The SBA has released a new application and two Interim Final Rules (IFRs) that clarify how businesses and nonprofits can qualify and apply for the second round of Paycheck Protection Program (PPP) loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act). The IFRs are effective immediately to allow for expeditious implementation by lenders.
Referring to them as second draw loans, the IFRs confirm that the relief is available to both first-time and repeat PPP borrowers that meet updated eligibility requirements. According to this new guidance, the second round of loans will be issued under many of the same terms as first draw loans, such as the 5-year maturity date, 1% interest rate, full loan forgiveness potential and good faith certification requirement.
In addition, the IFRs provide the following updates and clarifications:
- Application deadline for second draw PPP loans is March 31, 2021.
- To qualify, repeat PPP borrowers must use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the second draw loan – in addition to meeting the new eligibility requirements for all applicants (generally, 25% revenue reduction and 300 or fewer employees).
- Any borrower that was deemed ineligible for a first draw loan cannot apply for a second draw loan.
The IFRs also explain the methodologies for calculating eligibility requirements for a second draw PPP loan:
- Revenue reduction of 25% or greater in 2020 – This should be determined by comparing the borrower’s quarterly gross receipts for one quarter in 2020 to the gross receipts in the corresponding quarter of 2019. Alternately, borrowers that were in operation all four quarters of 2019 may choose either an annual or quarterly basis for this comparison.
- 300 or fewer employees – The Economic Aid Act applies the same affiliation rules and waivers as the CARES Act when calculating this eligibility requirement. Generally, a borrower must include all affiliates in the total headcount number. Businesses with a NAICS code beginning with 72 are eligible if they have 300 or few employees per physical location.
Maximum Loan Size
Like the initial PPP, the maximum loan size of second draw loans is determined by payroll costs. Under the Economic Aid Act, loan amounts are capped at the lesser of two and a half months (three and a half months for 72 NAICS code borrowers) of average monthly payroll costs or $2 million.
The IFRs provide new options for calculating average monthly payroll costs. Borrowers can determine the expenses based on calendar year 2019 or calendar year 2020. Borrowers who are not self-employed may alternately choose the 12-month period prior to the date the loan is issued. As a practical matter, most borrowers will use 2019 as documentation supporting those payroll costs was provided in the round 1 PPP loan application process and would not need to be submitted again.
What to do next?
We anticipate lender portals will begin to open for second draw PPP loans mid to late next week (January 13 or later). In the interim, if you intend to apply, you should:
- Confirm with your lender that they are participating, or identify an alternate lender;
- Ensure your lender portal access credentials (IDs and passwords) are current and operating;
- Accumulate documentation to support your assertion of revenue reduction. (Borrowers with loan sizes under $150,000 will not be required to submit documentation with the initial application, but will be required to do so in the forgiveness process); and
- Contact and work with your advisors, as necessary, to be prepared to apply as soon as the lender portals open.
If you have any questions about your business’s eligibility for a second draw PPP loan or how the new guidance affects your existing PPP loan, please contact your Grassi advisor or our Crisis Response & Recovery hotline at 212.223.6216 or response@grassiadvisors.com.
