Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Small Business Administration (SBA) is tasked with administering the Paycheck Protection Program (PPP), the loan program intended to allow employers to continue to pay their employees and assist with certain other expenses resulting from the COVID-19 pandemic.
As the PPP went into immediate effect without the standard comment period, the SBA continues to issue additional guidance in the form of Frequently Asked Questions (FAQs) and responses. The most recently updated FAQs are available here. Importantly, the government will not change actions that borrowers and lenders take consistent with the guidance in effect at the time.
In the most recently updated FAQs, the SBA provided the following guidance:
1. Assessment of Other Sources of Liquidity
While the CARES Act specifically states that an applicant does not have to attempt to obtain credit elsewhere in order to be eligible for a PPP loan, businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations must assess whether they can certify, in good faith, that the PPP loan is actually necessary, given the availability of the applicant to access other sources of liquidity.
Specifically, the PPP loan application requires the applicant to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” While this certification is vague and broad, the FAQs give an example of public companies with large market values and access to capital markets as being unable to make the certification in good faith.
Because this guidance was issued nearly three weeks after lenders began accepting applications and a number of public companies have already received PPP loans, the SBA has given a grace period – through May 7, 2020, – for businesses to reconsider whether they were able to make the certification in good faith given the new guidance. If a business repays their PPP loan before the end of the grace period, they will be deemed to have made the certification in good faith.
NOTE: It is unclear what this guidance means for portfolio companies backed by venture capital funds.
2. Treatment of Housing Stipends in Calculating Payroll Costs
The SBA clarified that housing stipends are includable as payroll costs – subject to the $100,000 annual compensation per employee – for purposes of calculating the maximum loan amount. Payroll costs were initially defined to include cash compensation, wages, commissions and tips, but the new guidance expands the definition to also include housing stipends.
3. Determination of Principal Residence
Under the PPP, only payroll costs of employees whose principal place of residence is the United States may be included when determining the maximum loan amount an applicant may borrow. The FAQs state that borrowers may consider IRS regulations – specifically 26 CFR § 1.121-1(b)(2), available here – which states that if a taxpayer has two or more residences, the residence that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer’s principal residence; however, this is subject to the particular facts and circumstances of the individual employee.
4. Eligibility of Cooperative for PPP Loans
Small agricultural cooperatives and other cooperatives may receive PPP loans if other PPP eligibility requirements are met.
NOTE: Notwithstanding the SBA’s statement regarding “other cooperatives,” it is unclear whether building cooperatives are eligible for PPP – we await additional guidance on this point.
5. Calculation of Employees for Purposes of Loan Eligibility
In order to be eligible for a PPP loan the applicant, together with its affiliates (if applicable), must have 500 or fewer employees. The CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.
However, for purposes of loan forgiveness, the CARES Act uses the standard of “full-time equivalent employees” – i.e., employees who work at least 30 hours per week – to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.
In addition to the FAQs, the SBA also issued new interim final rules – available here – which states that hedge funds and private equity companies are not eligible to receive a PPP loan.
