Paycheck Protection Program – Second Draw PPP Loans and Changes to PPP Loans

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This Memorandum is subject to further review and update as circumstances develop and should not be relied on for any legal advice without consultation with an attorney.

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As part of our continuing series of alerts regarding the Paycheck Protection Program (“PPP”), we are outlining below some features of the PPP renewal program authorized under the stimulus package passed by Congress in late December, which allocated $284 billion for new PPP loans.  Loans continue to be available for new borrowers who have not previously received a PPP loan, and are also available to certain eligible existing PPP borrowers (“Second Draw PPP Loans”).  This update will focus on the requirements for Second Draw PPP Loans, and also certain changes that now apply to all PPP loans.

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Second Draw PPP Loans

Eligible borrowers that previously received a loan under the PPP may now apply for Second Draw PPP Loans until March 31, 2021. By and large, the requirements for Second Draw PPP Loans, as well as the application and forgiveness processes, are the same as for the first round of loans under the PPP (“First Draw PPP Loans”). However, there are a few notable changes to eligibility and loan amounts of which you should be aware if you are considering applying for a Second Draw PPP Loan.

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Eligibility 

Borrowers are eligible for a second draw PPP loan if they meet three criteria:

• Application of First Draw PPP Loan:  The borrower must have previously received a First Draw PPP Loan and, and at the time of the Second Draw PPP Loan disbursement, have used the full amount of such First Draw PPP Loan only for authorized uses under the PPP.
• Employees: The borrower, together with its affiliates (as defined under the SBA affiliation rules), has no more than 300 employees.  This is a change from the 500-employee maximum for First Draw PPP Loans. Borrowers should carefully review their affiliates when making this determination, as the analysis may be different from that done for First Draw PPP Loans if a borrower’s cap table has changed.
• Gross Receipts Reduction:  Finally, the borrower must be able to demonstrate at least a 25% reduction in gross receipts between one set of comparable quarters in 2019 and 2020 (e.g., Q2 of 2019 vs. Q2 of 2020).  This is a new requirement for Second Draw PPP Loans, and borrowers are expected to provide supporting documentation for the gross receipts reduction along with their loan applications.

The application for Second Draw PPP Loans is otherwise substantially the same as for First Draw PPP Loans, and continues to contain a certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”.

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Loan Amount‍

The maximum loan amount for Second Draw PPP Loans is $2 million, unlike the $10 million cap on First Draw PPP loans. Loan amounts will be calculated based on 2.5x average monthly 2019 or 2020 payroll costs for the borrower, except for borrowers in the accommodation and food services business, in which case the maximum loan amount is 3.5x such costs.