Paycheck Protection Program Loans: A Roller Coaster Ride

by Lisa A. Krupicka

  • The Paycheck Protection Program (“PPP”) was established on March 27, 2020 as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act providing for forgivable loans to qualifying small businesses
  • Initial funding was $349 billion
  • PPP loans are to be administered by the Small Business Administration (“SBA”)
  • PPP loans were to be made through banks rather than directly through the SBA
  • In order to obtain a small business loan, SBA ordinarily requires that a borrower certify that it cannot obtain credit elsewhere; that requirement is waived but borrowers were required to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • Borrowers had to qualify as a small business, defined as having fewer than 500 employees
  • Exception to the 500 employee requirement was made for companies with North American Industry Classification System Code 72, which covers hotels, casinos, restaurants, caterers, and bars, among others
  • These businesses would qualify if they employed fewer than 500 employees at each of their physical locations
  • The program was open to applicants as of April 3, 2020
  • Many borrowers found the electronic portal established by lenders to be difficult to access because of electronic glitches and/or because of the sheer number of borrowers trying to apply at  once
  • National banks expressed reluctance to participate, citing potential liability and scale concerns
  • On April 9, 2020, the Federal Reserve announced it would support the PPP by creating the Paycheck Protection Program Liquidity Facility (“PPPLF”) to extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value
  • Nevertheless, media reports showed that some lenders would loan only to current customers and favored larger borrowers over smaller ones
  • The initial funding for the PPP was exhausted on April 16, 2020
  • On April 27, 2020, Congress provided for an additional $311 billion for the PPP
  • National restaurant chains such as Ruth Chris and Shake Shack received loans under the Category 72 exception, but quickly returned the money after intense public outcry
  • Elite private schools like Sidwell Friends in Washington, D.C. (Obama daughters attended), the Brentwood School in Los Angeles (Treasury Secretary Mnuchin’s children attend),  and St. Andrew’s Episcopal School in Maryland (Barron Trump attends) also received PPP loans
  • The Los Angeles Lakers (valued at $3.7 billion) also received a PPP loan and returned it after negative media coverage
  • In addition, a number of publicly traded companies were approved for loans despite robust market capitalization:

  • On April 23, 2020, the SBA added Question and Answer 31 to its FAQs on the PPP, which advised borrowers to “review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
  • Borrowers were also advised to take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business”
  • As an example, the SBA advised that it was “unlikely” that “a public company with substantial market value and access to capital markets will be able to make the required certification in good faith”
  • Q&A 31 also created a safe harbor by which businesses that gave back their loans by May 7, 2020  would be presumed to have made a good faith certification
  • Q&A 37 was also added, which asked “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  The answer was a cryptic and unhelpful “See response to FAQ #31.”
  • On May 1, 2020, Steve Mnuchin tweeted that “some private schools with significant endowments have taken PPP loans.  They should return them.”
  • As a result of Secretary Mnuchin’s tweet, some prominent private schools, including the Brentwood School, returned their PPP loans
  • Late on May 5, 2020 the SBA extended the safe harbor to May 14, 2020 and promised to provide additional guidance before then
  • On May 13, 2020, the SBA added FAQs 43-47 offering further guidance, stating in the answer to Question 46 that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan in good faith.”
  • The SBA made clear that loans of $2 million or above can still have an adequate basis to make the certification in good faith “based on their individual circumstances” and that even if the SBA determines that a certification was not made in good faith, it will not pursue enforcement action as long as the loan is repaid on demand from the SBA
  • The SBA also extended the safe harbor deadline to May 18, 2020
  • The most recent version of the FAQs published by the SBA can be found here.
  • PPP loans are in theory fully forgivable if at least 75% of the loan proceeds are spent on payroll costs within eight weeks of disbursement of loan
  • Forgiveness is tied to maintaining headcount and payroll
  • For some businesses that received PPP loans during the first round of funding, it was difficult to recall workers who stood to make more from unemployment than from working, and thus difficult to meet payroll-utilization requirements for full forgiveness
  • SBA, on May 15, 2020, released the application to be used by borrowers in connection with seeking loan forgiveness
  • The application does not alter the requirement that at least 75% of loan proceeds be used for payroll costs
  • The application, however, does contain certain concessions to borrowers
  • One  concession is that, for the purpose of calculating payroll costs, borrowers may choose between the eight-week period starting on the date of loan disbursement OR the eight-week period beginning on the first day of the first pay period following the disbursement date
  • Borrowers may also include expenses incurred OR paid during the eight-week period
  • According to the form’s instructions, forgiveness will not be reduced for those headcount reductions in which (1) the borrower made a written offer in good faith to the employee and the employee thereafter rejected the offer and refused to return to work; (2) the employee was “fired for cause”; (3) the employee voluntarily resigned; or (4) the employee voluntarily requested and received a reduction in his/her hours
  • Consistent with the SBA’s earlier guidance that loan amounts above $2 million will be audited, there is a box on the application that must be checked if the borrower (together with its affiliates, as defined under the applicable affiliation rules) received loan proceeds in excess of $2 million