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Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

January 8, 2021

COVID-19: New Economic Aid Act Allows Certain Borrowers to Take a Second Loan Under the Paycheck Protection Program

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) adds a second temporary program to the SBA’s 7(a) loan program that provides certain borrowers of Paycheck Protection Program (PPP) loans the opportunity to apply for and receive a second PPP loan (called a second draw PPP loan) under substantially similar terms, conditions, and requirements as their first PPP loan.

Second draw PPP loans are available until March 31, 2021, to borrowers that (i) have 300 or fewer employees, (ii) experienced a revenue reduction of at least 25 percent in any quarter in 2020 relative to the same quarter in 2019, (iii) previously received a PPP loan, and (iv) have used or will use the full amount of their initial PPP loan for authorized purposes on or before the expected date of disbursement of the second draw PPP loan. The borrower must have spent the full amount of its first PPP loan on eligible expenses under the PPP rules to be eligible for a second draw PPP loan.

Like borrowers’ initial PPP loans, the terms of the second draw PPP loans are as follows:

  • The SBA will guarantee 100 percent of second draw PPP loans and may forgive up to the full principal loan amount.
  • No collateral is required.
  • No personal guarantees are required.
  • The interest rate is 1 percent, calculated on a non-compounding, nonadjustable basis.
  • There’s a five-year maturity.
  • Borrowers will be required to make certifications upon which lenders will rely to determine the borrower’s eligibility and use of loan proceeds.

When calculating the revenue reduction requirement, a borrower must compare its quarterly gross receipts for one quarter in 2020 with its gross receipts for the corresponding quarter in 2019. A borrower that was in operation in all four quarters of 2019 is deemed to have experienced the required revenue reduction if it experienced a reduction in annual receipts of at least 25 percent in 2020 compared to 2019 and the borrower submits copies of its annual tax forms to substantiate the decline.

Under the CARES Act, a business entity assigned a NAICS code beginning with 72 (which includes hotels and restaurants) that employs not more than 500 employees at a single location was eligible to receive a PPP loan. The Economic Aid Act reduces the number of employees to 300 or fewer per physical location. The same rule will apply to eligible news organizations with more than one physical location. As a result, a single business entity in the accommodation and food service industry is eligible to receive a second draw PPP loan if it employs fewer than 300 employees per physical location, meets the revenue reduction requirements, and otherwise satisfies the eligibility criteria. For all entities not assigned a NAICS code beginning with 72, for purposes of determining the number of employees, a borrower must include all employees of its affiliates. The determination of a borrower’s affiliates, as well as the waiver of affiliation rules, is the same as was the case for the borrower’s initial PPP loan.

For purposes of the revenue reduction calculation, the definition of “gross receipts” is consistent with the definition of receipts in 13 CFR 121.104, meaning all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Not included in gross receipts are net capital gains or losses or taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers. Also excluded is any forgiveness amount of a borrower’s initial PPP loan received in calendar year 2020.

A borrower is ineligible for a second draw PPP loan if it receives a grant for shuttered venue operators under the Economic Aid Act. Additionally, any entity that has permanently closed is prohibited from receiving a second draw PPP loan. However, borrowers that have temporarily closed or temporarily suspended their business operations remain eligible for a second draw PPP loan.

The maximum loan amount for second draw PPP loans will be the lesser of (1) the average total monthly payment for payroll costs incurred or paid during either (i) the 2020 calendar year or (ii) the 2019 calendar year, multiplied by 2.5; or (2) $2 million. In the case of borrowers who are not self-employed, the borrower can use the precise one-year period before the date the loan is made or calendar year 2020. For accommodation and food service industries, the multiplier is 3.5 of average payroll with the same $2 million cap. Borrowers part of a single corporate group are limited to receiving $4 million in second draw PPP loans in the aggregate.

The documentation required to substantiate a borrower’s payroll cost calculations is generally the same as the documentation required for a borrower’s initial loan. For second draw PPP loans with a principal amount greater than $150,000, borrowers must also submit documentation adequate to establish the required revenue reduction. This documentation is not required at the time of application for second draw PPP loans of $150,000 or less, but must be submitted on or before the date the borrower applies for loan forgiveness.

If a borrower’s initial PPP loan is under review by the SBA, an SBA loan number will not be provided for the second draw PPP loan until the issue related to the borrower’s initial PPP loan is resolved. The SBA will set aside available funds for second draw PPP loans applied for by unresolved borrowers in the event they are approved.

In addition to the certifications borrowers are required to make to receive an initial PPP loan, the certifications unique to second draw PPP loans are as follows:

  • The borrower has not and will not receive another second draw PPP loan.
  • The borrower has realized a reduction in gross receipt in excess of 25 percent relative to the applicable comparison time period.
  • The borrower received an initial PPP loan and, before the date on which the second draw PPP loan is expected to be disbursed, the borrower will have used the full loan amount of the initial PPP loan only for eligible expenses.

If you have any questions regarding this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Samantha Podlas, associate, at spodlas@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.

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