On October 26, 2020 the Federal Register published a document from the SBA referencing the PPP loan forgiveness process and started a 30-day comment period. Of interest in this published document is reference to “SBA Form 3509 – Loan Necessity Questionnaire (For-Profit Borrowers)” and “SBA Form 3510 – Loan Necessity Questionnaire (Non-Profit Borrowers)”. The actual forms 3509 and 3510 were not published in the Federal Register; however, unsubstantiated copies of these documents have been posted by Politico. This link will take you to the circulated, but unsubstantiated by the SBA, version of the 3509 form applicable to For Profit Borrowers.
Based on the current information, these SBA Forms 3509 and 3510 would apply to borrowers with PPP loans of $2 million or more. Borrowers with less than $2 million of PPP loans would be deemed to have met the loan necessity threshold. Borrowers with $2 million or more of PPP loans had expected some additional review process based on comments from the Secretary of the Treasury earlier this year. It appears SBA Forms 3509 and 3510 may be providing insight into what that additional review process will entail.
The draft form indicates that its purpose is to collect supplemental information to be used by the SBA loan reviewers to evaluate the good-faith certifications borrowers made on their PPP applications. The certifications included the statement that economic uncertainty made the loan request necessary to support ongoing operations.
Upon receipt of Form 3509 from the lender servicing the PPP loan, the borrower will have 10 business days to return the completed form and supporting documents to its lender. Once the form is submitted, the SBA may request additional information to complete its review.
Once the lender receives the response from the borrower, the servicing lender must upload the form and supporting documents to the SBA within 5 business days.
The questionnaire focuses on two areas:
Business Activity Assessment, and
Liquidity Assessment.
Business Activity Assessment
The Business Activity Assessment first asks for information on gross revenue for the second quarters of 2020 and 2019. Seasonal businesses may use the third quarter for the comparison. A business not in existence the second quarter of 2019 will compare the first and second quarters of 2020.
Next the Business Activity Assessment asks if the business was ordered to shut down after the Covid-19 National Emergency was declared on March 13, 2020. If the business was required to shut down, the name of the governmental authority requiring the shut down and the dates of the shutdown must be provided.
The third area of questioning focuses on whether the business was ordered to significantly alter its operations, and dates must be provided for the modification. Additional information is requested related to modifications for 1) the number of people permitted in a location, 2) service restrictions to outdoors, or 3) employee workspace reconfiguration. Cash outlays for these modifications are requested.
Next the Business Activity Assessment asks for the times the borrower voluntarily, without government order, took any of the three actions noted. And, if the business closed, the Business Activity Assessment asks for the reason for the closure, providing these two options: 1) an employee contracted Covid-19 or 2) Covid-19 disrupted the supply chain for the business. Other reasons for closure must be explained in 1,000 characters or less.
The sixth question asks if the business began any capital improvement projects not related to Covid-19 between March 13, 2020 and the end of the loan forgiveness covered period. The amount of cash outlays for that improvement project or projects is also requested.
Next the Business Activity Assessment asks for the NAICS code, and finally provides a 1,000 character box for additional comments.
Liquidity Assessment
Form 3509 then terms to a liquidity assessment which first asks the borrower to provide a listing of its cash and cash equivalents on hand the last day of the calendar quarter immediately before the PPP loan application, along with documentation supporting the balances.
Second the Liquidity Assessment asks if any dividends or other capital distributions (other than for pass through tax payments) were made to owners between March 13, 2020 and the end of the PPP loan forgiveness period. The total of distributions must be provided. Pass through tax obligations are further defined as not being able to exceed the tax liability on profits earned in the first three quarter of 2020, 110% of the pro-rata share of last year’s tax liability on distributions, and/or 100% of the pro-rata share of the tax liability on total distributions in 2020.
The third area of question asks about prepayment of outstanding debts that exceed contractual amounts due during the PPP loan forgiveness covered period and asks for the amounts paid and supporting documents.
Next the questions relate to employees that were compensated at an annualized rate of $250,000 or more. Borrowers will need to provide information including how many employees were compensated at that level and the total amount paid to employees at or above the $250,000 annualized rate, all during the loan forgiveness covered period.
Question 5 of the Liquidity Assessment asks for the same information as in Question 4, but for owners of the borrower.
Next the Liquidity Assessment asks if the borrower had any equity instruments listed on a national security exchange, and it asks for market capitalization on the date of the PPP application.
Question 7 asks if a public company owned more than 20% of any class of the PPP borrower’s outstanding equity securities, and it asks for the name and market capitalization of the public company equity holder on the date of the PPP application.
If the borrower did not have any equity securities listed on a national exchange, question 8 asks for the book value of the borrower as of the calendar quarter end immediately preceding the PPP loan application.
Question 9 addresses parent companies, specifically asking if the parent is US based and what the market capitalization was at the PPP loan application date.
Question 10 asks if a private equity firm, venture capital firm, hedge fund, or any fund managed by one of those firms owns 20% or more of any class of equity of the borrower.
In question 11, the Liquidity Assessment asks if the borrower was an affiliate or subsidiary of a foreign, state owned entity or a department or agency of a foreign state. The name of the foreign entity must be provided.
Next the borrower must provide a listing of any funds received from other CARES Act programs.
The last questions allows the borrower 1,000 characters to further explain any answers to the Liquidity Assessment.
Final Certifications
Once the Business Activity Assessment and Liquidity Assessment are completed, the borrower must certify that:
The person signing has the authority to sign and submit on behalf of the borrower.
The information and supporting documentation is true and correct.
The person understands that a knowing false statement is punishable under law and may result in imprisonment and fines for the signer.
What is Next?
If a borrower has a PPP loan of $2 million or more, the borrower should begin to assemble the information outlined. While the final forms 3509 and 3510 and the required documentation may change, it will be important for borrowers to assemble the information and assess any potential risk factors.
These assessments and certifications should be expected to be part of the SBA’s review of all PPP loans at or above $2 million. Lenders may require PPP borrowers meeting the $2 million threshold to provide this information at the time of application for forgiveness. And the lenders and the SBA may use this information to adjust forgiveness of the PPP loans.
The 30-day comment period will expire November 25, 2020. Between now and then, Focus Management Group will continue to track developments.