Paycheck Protection Program Flexibility Act (Mainly) Makes Welcome Changes to P3 Loans | Holland & Hart LLP
On June 5, 2020, President Trump enacted the 2020 Paycheck Protection Program Flexibility Act (the “Flexibility Act”). The Flexibility Act amends the main provisions of the Paycheck Protection Program (“PPP”) established by the CARES Act, providing borrowers with significant flexibility in the use of loan proceeds, timing requirements and payment. final cancellation of their loan.
Here is a summary of the changes introduced by the Flexibility Act:
- Loan maturity date: The Flexibility Law extends the repayment term from two years to five years at one percent per year, as long as a borrower’s loan is not fully canceled. This revision only applies to PPP loans granted as of June 5, 2020, the date on which the Flexibility Law entered into force. The Flexibility Law does not prohibit lenders and borrowers from changing the maturity date of pre-existing PPP loans, nor does it require them to do so.
- Loan period covered: The Flexibility Act extends the period during which a borrower can use the proceeds of a PPP loan while still being eligible for an 8 week loan forgiveness, as originally required under the CARES Act, up to 24 weeks after origin or December 31, 2020. The clock always starts upon receipt of the PPP loan, but borrowers now have the option to keep their loan proceeds until they can reopen and / or until employees are effectively able to return to work. While this will likely help most businesses that have not yet been able to reopen or fully rehire staff, many businesses remain unable to open or open at full capacity, and many have yet to visibility as to whether or when they can do so.
- Extension of deadline to rehire employees for loan forgiveness: The flexibility law extends the date on which borrowers must rehire workers for wages to be considered for loan cancellation from June 30, 2020 to December 31, 2020. This increases the likelihood that most businesses will be able to reopen and rehire completely by the deadline. , yet many companies have found it difficult to get their employees back to work in part because of generous unemployment benefits and workplace safety concerns of some employees.
- Exemptions for rehiring employees: The Flexibility Act provides two new exemptions from the rules that otherwise reduced a borrower’s eligibility for loan forgiveness:
- A reduction in loan forgiveness will not apply if the borrower can document an inability to rehire the same or similar employees who were in place as of February 15, 2020; Where
- A reduction in loan cancellation will not apply if the borrower can document their inability to return to the same level of business activity as before February 15, 2020 due to the application of social distancing, l sanitation and other health secretary safety requirements or guidelines. and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration issued between March 1, 2020 and December 31, 2020.
- Uses of loan proceeds: Under the CARES Act and existing SBA rules and guidelines, the PPP loan amount eligible for forgiveness would be proportionately reduced to the extent that the borrower spent less than 75% of the loan proceeds on eligible salary costs. The flexibility law reduces this percentage from 75% to 60%. This change has the dual benefit of also increasing the product available for other eligible expenses, such as mortgage interest, rent, and utilities, from 25% to 40%, with no reduction in loan forgiveness. However, the Flexibility Act appears to impose a “cliff” requirement that at least 60% of the loan proceeds must be spent on labor costs in order for the borrower to be eligible for the loan. all forgiveness. In other words, a PPP borrower with high fixed expenses for rent, mortgage interest and / or utilities who could not spend more than 59.9% of the total loan proceeds on salary costs ( possibly due to state or local restrictions on openness and / or the inability to achieve necessary endowment levels) would be denied the loan cancellation entirely. We understand that some Senators have had discussions with the Treasury Department and the SBA about a possible regulatory solution to this problem, but it does not yet exist.
- Deferred loan payments: The Flexibility Act extends the “public holiday” for payments on the PPP loan until the loan forgiveness is remitted by the SBA to the lender, or 10 months after the applicable covered period, if the borrower does not request. no discount during this 10 month period. period.
- Payroll tax deferral: The Flexibility Act allows borrowers whose PPP loans have been partially or fully canceled to defer the payment of payroll taxes.
Although the Flexibility Act once again changes the rules of PPP for borrowers, the result provides many borrowers with important options in their use of the loan proceeds, timing requirements and, ultimately, the cancellation of the loan. This is a victory for many businesses who have applied for or are still considering applying for a PPP loan. However, companies that have not yet fully reopened or reorganized their workforces and face persistent uncertainty about their prospects to do so by the end of 2020 should carefully consider whether the revised PPP program (at least until the end of 2020). ” that there is relief that suits them or they should apply for a lower loan amount than they would otherwise be entitled to.