injury Disaster Loan (EIDL) being refinanced (but not any advance of an EIDL). 

·  Businesses that are part of a single corporate group in no event shall receive more than $20 million of PPP loans in the aggregate.

Applies to loans made on or after December 27, 2020, but can be applied to PPP borrowers that did not receive loan forgiveness by December 27, 2020, under limited circumstances.

Fees

·  The SBA will pay lenders’ fees based on the balance of the financing outstanding at the time of the disbursement of the loan.

Applies to loans made on or after December 27, 2020.

Certification

·  The eligible borrower must certify in good faith that the “[c]urrent economic uncertainty makes this loan request necessary to support [its] ongoing operations.” Only PPP borrowers along with their affiliates that received PPP loans in an original principal amount of less than $2 million will be deemed to have made the required certification in good faith without additional diligence on behalf of the lender or the SBA.

·  The eligible borrower was in operation on February 15, 2020, has not permanently closed, and was either an eligible self-employed individual, an independent contractor, or a sole proprietorship with no employees, or had employees for whom it paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC.

·  The funds will be used to retain workers and maintain payroll or to make payments for mortgage interest, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures.

·  Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, covered utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, and not more than 40% of the forgiven amount may be for non-payroll costs.

·  The eligible borrower has not received another PPP loan.

·  The eligible borrower has not received a Shuttered Venue Operator Grant from the SBA.

·  The president, the vice president, the head of an executive department, or a member of Congress, or the spouse of such person as determined under applicable common law, does not directly or indirectly hold a controlling interest in the eligible borrower.

·  The eligible borrower is not 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.

 

Guaranty

·  100% guaranteed by the SBA

·  No personal guarantees required

 

Collateral

·  None required

 

 

Loan Forgiveness

Borrowers may obtain loan forgiveness for certain expenses up to the full principal amount of the loan. In addition to expenses previously eligible for loan forgiveness, including payroll costs, mortgage interest payments, rent payments, utility payments, interest payments on any other debt obligations that were incurred before February 15, 2020, and refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020, the Economic Aid Act expands the categories of eligible expenses to include covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. Additionally, the Economic Aid Act changed the covered period from an election of either eight weeks or 24 weeks to a period between 8 and 24 weeks at the election of the borrower. The SBA has noted that it will issue a subsequent IFR to address all aspects of loan forgiveness and the loan review process. A more detailed overview of the loan forgiveness process can be found here.

Applying for a Loan

Borrowers can apply for a First Draw PPP Loan through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating. A copy of the application form is accessible here: PPP Borrower Application Form (SBA Form 2483). In addition to providing SBA Form 2483, the borrower will have to provide necessary payroll documentation. Borrowers that need help navigating these requirements and rules should reach out to their counsel before or during the application process.


*Ineligible businesses include: (i) businesses engaged in illegal activity; (ii) household employers; (iii) owners of 20% or more of the equity of the applicant who are presently incarcerated or presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or have been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation for a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the past five years or any other felony within the past year; (iv) businesses that previously obtained a direct or guaranteed loan from the SBA or other federal agency and is currently delinquent or has defaulted within the past seven years and caused a loss for the government; (v) hedge funds and private equity firms (businesses involved in investment or speculation); (vi) debtor applicants in a bankruptcy proceeding either at the time they submit the application or at any time before the loan is disbursed; and (vii) businesses that are ineligible for SBA 7(a) loans under 13 CFR 120.110, except for paragraphs (a), (g), and (k).

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© 2020 Jones Walker LLPNational Law Review, Volume XI, Number 14
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Curtis R. Hearn Securities Attorney Jones Walker Law Firm
Partner

Curt Hearn is the practice group leader of the Corporate & Securities Practice Group. He handles mergers, acquisitions, and divestitures, as well as capital raising transactions for a variety of publicly traded and privately held companies. Mr. Hearn represents private equity and venture capital firms, and focuses his practice on companies in the energy, energy service, healthcare, transportation, logistics, and manufacturing sectors. 

Mr. Hearn has more than twenty years of experience representing large bank holding companies in Louisiana....

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Aimee Andrepont Decuir Corporate Attorney Jones Walker New Orleans, LA
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Aimee Andrepont Decuir is an associate in the Corporate Practice Group. Aimee’s practice focuses on drafting and negotiating commercial contracts, commercial lending and finance, mergers and acquisitions, and other transactional matters.


Aimee’s experience includes assisting clients with commercial contract preparation and negotiation, business entity formation, joint ventures, and financial transactions. Aimee also assists a range of clients with drafting business documents, asset sales, and other corporate transactions.

Prior to joining Jones Walker,...

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Joshua A. DeCuir is an associate in the Corporate Practice Group, where he focuses his practice on financial and commercial transactions.


As a corporate transactional attorney with broad experience, Josh represents clients primarily in the energy, oil, and gas marketplaces. Prior to joining the firm, he worked as in-house counsel at several large and small companies and in private practice. Drawing on his dual perspective, Josh analyzes the issues at hand and creatively navigates the unique dynamics of each client’s situation.

Josh drafts, reviews, and...

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