COVID-19 Relief Bill Includes “Second Draw” PPP Loans

Note that while the COVID-19 relief package has been passed by Congress, the bill has yet to be signed by President Trump as of the time of publication of this alert.  The summary set forth in this alert reflects the bill as passed by Congress on December 21, 2020.

In addition to making loans available to first-time PPP borrowers, the new bill also includes a so-called “second draw” loan program.

Under the second draw program, an additional round of forgivable PPP loans will be made available to eligible borrowers who received and fully used loans received in the initial PPP program earlier this year.  As with the original PPP program, non-profit organizations are eligible to participate in the second draw program.  Other aspects of the program include:

• Number of Employees: Eligible borrowers must have no more than 300 employees.  As with the original PPP loan program, the SBA will apply its affiliate rules that often require a borrower to consider employees of its affiliates for purposes of loan eligibility.
• Reduction in Gross Receipts: Unlike the original PPP loan program, which only required a borrower to certify that the PPP loan was necessary to support ongoing operations in the light of the uncertainty surrounding COVID-19, the second draw program includes a more objective test based on gross receipts.  In order to be eligible for a second draw PPP loan, a borrower must generally demonstrate that its gross receipts during any fiscal quarter in 2020 were down at least 25% from the comparable quarter in 2019 (or another quarter in 2019 if the borrower was not in business for all of 2019).
• Loan Amounts: Available loans under the second draw program are equal to 2.5 times the borrower’s average monthly payroll costs during the one-year period prior to the loan being made, unless the borrower has an NAICS code beginning with 72 (accommodations and food service), in which case the multiple increases to 3.5 times.  No loans will be made in excess of $2 million.
• Use of Loan Proceeds: In order to be eligible for loan forgiveness, at least 60% of the loan proceeds must be used for eligible payroll costs, while up to 40% can be used for other covered expenses.  These covered expenses include those from the original PPP loan program, such as rental payments and utilities, but have been expanded to include additional expenses, including:
  • “Operations expenditures” such as business software or cloud computing service costs.
  • “Property damage costs” arising from vandalism or looting during the public disturbances earlier this year that were not covered by insurance.
  • “Supplier costs” relating to procuring essential supplies, including perishable goods.
  • “Worker protection expenditures” relating to costs incurred adapting business operations to applicable CDC, OSHA or other government requirements, such as installation of air filtration systems, purchases of PPE and expansions of indoor or outdoor business spaces.
• Ineligible Borrowers: The second draw program also introduces additional categories of ineligible borrowers, including businesses primarily engaged in political or lobbying activities (including political “think tanks”), as well as entities with links to the People’s Republic of China or Hong Kong, including those with directors who are residents of China.

As with the original PPP loan program, we expect that the SBA will issue additional rules and guidance for the second draw program in the coming weeks, and we will provide updated information as it becomes available.

The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.

Author Matthew McDonald is a partner in the corporate and securities department at Klehr Harrison.