In recent weeks, the $659 billion Paycheck Protection Program has come under political fire. The program began accepting loan applications April 3 and quickly ran out of money. Congress replenished the fund at the same time news broke that several large and/or well-known companies had received multimillion-dollar loans under the program, including Ruth’s Chris Steak House and the Los Angeles Lakers. These companies, along with many others, have since returned the money.
The PPP was written into the Coronavirus Aid, Relief, and Economic Security (CARES) Act to allow companies with 500 employees or less to apply for forgivable loans of up to $10 million. The law waived the Small Business Administration’s usual requirement that an applicant demonstrate an inability to receive funds from other sources and expressly exempted franchises and applicants in the restaurant and hospitality industries from the SBA’s existing affiliation rules. Perhaps most importantly, the PPP allows these loans to be forgiven if the borrower meets certain requirements.
Gregory A. Brower
Amid political outrage and confusion as to how some large, national and, in some cases, even publicly traded companies received these loans, the Treasury Department and the SBA released guidance indicating doubt that large companies with access to the capital markets could make the certifications necessary to be eligible for the program. In addition, Treasury and the SBA announced they would fully review all loans in excess of $2 million following applications for loan forgiveness. These events have raised questions about how Treasury and the SBA will measure eligibility and forgiveness, and whether companies can anticipate another round of scrutiny.
The CARES Act allows PPP loans to be forgiven so long as 75% of the funds are used for payroll. The other 25% can be used for payroll, or for utilities, rent or mortgage interest. Any amount of the loan that is not forgiven is repayable over two years at 1% interest.
Sarah Mercer
If applicants furloughed or laid off full-time employees between Feb. 15 and April 27, they have until June 30 to rehire or replace the employees to avoid forgiveness reduction.
Borrowers must also pay any employee earning less than $100,000 at least 75% of the total salary and wages that the employee earned in the last full quarter before the borrower received the loan. Loan forgiveness is reduced dollar-for-dollar for each employee whose total salary and wages fall below the 75% threshold during the eight-week period following receipt of the loan.
These salary and wage reduction provisions raise a number of questions because they appear to apply to individual employees rather than to the generic “full-time equivalent” employee that the forgiveness reduction formula uses. These questions include:
• If you hire a new employee, do the salary and wage reduction provisions apply?
• If an employee was full-time but chooses to return as part-time, can the salary and wages of that employee be adjusted to reflect this change?
• Does an employee’s salary and wages include benefits and other payroll costs?
These questions will not be fully answered until Treasury and the SBA release an additional interim final rule and guidance on forgiveness.
As for eligibility, the program requires applicants to self-certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” Treasury and the SBA have said applicants must make this certification in good faith, “taking 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.”
These standards are not yet further defined, but do not mandate that borrowers demonstrate a lack of access to capital. In fact, the CARES Act specifically exempts borrowers from having to demonstrate this “credit elsewhere” policy. Instead, the standard for this program is subjective, balancing “current business activity” and “other sources of liquidity” against “significant detriment” to the borrower. Borrowers who have not yet done so should take time to document the necessity of the loan given, such as reduction in revenues, substantial expenses, cash flow challenges, supply chain interruptions or mandated closures.
Another complicating aspect of the PPP is that the public’s access to information about a borrower’s loan is governed by the Freedom of Information Act. The program’s application makes clear that although an applicant’s proprietary business data is not routinely made available to third parties, an applicant’s name, officers, directors, stockholders, partners and amount of loan are not shielded from disclosure under FOIA. In addition, FOIA case law regarding other SBA loans holds that outstanding balances, payment, and collection and discharge status are also disclosable to the public. However, information that is generally exempt from disclosure includes payroll information, tax returns, banking information, corporate structure and nonstatistical information regarding applications, defaults, delinquencies or losses.
While the PPP has been overwhelmingly popular as the economic impact of this pandemic worsens, there are many questions that remain as businesses seek to determine whether they are eligible for these loans, and whether these loans make sense from both a business and public relations perspective. Additional guidance from Treasury and SBA is expected to assist businesses in making these difficult decisions.
There is still much yet to be determined with respect to how Treasury and the SBA will measure forgiveness and eligibility, but whether borrowers can anticipate additional scrutiny is something everyone can count on.
Greg Brower and Sarah Mercer are attorneys with Brownstein Hyatt Farber Schreck.