Real estate companies are asking good questions about the SBA’s PPP loan program, particularly about borrower certifications. If you’re thinking about or have received a PPP loan, consider these factors when documenting your rationale.
In order to be considered for a PPP loan, you had to certify in your application that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The SBA has provided further guidance on what this certification means and how to support it with its FAQ document. In that document, Q&A #31 asks, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
In its response, the SBA states that, “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.”
As the business owner, perhaps you consulted with your CFO, external CPA, or legal counsel when you completed the loan application. At this point in time, we would encourage you to take a few moments to document your thought process as to why you applied for a PPP loan.
At this point in time, we would encourage you to take a few moments to document your thought process as to why you applied for a PPP loan.
Here are a few important things to consider as you prepare to put your rationale to paper (or monitor) and gather your supporting documentation:
- First, refer to the guidance directly. The SBA guidance notes that borrowers should be documenting in a memo, with additional support, their rationale behind signing the certifications. Check back frequently, since new guidance is released (almost) daily.
- Second, keep in mind that real estate is a lagging industry. Cash on the balance sheet today might not mean cash is in the bank three months from now. Review your budget; stress the cash flows under various scenarios; and understand which bills you will pay and which bills you will need to postpone.
- Third, make sure you consider factors that are unique to the real estate industry. For example:
- It’s likely you already have a mortgage on your property — have you reached out to your lender to start the conversation about financial covenants, debt service requirements, escrow funding, etc.?
- Do you already have access to other sources of capital — a line of credit, uncalled capital from investors, or delaying distributions to equity holders?
- Do you have a fund structure and uncalled capital that’s waiting to be deployed? Have you been in contact with your investors to ensure they’ll be willing and able to step up to the plate if their capital is called?
- Do you have a majority investor in your deals? Are you keeping in regular contact while you make cash flow decisions?
- If you rely heavily on income from fees to support your service-based company, have you already cut overhead spending, reduced payroll costs for highly compensated staff, furloughed workers, etc.?
The SBA guidance notes that borrowers should be documenting in a memo, with additional support, their rationale behind signing the certifications.
After you’ve revisited your loan application and your documentation, review Q&A #31. Do you feel that your real estate company meets the certification requirements? If not, you’re allowed a safe harbor if you return the loan funds by May 14, 2020.
A few other points of guidance:
- Although the SBA has been making loans for years, the PPP is a special program under the CARES Act. As such, the “credit-elsewhere” requirement that usually applies in an SBA loan is waived — companies aren’t required to certify that they couldn’t get credit elsewhere.
- Q&A #17 notes that companies don’t have to reevaluate their certification based on new guidance or Q&As that came out after April 2, 2020. Put another way, you can rely on the initial rules and guidance when you submitted your application.
If you conclude that retaining the funds for use in your business is your best option, consider the following steps — immediate steps — to plan for the future:
- Consider keeping the PPP funds segregated from your operating cash and drawing them down for appropriate costs. At the end of your eight-week period, when you request forgiveness of the loan, you’ll need to provide documentation and support to show how you spent the funds.
- Be able to document and support that you will be using up to 75% of the SBA loan proceeds for payroll expenses — these loans were intended to keep employees working and collecting a paycheck.
- If the loan, or a portion of it, isn’t eligible for forgiveness, the loan has a two-year maturity date and an interest rate of 1%.
- Keep in mind, your loan application is available to the public under the Freedom of Information Act, so be thoughtful about the information included.
Keep in mind, your loan application is available to the public under the Freedom of Information Act.
As you review the SBA’s guidance and your loan application, document your thoughts now in case you’re asked to demonstrate to a reviewer later why you need the funds. And if, upon a closer look, you no longer believe you meet the SBA’s standard, be sure to return the money by May 14. Further, note under FAQ #39, the SBA has now decided to 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.
As always, if you have questions, feel free to give us a call.