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PPP Loans Over $2 Million and the PPP Necessity Questionnaires

November 6, 2020

Overview

Starting around October 26, 2020, the Small Business Administrations (the “SBA”) asked some Paycheck Protection Program (“PPP”) lenders to provide certain questionnaires to PPP borrowers with loans over $2 million. The questionnaires are not on the official SBA sites. There are two questionnaire forms: Form 3509 for for-profit borrowers and Form 3510 for non-profit borrowers. We do not know if these forms are finalized and we expect further guidance.

Takeaway: Borrowers with loans over $2 million should gather the requested information now in anticipation of the lender’s request. Given the uncertainty as to how this process will be administered and how the information will be used, and the fact that clarifications are needed and there are tight timelines, borrowers should seek legal advice prior to submitting a forgiveness application or responding to a request. These borrowers should also consider delaying their forgiveness application until some of these open issues are clarified.

Purpose of the Forms: In the initial PPP loan application, borrowers were required to make several representations and certifications. One of the certifications dealt with the economic conditions of the borrower. Each borrower had to certify in good faith that current economic uncertainty makes the borrower’s loan request necessary to support its ongoing operations.

The purpose of these new forms according to the SBA “is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that [a borrower] made on [its] PPP Borrower Application (SBA Form 2483 or Lender’s equivalent form) that economic uncertainty made the loan request necessary.”

Borrowers Impacted: Each borrower that, together with its affiliates, received PPP loans with an original principal amount of $2 million or greater is required to complete the applicable form and submit it, along with the required supporting documents, to the lender servicing the borrower’s PPP loan.

Scope of the Information: The SBA previously announced that it would review the necessity of the PPP loans, especially for those borrowers with loans over $2 million, with “necessity” understood as:

“… all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application … [A]ll borrowers should review carefully the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” [Emphasis added]. FAQ #31.

Although both the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and FAQ #31 instructed borrowers to assess their need for the loan at the time of application, the SBA’s new forms gather information to assess need both at the time of application and during the use of the funds. This is a surprise for most borrowers who were prepared to provide information about “necessity” at the “time of the application” but were not anticipating scrutiny about necessity over the period of use of the funds. With that said, this time, we don’t know whether the information “during the use of the funds” will be used by the SBA to determine “necessity” or whether it is merely gathering information.

Information Requested: The information requested is extensive and somewhat unclear. There are two categories:

  • Business Activity Assessment – questions and documentation:
    • Documentation of Gross Revenue – the gross revenue of the borrower in the first quarters of both 2019 and 2020 and supporting documentation to justify the revenues reported.
    • Explanation of Effect of COVID-19 – since March 13, 2020, whether and how COVID-19 has temporarily shut down, affected, altered, ceased, or reduced operations, or resulted in additional capital improvement projects or cash outlays of the borrower. Although documents are not required, borrowers are required to provide answers to many questions and provide their six-digit NAICS code.
  • Liquidity Assessment – questions and documentation of:
    • Cash on hand – the amount of cash and cash equivalents as of the last day of the calendar month immediately before the date of the borrower’s PPP loan application.
    • Dividends and distributions – the amount of dividends or other capital distributions (other than for pass-through estimated tax payments) paid to owners between March 13, 2020, and the end of the covered period.
  • Outstanding debt –all debt prepayments made between March 13, 2020, and the end of the covered period.
  • Highly paid owners and employees – the amounts paid to owners and/or employees in excess of $250,000 on an annualized basis during the covered period.
  • Value of the borrower – if publicly traded, value based on market capitalization on the date of the PPP loan application; if privately held, the book value on the last day of the quarter preceding its ownership.
  • Ownership – whether their equity was owned by a publicly traded company, private equity or venture capital firm or hedge fund, whether it is an affiliate of another entity, and whether they are owned by a foreign or state-owned enterprise.
  • Other CARES Act benefits – whether or not they received any other benefits through the CARES Act, excluding tax benefits.

Information Not Specifically Requested: Although FAQ #31 talked about the borrower’s “ability to access other sources of liquidity,” at this time, the forms do not ask about this item. We recommend that borrowers be prepared to answer this question and provide documentation if it is requested.

Process: The completed form and data are due to the PPP lender servicing the PPP loan within 10 business days of receipt from the lender. At this point, we don’t know if borrowers will receive the request at the time of submission of a forgiveness application or at another time. After the form is submitted, the SBA may request additional information, if necessary, to complete the review. The SBA’s determination will be based on the totality of the borrower’s circumstances. Failure to complete the form and provide the required supporting documents may result in the SBA’s determination that the borrower was ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and the SBA may seek repayment of the loan or pursue other available remedies.

PPP Questions: Because of the many variables that affect each borrower differently, a borrower should consider discussing the loan forgiveness process with legal counsel before submitting the application. Schwabe is committed to providing our clients with up-to-date resources to understand the CARES Act and navigate the COVID-19 pandemic. For more information about the PPP Loan Forgiveness Application, visit our PPP Portal or reach out to one of our attorneys today.

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