Treasury Secretary Mnuchin and Administrator Jovita Carranza announced on April 28th the review procedure for PPP loans. What seemed like a flexible small business government program has turned into a media frenzy. Complicating matters is our understanding that the names of borrowers who received funding may be made public. Therefore, in order to address the below FAQs that were issued by the Treasury, we are attaching the AGC letter to Secretary Mnuchin along with some support from the AGC has put together.
In the legal profession some often say “Bad Facts Make Bad Law”, “Tell the Truth, it is easier to remember” and “Stick to the purpose of the loan”. We recommend that borrowers document in writing their thought process and approval process at the time they signed their PPP loan application and PPP loan document. This will help prove their good faith if the government keeps rewriting the rules or attempts to hold them to a different standard if and when these loans are reviewed by the SBA.Some thoughts to consider are as follows:
- Uncertainty regarding your ability or need to continue paying same wages and headcount because of the pandemic. The program has often been referred to as one that enables businesses to maintain their workforce and to act as the unemployment agency such that when the pandemic is over the economy would return to normal. At the time government officials were not making it public as to what now appears to be a much longer “wait and see” situation with possible 2nd and 3rd resurgences now being publicized.
- A recent article from the AICPA highlights businesses that see PPP funds as important to keeping employees and remaining viable should not be concerned about keeping or applying for the PPP funds. Business leaders should remain focused on the intent of the PPP, which is to keep business afloat and employees paid.
- There was no defined timeline or period for the uncertainty and the impacts of the pandemic may not have been fully felt on the construction industry as of yet. Therefore document current new pipeline, pre-COVID versus post-COVID bid activity and job productivity.
- Safety measures, technology improvements and related costs to operate during the pandemic are uncertain with future guidelines. Will construction codes require an independent COVID-19 safety director on all job sites? The costs and risks associated with a contract site that gets “tainted” with the virus and related tracking of where all the employees involved have been. The possibility of other job site infections along with vehicles and equipment, tooling and supplies that became tainted as a result.
- Your ability to access other sources of liquidity in a manner that is not significantly detrimental to the business. Closely-held business having a pre-existing line of credit or access to a few wealthy owners does not prevent a business from making the certification. Tapping into an available line of credit which purpose was to support bonding, job issues, AR buildup, payments to vendors and subs was not meant to act as a pandemic buffer and if used could put the company in a detrimental position, especially if the government’s desire was for companies to employ and continue worker employment during times of substantial uncertainty and risks. Reducing employment and minimizing new work may have been less risky than continuing work and have employees at risk.
- There is uncertainty regarding employee lawsuits and claims from COVID-19 for those businesses that continued to have employees at job sites and may have not adequately followed recommended or required safety precautions. What happens if your business infects a customer’s job site?
- Document uncertainties in supply chain, employees’ concerns with working, potential for union strikes, and whether customers would allow jobsites to remain open.
- Impact to pending or unapproved out of scope work and ability to negotiate into a change order can lead to collection and cash flow concerns.
- Concerns with banks, bonding agents, applicable working capital and covenant requirements. Company debt leverage and backlog risk of performance under uncertain times and associated risks of continuing operations without PPP loan support.
- Impact of school closures , working spouses, ability to stay at home and claim increased unemployment benefits versus staying employed.
- Increased competition and margin reductions that could result and currently how are gross profit margins, sales volume and bidding activity looking.
- What cost cutting measures and delayed spending has the business implemented during these uncertain times to support your concerns for uncertainty?
- For those public works contractors there are already concerns being raised that government agency funding is at significant risk due to the pandemic. The Federal, State and Local Governments are exhausting funds to fight the pandemic creating uncertainty for the funding of future public works contracts. The media and political discussions regarding states ability to file for bankruptcy has brought on a whole new scare of uncertainty, especially in very hard hit areas. The agencies themselves will be struggling with operating budget deficiencies, work restrictions and precautions and bottlenecks in the processing of projects currently in the pipeline.
Below are the pertinent FAQs from the Treasury relative to the above:
FAQ 43 Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date? Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
FAQ #31 Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan? Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
FAQ #39 Question: Will SBA review individual PPP loan files? Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.
Please reach out to Withum’s Construction Services Team with any questions.