SBA Releases Paycheck Protection Program FAQs

On April 23, 2020, the Small Business Administration (“SBA”), in consultation with the Department of Treasury, released supplemental guidance in the form of Frequently Asked Questions (“FAQs”) with respect to the implementation of the Paycheck Protection Program (“PPP”). These FAQs clarify certain aspects of the SBA Interim Final Rules released on April 3, 2020 and April 15, 2020 (each, an “Interim Rule”), which proposed preliminary guidelines with respect to administration and application of the PPP and updates earlier versions of the FAQs initially released on April 3, 2020.  Borrowers and Lenders are entitled to rely upon the FAQs as the SBA’s interpretation of the CARES Act and each Interim Rule.

Below is a high-level summary of certain new questions and clarifications addressed by the FAQs:

1. SBA Affiliation Rules.

• • So long as a franchise brand is listed on the SBA Franchise Directory, each of its franchisees that meet the SBA’s applicable size standard are eligible to apply for its own PPP loan.
  • Restaurants and Hotels. As previously clarified by the Interim Rules, the SBA affiliation rules do not apply to applicants that are assigned a NAICS code beginning with 72 and that employ no more than 500 employees per physical location. The FAQs further explain that, if each hotel or restaurant location owned by a parent business is a separate legal entity, each such legal entity is eligible to apply for a separate loan so long as such entity uses its unique Employer Identification Number.
  • Ownership Affiliation Rules. SBA affiliation rules provide that a minority shareholder is deemed to be an affiliate of an applicant if such shareholder has control over the business by virtue of the right to prevent a quorum or otherwise block actions by the board of directors or other shareholders. The FAQs clarify that a minority shareholder will not be considered an affiliate of an applicant if such rights are irrevocably waived or otherwise relinquished.

For additional information on SBA affiliation rules as applied to the PPP, click here.

2. Guidance on Payroll Costs.

• • Measurement Period. For purposes of determining the applicant’s maximum loan amount eligibility and aggregate payroll costs, prospective borrowers may rely on data from either the immediately preceding 12-month period or from calendar year 2019. Applicants that were not in business from February 15, 2019 through June 30, 2019 may instead use average monthly payroll costs for the period January 1, 2020 through February 29, 2020. For seasonal businesses, the measurement period may start on February 15, 2019 or March 1, 2019 and end on June 30, 2019, at the applicant’s option.
  • Number of Employees. The time period detailed above should also be employed in determining the average number of employees for purposes of applying the SBA’s employee-based size standard in connection with application. Alternatively, applicants may use the average number of employees per pay period in the immediately preceding 12 calendar months prior to application. For businesses that have not been operational for 12 months prior to applying, the applicant should use the average number of employees for each pay period during which the business has been operational.
  • Exclusions. The FAQs clarify that the exclusion of employee compensation in excess of $100,000 per year, as originally provided by the CARES Act, applies only to cash compensation. As a result, non-cash benefits such as employer contributions to defined-benefit or defined-contribution retirement plans, payment for the provision of group healthcare coverage (including premiums), and payment of state and local taxes assessed on employee compensation, may be included in the determination of aggregate payroll costs.

3. Economic Need. The FAQs specifically state that borrowers must demonstrate economic need for a PPP loan at the time of application. Applicants must make the required certification that “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant”. In evaluating its ability to make such certification, the applicant should consider the state of its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner not materially detrimental to the business. The FAQs specifically cite public companies with substantial market value as an example of a prospective applicant that is unlikely to be able to make such certification in good faith.
4. Beneficial Ownership. The FAQs provide additional guidance on information required with respect to each direct and beneficial owner of an applicant. For lenders dealing with existing customers, lenders are not obligated to re-verify beneficial ownership information to the extent such lender has already verified the same in connection with prior dealings with the application. With respect to new customers, lenders must collect and verify ownership information from all natural persons with a 20% or greater ownership stake in the applicant, for purposes of compliance with the Bank Secrecy Act and FinCEN regulations. For ownership interests held by a business or other legal entity, lenders will require appropriate beneficial ownership information for such entity.
5. Forgiveness. The FAQs clarify that the 8-week period referenced in determining the amount of forgiveness of a PPP loan begins on the date that lender makes the first disbursement to borrower. Note that lenders must make such first disbursement no later than 10 calendar days from the date of PPP loan approval.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.