Second-Draw PPP Loans: Do You Qualify?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the Paycheck Protection Program (PPP) to help businesses keep their workforce employed during the pandemic. PPP loans were intended to cover payroll expenses, as well as qualifying rent, utility, and mortgage payments and forgivable in part, under certain conditions. More than $500 billion in loans were disbursed to over 5 million businesses before the program closed in August.
The recently enacted Consolidated Appropriations Act made changes to the PPP, including reopening the program to new borrowers, and allows certain existing borrowers to obtain a second-draw loan. Congress designated $137 billion for second-draw loans as part of a larger funding and relief package. The recent legislation allocates a total of $284.5 billion for PPP loans.
The Small Business Administration has announced that the program opened again on Jan. 11 and will close on March 31, 2021. Management companies and owners who plan to apply for a second PPP loan should do so as soon as possible after gathering the necessary information. It’s important to note that PPP loans are subject to the normal HUD subordinate financing rules. According to HUD’s most recently updated COVID-19 FAQs, HUD’s standard subordinate financing requirements must be followed for PPP loans. And for subsidized properties, repayment can only come from surplus cash.
On Jan. 6, 2021, the SBA issued the following Interim Final Rules for the PPP, as amended, and the second-draw loans.
First-Draw Loan Eligibility
New borrowers that were in operation on Feb. 15, 2020, and that fall into certain categories are eligible for a first-draw loan. The groups that may receive a first-draw loan include:
- Certain businesses with 500 or fewer employees;
- Sole proprietors, independent contractors, and self-employed individuals;
- Nonprofits or business leagues; and
- Restaurants, hotels, and other similar establishments with fewer than 500 employees.
Second-Draw Loan Eligibility
Previous PPP recipients may apply for another loan, provided they:
- Have used or will use the full amount of their first-draw loan for eligible uses on or before the expected date on which the second-draw loan will be disbursed;
- Have 300 or fewer employees at the time of the application; and
- Can show a 25 percent or greater gross revenue decline in any 2020 quarter, as compared to the same quarter in 2019.
Maximum Loan Amount
In general, borrowers may receive a loan of up to 2.5 times the borrower’s average monthly payroll costs. The maximum amount for a first-draw loan remains $10 million; the amount of the second-draw loan will be capped at $2 million.
Second-draw funds are forgivable, provided they are spent on covered costs, including:
- Payroll costs, including paid sick leave and group insurance benefits provided by the employer.
- Operating costs, including payments for mortgage interest, rent, utilities, software, and human resources and accounting needs.
- Property damage sustained during protests and disturbances in 2020, unless covered by insurance.
- Payments to a supplier covering contracts and purchase orders in effect before taking out the second-draw loan.
- Personal protective equipment and modification made to meet health and safety requirements.
At least 60 percent of the total loan amount must be used on payroll expenses over the covered period to qualify for full loan forgiveness. The covered period may now be anywhere between eight to 24 weeks, at the borrower’s discretion, rather than eight or 24 weeks as was previously required.
Simplified Forgiveness Process
A recipient of a PPP loan of $150,000 or less will receive forgiveness if the borrower signs and submits to the lender a certification that’s not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. That form has not yet been provided. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
Loans issued through the PPP, as amended, or as a second-draw loan will be available only through March 31, 2021.