Additional Scrutiny Given to PPP Loans of $2 Million or Greater

November 4, 2020 | Article

When applying for a Paycheck Protection Program (PPP) loan, borrowers, regardless of the size of their loan, were required to certify, in part, that “[c]urrent economic uncertainty” (measured at the time of the application) makes the loan necessary to support ongoing business operations. The certification also included language that the borrower will use the PPP loan proceeds to maintain payroll and make qualified expenditures.

In partial reaction to negative press coverage concerning certain large companies receiving PPP loans, the government attempted to retroactively institute new eligibility rules (after borrowers had already applied for and received PPP funds) by stating borrowers must take into account their ability to access “other sources of liquidity” when determining whether the PPP loan is necessary. The government also stated it planned to issue further guidance on this topic.

New proposed Form 3509 and PPP Loan Funding
This further guidance is apparently new SBA Form 3509, titled “Loan Necessity Questionnaire.” Although this form has not been released publicly, lenders and borrowers have indicated that the SBA has sent the form and asked lenders to pass it on to any borrowers submitting forgiveness applications with PPP loans of $2 million or greater. The $2 million threshold includes any affiliate loans, except for affiliates exempted from the affiliation rules (listed franchises, certain businesses involved in the hospitality industry and certain other businesses).

Many of the questions contained in Form 3509 continue the trend of the government instituting retroactive rules to judge eligibility for PPP loans. Borrowers may find this troubling given that they incurred PPP loans in good faith and maintained full payroll throughout their covered period, and now the government is forcing them to answer additional questions.

Questions Raised in Form 3509
To our knowledge, Form 3509 is not yet final, and there is a chance the government may alter it before releasing it to the public. Still, we have summarized below some of the noteworthy questions raised in Form 3509.

  • Gross revenue. Borrowers are asked to list their second quarter 2019 and 2020 gross revenue figures.
  • COVID-19 shut down orders. Borrowers are asked to detail how their business was affected by governmental COVID-19 shut down orders.
  • Capital expenditures. The government asked borrowers whether they undertook any capital improvement projects between March 13, 2020, and the end of the borrower’s covered period.
  • Liquidity assessment. A borrower’s cash and cash equivalents (as of the last day of the calendar quarter immediately before the application) must be listed. Also, a borrower must state whether they paid any dividends or distributions to owners (other than tax distributions) and whether any debt was prepaid.
  • Owner compensation. A borrower must disclose if any employees (including owner employees) were compensated at an annual rate in excess of $250,000 during the covered period.
  • Other governmental aid. A borrower must disclose whether it received funds from any other CARES Act program (like an EIDL loan).

Borrower Concerns with PPP Funding of $2 Million or More
Many affected borrowers will justifiably wonder why the government is imposing these questions on a retroactive basis, especially because many borrowers undertook the burden of maintaining a full-time payroll because of the PPP loan proceeds.

Some of the questions focus on time periods both before and after the loan application date, which again seems unfair given that the PPP application only required a borrower make attestations as of the date of the PPP loan application. Additionally, many of these questions require supporting documentation, and a borrower must respond to the questions within 10 days of receipt of Form 3509 from the lender.

The Takeaway from the Additional Scrutiny of PPP Loans
The Form 3509 has not yet officially been released to the public, so there is a chance the government could either modify this form, or withdraw it, before borrowers must respond. Still, all borrowers with PPP loans of $2 million or greater (including relevant affiliate loans) should read through the Form 3509 and work with their advisor to formulate appropriate responses in case the current version is made final.

Form 3509 raises issues and concerns for anyone that had $2 million or more in PPP funding.

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