On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic, was signed into law. The CARES Act made available, through the Keeping American Workers Paid and Employed Act, $349 billion in loans under the Paycheck Protection Program (PPP) (under the SBA 7(a) loan program).
On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement (PPPHCE) Act, which, among other things, amended and supplemented the CARES Act by increasing funding to small businesses, states, municipalities, and hospitals, including an additional $310 billion to the PPP, was signed into law.
Today, June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (PPPFA), was signed into law. The PPPFA amends, among other things, the PPP loan terms and PPP loan forgiveness terms set forth in the CARES Act and PPPHCE Act. The highlights of these amendments are set forth below:
PPPFA Amendments Affecting PPP Loan Terms
- Extension of Covered Period for PPP Loans: Extended the “covered period” for purposes of obtaining a PPP loan and using the PPP loan proceeds from June 30, 2020 to December 31, 2020.
We expect that there may be additional guidance issued by the SBA or Treasury to clarify whether the extension of the covered period allows new PPP Applications to be submitted after June 30, 2020.
- Extension of Loan Maturity Date: Extended from 2 years to 5 years.
- The 5-year term will apply to all PPP loans originated on or after June 5, 2020.
- Borrowers and Lenders may mutually agree to modify the term of a covered loan that originated before June 5, 2020, to conform to the modified maturity terms.
- Extension of Deferment Period: Extended from the date that is 6 months following the date of disbursement of the PPP loan to the date on which the amount of forgiveness is remitted by the SBA to the lender. If a borrower fails to apply for loan forgiveness within 10 months after the last day of the applicable covered period for loan forgiveness (as described below), then borrower shall make payments of principal, interest, and fees beginning on the date that is 10 months after the last day of such covered period.
PPPFA Amendments Affecting PPP Loan Forgiveness Terms
- Extension of Covered Period for Loan Forgiveness:
- Original “Covered Period”: the 8-week period beginning on the date of the first disbursement of PPP loan proceeds.
- Amended “Covered Period”: the period beginning on the date of the origination of the PPP loan and ending on the earlier of:
- The date that is 24 weeks after the PPP loan origination date; or
- December 31, 2020.
- Election of Covered Period: Borrowers may still elect to use the 8-week period instead of the 24-week period for its “covered period” for forgiveness purposes. One reason a Borrower might want to elect the 8-week period rather than the 24-week period is that the statutory reductions in loan forgiveness for reductions in FTE employees or employee salaries/wages are measured over the covered period. Therefore, while electing the 24-week period provides the borrower with a longer period during which they can spend the PPP loan proceeds and qualify for forgiveness, it also extends the period over which the employer must avoid a reduction in FTE employees and employee salaries/wages.
- Extension of Safe Harbor Date for Employee Levels: The statutory safe harbor date for restoring employee levels (for borrowers who reduced their FTE employee headcount or employee salary/wage levels between February 15, 2020, and April 26, 2020) is extended from June 30, 2020 to December 31, 2020.
- New Exemption Based on Employee Availability: The amount of loan forgiveness will not be proportionately reduced by a reduction in the number of FTEs if the employer is able, in good faith, to document:
- an inability to rehire individuals who were employees on February 15, 2020, and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or
- an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19, established (or through guidance issued), during the period beginning on March 1, 2020 and ending December 31, 2020, by one of the following:
- Secretary of Health and Human Services;
- Director of Centers for Disease Control and Prevention; or
- Occupational Safety and Health Administration.
- Limitation on Loan Forgiveness (Percentage of Payroll Costs vs. Nonpayroll Costs):
- To receive loan forgiveness, at least 60% of the loan amount must be used for payroll costs.
- Borrowers may use up to 40% of the loan amount for:
- Interest payments on any business mortgage obligation on real or personal property incurred before February 15, 2020 (but not any prepayment of principal or advance payments of interest);
- Payments of business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; or
- Business utility payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
We expect that there may be additional guidance issued by the SBA or Treasury to clarify that partial loan forgiveness remains available under the PPP.
PPPFA Amendments Affecting Other Provisions of the CARES Act
The PPPFA amends Section 2302(a) of the CARES Act to allow an employer that receives a PPP loan to defer the deposit and payment of its share of social security tax until after the loan is forgiven.
Due to some of the significant amendments to the CARES Act and the PPPHCE Act implemented by the PPPFA, borrowers with existing PPP loans should expect communications from their PPP lenders regarding the need to potentially modify/amend their PPP loan documents. In addition, additional rulemaking and guidance and an updated or new Loan Forgiveness Application are expected to follow to further clarify and address the foregoing amendments.
More to Come
As we have noted in prior articles, the facts, laws, and regulations regarding COVID-19 are developing rapidly and frequently changing, including guidance involving the PPP. Since the date of publication, there may be new or additional information not referenced in this update. JW will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at the JW Coronavirus microsite.
This update is not intended to provide legal advice, and no legal or business decision should be based on its contents. Please consult with your legal counsel for guidance.
Lindsey B. Berwick has multifaceted experience handling commercial financing and transactional matters in both private practice and at one of the nation’s 60 largest financial institutions. Lindsey’s practice focuses on complex business transactions involving real estate, finance, commercial agreements and general corporate law. Clients look to Lindsey to evaluate and advise on commercial loan structures and documentation, leveraging her extensive background in the banking and finance industry to identify the correct financing vehicle for each transaction with a focus on achieving the clients’ business goals.
John D. Wittenberg represents and counsels a wide variety of clients in all aspects of commercial real estate (office, retail, and industrial). John’s practice includes the representation of banks and other financial institutions, as well as equity sponsors and borrowers, on complex business transactions and a broad range of transactional matters. Over the course of his career, John has represented clients on acquisitions and dispositions of commercial real estate, commercial leases (office, retail and industrial), sale-leasebacks, and commercial development transactions.
Please note: This article and any resources presented on the Jackson Walker Coronavirus microsite do not constitute legal or medical advice.