Reed Smith Client Alerts

The Paycheck Protection Program Flexibility Act of 2020 addresses key concerns raised by borrowers about the Paycheck Protection Program, the forgivable loan program meant to aid small businesses during the COVID-19 pandemic. This new law makes it easier for loan recipients to use their loan, qualify for loan forgiveness, and avoid harmful tax effects. Tenants who have received these loans, and landlords who depend on them for rent payments, will benefit from these changes.

Authors: William A. Organek

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On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the PPPFA) became law. This brief, three-page statute amends the Paycheck Protection Program (the PPP) – a critical part of the 880-page CARES Act – in several important ways without appropriating additional funds or fundamentally altering the PPP. By addressing some of the key concerns raised by businesses struggling to use a PPP loan, the PPPFA makes it easier for PPP recipients to use their loan, qualify for loan forgiveness, and avoid harmful tax consequences. As a result, passage of the PPPFA will be welcome news for tenants and their landlords.

To understand the importance of the PPPFA, a brief overview of key provisions of the PPP may be helpful. The PPP originally allowed businesses with 500 or fewer employees to obtain loans in amounts tied to the average monthly payroll expenses of the business.1 As discussed in a previous client alert (2020-204), this precluded businesses with substantial assets but few employees, such as many landlords, from obtaining meaningful help through the PPP, though tenants would be more likely to obtain PPP loans. These loans could be forgiven if at least 75 percent of the funds were spent on eligible payroll costs (such as maintaining wages or rehiring workers), and if all funds were spent before June 30, 2020.2 If recipients violated the rules, only a portion of their loan would not be forgiven,3 and PPP loans with unforgiven amounts would have a maximum maturity of 10 years (but no minimum).4 Any principal, interest, and fees that might be owed on a PPP loan would be deferred for a period ranging from six months to one year.5 Finally, while employers were permitted to defer payroll taxes for 2020, this deferral would not apply to a taxpayer whose loan was forgiven.6 Each of these provisions has been modified by the PPPFA in borrower-friendly ways that will ultimately benefit tenants and landlords.

The new PPPFA provides that PPP loans can now be forgiven if only 60 percent of the loan is used for payroll costs incurred during the “covered period,” and expressly permits up to 40 percent of the loan amount to be used “for any payment of interest on any covered mortgage obligation…,any payment on any covered rent obligation, or any covered utility payment.”7 Additionally, the “covered period” during which PPP funds must be used is extended to the earlier of (1) 24 weeks after loan origination, or (2) December 31, 2020.8 Together, these provisions will be among the most welcome changes to the PPP, as many businesses were unable to spend the funds quickly enough, and with a high enough amount being spent on employee retention, to qualify for forgiveness. Landlords and tenants will benefit from the increased amount that can be spent on non-payroll expenses; tenants will have more funds to pay rent, and landlords who received PPP loans will be able more easily to use PPP loan proceeds to make mortgage payments.