SBA Regulatory Update: Paycheck Protection Program Flexibility Act of 2020
On June 11, 2020, the SBA published revisions to its First Interim Final Rule on the Paycheck Protection Program (“PPP”). These rule changes incorporate, among other things, the Paycheck Protection Program Flexibility Act of 2020 (“Act”) that was enacted on June 4. We have previously discussed the passage of the Act on this blog.
How The New SBA Rules Affect The PPP:
While the new rules (the “New Rules”), which are available here, largely incorporate the Act into the PPP Interim Final Rules, what follows is a short discussion highlighting items that small businesses should know when considering the PPP.
Deadline to Apply: According to the SBA, the New Rules have been published quickly because the last day to apply for a PPP loan is June 30, 2020. This is not a part of the Act but rather a new deadline established in the New Rules. While the PPP itself has been stopped and started before, there is no guarantee that this deadline will be extended.
Maturity Date for Loans: The Act provided that PPP loans made on or after June 5, 2020 were to be 5-year terms. Under the initial PPP, the loans were for 2 years. The New Rules clarify that the date that the SBA assigns a loan number to the PPP loan will be the date that the loan is considered to have been “made.”
Loan Forgiveness Proportions: One hallmark of the Act is that it raises the cap on non-payroll spending from 25% to 40% of the amount of the loan. While the Act, as drafted, could be interpreted to treat spending 60% of the loan proceeds on payroll expenses as a threshold requirement to applying for any forgiveness, the New Rules clarify and confirm that 60% refers to the proportion of spending that is forgivable, not a threshold to meet before applying. Therefore, a borrower who gets a loan of $1 Million but only spends $500,000 on payroll can still apply for loan forgiveness, but the maximum forgivable amount will be reduced to $833,333.33 (because the $500,000 spent on payroll must reflect 60% of the maximum forgivable amount).
“Same Level Of Business Activity” Safe Harbor – An Update
We note as well that subsequent discussions and examination of one of the exemptions in the Act highlights a potential ambiguity. While this ambiguity is not discussed in the New Rules, it is important to highlight it as it may affect potential borrowers’ decisions.
The Act provided an exemption to the PPP’s loan forgiveness reduction penalties. The penalty reduces a borrower’s PPP loan forgiveness in proportion to any reduction in a borrower’s full-time equivalent employees (“FTEs”) against prior staffing level benchmarks. Borrowers who can document, in good faith, an inability to return to the “same level of business activity” as prior to February 15, 2020 due to compliance with legal requirements for sanitation, social distancing, and worker or customer safety, will not be subject to this reduction.
We note that this exemption as drafted applies only to businesses whose activity is stunted due to legal compliance with required safety protocols, and is not a blanket exemption for all businesses. For example, a restaurant forced to cut its dining room capacity by 50% to space tables apart might get the exemption, but its linen supplier wouldn’t, even if the supplier’s orders also dropped by 50%, since the linen supplier’s business isn’t affected by its own legal compliance, only that of the restaurant. Of course, the outcome is different if the linen supplier has outsized compliance issues of its own that cause its business to fall.
Thus, while the Act does provide a safe harbor for certain sectors of the hospitality industry, it may leave others out. It will remain to be seen whether this is the intention of the Act, or whether the SBA will publish additional rules changes to allow additional businesses to avail themselves of this exemption.