The Consolidated Appropriations Act of 2021 was passed by Congress on December 21, 2020 and the Act is waiting to be signed into law by President Trump. The Act creates a second loan opportunity within the Paycheck Protection Program (PPP), called a “PPP second draw” loan for businesses that are smaller (300 or fewer employees) or harder-hit.
With the PPP second draw opportunity, the Act extends the PPP to March 31, 2021, and increases the authorization level for PPP to $806.5 billion. Further, the Act identifies set-aside amounts for certain industries or borrower types, including $15 billion for smaller, first-time borrowers with 10 or fewer employees. While the existing CARES Act PPP regulations and guidance (as modified from time to time, including by the Act – see Alert here) apply to second draw loans, the Act modifies certain PPP second draw eligibility and loan and forgiveness terms to allow smaller and/or harder-hit businesses to have more access to these loans. The eligibility and loan terms specific to PPP second draw loans are now as follows:
PPP SECOND DRAW LOAN ELIGIBILITY
Eligible entities for a PPP second draw must: (1) have 300 employees or fewer (per location for borrowers with multiple locations); (2) have used or will use the full amount of their first PPP; and (3) demonstrate at least a 25% percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same 2019 quarter (note: for businesses that were not in operation in Q1, Q2, Q3, and Q4 of 2019 alternative timelines are included in the Act).
Further, the Act expands the types of eligible entities that can receive a PPP second draw (compared to the original PPP loans) to include (a) housing cooperatives, news organizations or FCC license holders, and newspapers, each with no more than 500 employees per physical location; or (b) SBA size standard and 501(c)(6) organizations with lobbying activity restrictions. Finally, the Act establishes a special procedure within the bankruptcy process to allow for a court to approve PPP loans to debtors.
PPP SECOND DRAW LOAN TERMS
Under the PPP second draw program, borrowers may receive one PPP second draw loan of up to 2.5 times their average monthly payroll costs in the one year prior to the loan or the calendar year; provided, however, no second loan can be greater than $2 million. Borrowers in the accommodation and food services industry (NAICS code 72) may receive PPP second draw loans of up to 3.5 times their average monthly payroll costs.
PPP SECOND DRAW LOAN FORGIVENESS
Borrowers of a PPP second draw loan are eligible for loan forgiveness equal to the sum of their payroll costs, as well as covered mortgage, rent, and utility payments, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures incurred during the covered loan period (either an 8 week or 24 week election). The 60/40 cost allocation between payroll and non-payroll costs, as well as other forgiveness requirements and safe harbors, in order to receive full forgiveness will continue to apply.
Borrowers should work with their internal CFO or external accountant to see if they meet the eligibility requirements for a PPP second draw. If the borrower can satisfy the PPP second draw eligibility requirements, they should work with their prior PPP lender to apply for a PPP second draw. Eligible borrowers that did not previously apply or receive a PPP loan, but are now eligible for a PPP under the second draw funding pool should reach out to their primary lender to see if they are participating in the PPP second draw program. Borrowers should seek legal advice as needed for clarification or understanding on this Act or the CARES Act.