Borrowers of Large PPP Loans to Receive Loan Necessity Questionnaire

November 3, 2020

 

The Small Business Administration (“SBA”) has announced that it intends to issue two questionnaires which will be required to be completed by borrowers of Paycheck Protection Program (“PPP”) loans with principal amounts in excess of two million dollars ($2,000,000.00). In a Federal Register notice published on October 26, 2020, the SBA referenced the two forms and is seeking public comment, but has not formally published the forms.

Borrowers who received PPP loans were required to certify as part of their loan applications that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  The two new questionnaires are designed to provide information to the SBA in order for the SBA to determine if a borrower’s certification was made in good faith.  One questionnaire is required to be filled out by for-profit recipients of PPP loans and one questionnaire is required to be filled out by non-profit recipients of PPP loans.

The questionnaires seek two types of information, information regarding a borrower’s business activities and a liquidity analysis.  A borrower must complete and return its applicable questionnaire, with supporting documentation, within ten (10) business days of when a borrower receives the questionnaire from its lender.  Given the short time frame for completing and returning the questionnaires, borrowers of PPP loans should begin gathering and preparing the required information now.  Failure to complete a questionnaire can result in a determination by the SBA that a borrower was not eligible for the PPP loan, the amount of PPP loan, or any forgiveness claimed and the SBA may seek repayment of the PPP loan or other available remedies.

FOR-PROFIT BORROWERS:

With regard to the information about business activity, the questionnaire requests the following with respect to for-profit borrowers:

  • A comparison of a borrower’s Q2 2020 gross revenue to a borrowers Q2 2019 gross revenue (or Q1 2020 if borrower was not in existence in Q2 of 2019);
  • Information regarding any mandatory or voluntary cessations (e.g. shutdowns), reductions, or alterations (e.g. reduced capacity, outdoor only activities) of a borrower’s business activities which have occurred since March 13, 2020;
  • Information regarding any new capital improvement projects, not related to COVID-19, that a borrower began between March 13, 2020 and the end of a borrower’s loan forgiveness covered period; and
  • Other relevant information a borrower wishes to provide.

With regard to the liquidity analysis, the questionnaire requests information regarding a non-profit borrower’s revenue, expenses, relationships with public companies, and distributions to shareholders, including, without limitation:

  • A borrower’s cash and cash equivalents as of the last day of the calendar quarter immediately preceding a borrower’s PPP loan application;
  • For the period between March 13, 2020 and the end of a borrower’s loan forgiveness covered period, information regarding: (a) dividends and other cash distributions made to owners (other than those made for the purposes of pass-through estimated tax payments) and (b) prepayment of any outstanding debt;
  • For the loan forgiveness covered period, information regarding whether any of the borrower’s employees, or owners who worked at the Borrower, were compensated in an amount that exceeds $250,000 on an annualized basis, including gross salary, gross wages, gross tips, gross commissions, and allowances for dismissal or separation;
  • Information regarding the ownership of a borrower as of the date of a borrower’s PPP loan application, including: (a) whether a borrower is listed on a national securities exchange, (b) whether twenty percent (20%) or more of any class of equity interest of a borrower was owned by: (i) a publicly traded company, (ii) a venture capital firm, (iii) a private equity fund, or (iv) a hedge fund, (c) whether or not a borrower was a subsidiary of another company, and (d) whether a borrower was an affiliate or subsidiary of a foreign state-owned enterprise or of a department, agency, or instrumentality of a foreign state;
  • For borrower’s that are were not listed on a national securities exchange as of the date of their PPP loan application, a borrower’s book value (i.e. shareholders’ equity value); and
  • Whether a Borrower received any funds from a CARES ACT program other than a PPP loan or tax benefits.

NON-PROFIT BORROWERS:

With regard to the information about business activity, the questionnaire generally requires similar information as for profit borrowers (described above).

With regard to the liquidity analysis, the questionnaire requests information regarding a non-profit borrower’s revenue, expenses and assets, including, without limitation:

  • A borrower’s cash, savings, and temporary cash investments as of the last day of the calendar quarter immediately preceding a borrower’s PPP loan application;
  • Whether there are any restrictions on a borrower using net income or cash, savings, and temporary cash investments for payroll and other costs such as mortgage interest, rent, and utilities payments;
  • Whether a borrower holds any assets in an endowment fund, either directly or through a related organization, and information on restrictions on the use of such funds;
  • The value of a borrower’s non-cash investments (such as equity, bond, and real estate holdings) as of the last day of the calendar quarter immediately preceding a borrower’s PPP loan application; and
  • If a borrower provides health care services, its program service revenue related to patient care in Q2 2020 and Q2 2019 (or Q1 2020 if borrower was not in existence in Q2 of 2019) and information about any discounts on patient care services due to COVID-19.

Links to the forms received by lenders are here: For-Profits; Non-Profits.  It is unclear whether these are the final forms or if the SBA will modify them. It is also unclear how the SBA intends to use the information requested by the new forms, and whether it will affect the SBA’s determination regarding forgiveness.

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Should you have any questions regarding the above, please contact the Garfunkel Wild attorney with whom you regularly work, or contact us at info@garfunkelwild.com.

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