PPP Breaking News! - - Treasury Announces Relief From 60% Cliff (and Reinstates 24 Month Payback Period)
Yet another update to the PPP came out yesterday.
Yesterday, U.S. Treasury Secretary Steven Mnuchin and Small Business Administration (SBA) Administrator Jovita Carranza released a joint statement regarding the passage of the Paycheck Protection Program (PPP) Flexibility Act, which was enacted on Friday and covered in our June 3rd blog post, Senate Passes House Bill H.R. 7010 – PPP Borrowers Breathe A Great Sigh of Relief, which explains its provisions.
60% Cliff Abolished.
The new 60% statutory requirement, which replaced the 75% requirement, as described below, will not be a cliff, meaning that if a borrower spends less than 60% of the PPP loan amount for expenses that otherwise would be forgivable for payroll, state payroll taxes, group health insurance and retirement plans (which are referred to as "payroll costs") during the 8 or 24 week testing period, then that borrower will get some forgiveness, instead of no forgiveness. While we do not believe that the SBA or Treasury Department have the authority to change the statute in this way, this is a welcome move towards what we expect the next iteration of the law to say, or for the SBA to follow, as a welcome change.
Now, a borrower that spends less than 60% of its PPP loan amount on payroll costs will be able to have forgiveness on all of such payroll costs, plus non-payroll expenses for interest, rent and utilities, to the extent that such non-payroll expenses do not exceed 66 2/3% of the amount spent on payroll expenses. Another way of calculating this is to divide payroll costs by 1.5 (or multiply them by 66 2/3%, if you are not so good at division) to determine the maximum amount of interest, rent and utilities costs that can count towards forgiveness.
For example, if the loan was $150,000 and the borrower spends only $60,000 on payroll expenses and $50,000 on interest, rent and utilities, then only $100,000 will be forgiven, instead of no forgiveness at all. This is based on $60,000 plus $40,000 (66 2/3% of $60,000).
Only Post-June 5th Approved Borrowers Will Get a 5-Year Payback Period.
The letter also explains that under the new law loans that were approved after June 5th can be paid back in 5 years, instead of 2 years, and that no interest has to be paid (at the 1% rate) until that 5 (or 2) year period. Approval is considered to have occurred on the day the SBA assigned a loan number to the borrower. The banks are permitted to extend the loan period for pre-June 5, 2020 loans for up to 5 years, but are not required to do so, and many borrowers will doubtlessly be held hostage by banks and be coerced into signing other types of long-term loan agreements as result of this. Lenders will want the leverage to be able to demand repayment on a 2 year basis, while borrowers will want as much time as possible to repay the loan.
This update suspends the 60% cliff, meaning businesses no longer have to spend at least 60% of the PPP fund on payroll costs to have any of the loan forgiven.
However, it also states that ONLY businesses that got PPP loans AFTER June 5th will have 5 years to pay the loan back. Loans made earlier will only have 2 years. Banks are permitted to expand the payback period to 5 years, but are not required to do so.
In addition, the SBA, in consultation with Treasury, announced that they will soon issue the following:
- Updated rules and guidance,
- A modified borrower application form, and
- A modified loan forgiveness application implementing these legislative amendments to the PPP.
Excerpts from the most recent changes follow.
Forbes
June 8, 2020
Alan Gassman
Yesterday, U.S. Treasury Secretary Steven Mnuchin and Small Business Administration (SBA) Administrator Jovita Carranza released a joint statement regarding the passage of the Paycheck Protection Program (PPP) Flexibility Act, which was enacted on Friday and covered in our June 3rd blog post, Senate Passes House Bill H.R. 7010 – PPP Borrowers Breathe A Great Sigh of Relief, which explains its provisions.
60% Cliff Abolished.
The new 60% statutory requirement, which replaced the 75% requirement, as described below, will not be a cliff, meaning that if a borrower spends less than 60% of the PPP loan amount for expenses that otherwise would be forgivable for payroll, state payroll taxes, group health insurance and retirement plans (which are referred to as "payroll costs") during the 8 or 24 week testing period, then that borrower will get some forgiveness, instead of no forgiveness. While we do not believe that the SBA or Treasury Department have the authority to change the statute in this way, this is a welcome move towards what we expect the next iteration of the law to say, or for the SBA to follow, as a welcome change.
Now, a borrower that spends less than 60% of its PPP loan amount on payroll costs will be able to have forgiveness on all of such payroll costs, plus non-payroll expenses for interest, rent and utilities, to the extent that such non-payroll expenses do not exceed 66 2/3% of the amount spent on payroll expenses. Another way of calculating this is to divide payroll costs by 1.5 (or multiply them by 66 2/3%, if you are not so good at division) to determine the maximum amount of interest, rent and utilities costs that can count towards forgiveness.
For example, if the loan was $150,000 and the borrower spends only $60,000 on payroll expenses and $50,000 on interest, rent and utilities, then only $100,000 will be forgiven, instead of no forgiveness at all. This is based on $60,000 plus $40,000 (66 2/3% of $60,000).
Only Post-June 5th Approved Borrowers Will Get a 5-Year Payback Period.
The letter also explains that under the new law loans that were approved after June 5th can be paid back in 5 years, instead of 2 years, and that no interest has to be paid (at the 1% rate) until that 5 (or 2) year period. Approval is considered to have occurred on the day the SBA assigned a loan number to the borrower. The banks are permitted to extend the loan period for pre-June 5, 2020 loans for up to 5 years, but are not required to do so, and many borrowers will doubtlessly be held hostage by banks and be coerced into signing other types of long-term loan agreements as result of this. Lenders will want the leverage to be able to demand repayment on a 2 year basis, while borrowers will want as much time as possible to repay the loan.
It is very predictable that further adjustments will occur in these rules, and that they will primarily be borrower friendly.
Full article here.
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