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Small Business Administration Releases Interim Guidance on Paycheck Protection Program

On April 2, the Small Business Administration published an Interim Final Rule intended to amend certain existing regulations in order to assist lenders and borrowers in advance of the April 3 opening submission opportunity for the newly established Paycheck Protection Program — a key component of the CARES Act enacted into law on March 27, 2020. While the Interim Final Rule is immediately effective, there is a 30-day comment period for the public to comment on the Rule and changes to it may be made after the comment period.

While the Interim Final Rule is immediately effective, there is a 30-day comment period for the public to comment on the Rule and changes to it may be made after the comment period.

The Interim Final Rule clarifies a handful of points regarding the administration of the program. Significantly it increased the applicable interest rate to 1.0% from the previously announced 0.5% and the loan deferral. It also clarifies the formula for calculating your maximum loan amount, the lenders who may provide PPP loans, and the procedures to be undertaken by those lenders as part of the loan process. A copy of the final two-page application (SBA Form 2483) was also made available, and the Rules indicated that the $349 billion appropriated funds will be distributed directly by lenders on a first-come, first-served basis. E-signatures will be permitted for applications and consents.

The SBA also reiterates in the Rules the established 500 employee or applicable alternative size limits for eligible applicants and the applicable affiliation rules under 13 CFR 121.301(f) that should be used by applicants to calculate their and their affiliates’ aggregate size to ensure that they are eligible for the PPP. The published rules further indicate that additional guidance may be promulgated to help interpret and apply these affiliation rules. Once applicants have established that they meet these requirements, they must self-certify their eligibility to the lender.

Applicants will also be required to calculate and demonstrate to the lender through documentation the maximum amount that they are eligible to borrower under the program. They should be prepared to submit payroll processor records, tax filings or Forms 1099-MISC to their lender together with an application. The maximum borrowing amount is clarified in the Rules, which set forth the following calculation methodology:

STEP 1: Calculate your aggregate payroll costs during the prior 12-months. Payroll costs include compensation paid to or for the benefit of employees residing principally in the US in the form of salary, wages, commissions, cash tips or the equivalent payment for vacation, parental, family, medical, or sick leave (but not leave wages paid under the Families First Coronavirus Response Act); an allowance for separation or dismissal; payments towards group health care coverage premiums and retirement plans; and payment of state and local taxes (but not federal FICA, Social Security or Income Tax). The guidance expressly states that pay to independent contractors should not be included in an applicant’s payroll costs because the independent contractor can itself seek a PPP loan. Independent contractors and sole proprietors applying on their own behalf should include their wages, commissions, income, or net earnings from self-employment or similar compensation.

STEP 2: Subtract from the applicant’s total payroll costs for any compensation paid to an employee (or to the independent contractor or sole proprietor) in excess of $100,000.

STEP 3: Calculate the average monthly payroll costs by dividing by 12.

STEP 4: Multiply by 2.5.

STEP 5: If applicable, add the outstanding amount of any Economic Injury Disaster Loans received since January 31, 2020, less the amount of any advance provided under that program.

The Rules also importantly clarified that in order to accomplish the congressional intent of the CARES Act, at least 75% of loan proceeds must be paid as payroll costs. The balance of loan proceeds may be applied to costs related to the continuation of health care benefits during paid leaves, mortgage interest (but not principal or pre-payments), rent, utilities, interest on previously outstanding debts, and refinancing of EIDL loans previously received.

Loan forgiveness will cover both principal and accrued interest on a loan. Not more than 25% of the loan forgiveness amount may be attributed to non-payroll costs. Further guidance will be published on loan forgiveness.

The Rules identify an expansive group of lenders that will be authorized to make loans under the PPP and indicates that those lenders will have substantial authority to determine applicants’ eligibility for the initial loans and the amounts forgivable under those loans, as outlined by the CARES Act. Lenders, if complying with all applicable SBA lender requirements, will be entitled to rely upon the applicants’ self-certifications, and will be held harmless in connection with their review of applications and their disbursement of funds.

Disappointingly the Rule fails to clarify ambiguities in the statute and confusion concerning critical issues in the market place. In particular, it does not address a fundamental issue impacting the hotel, multifamily, and senior living sectors. The issue is whether an owner who effectively makes payroll payments pursuant to a management agreement but who does not employ the employees may apply for the loan.

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