New PPP Loan Forgiveness Rules Unfair for Related Party Rent Payments
On August 24th, the SBA issued the first guidance received since August 11th in new Interim Final Rules that provide significant limitations for business owners who own their own buildings and pay themselves rent.
In a somewhat shocking announcement, the new IFRs state that rent paid to a related party is only eligible for forgiveness if (1) the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and (2) the lease and the mortgage were entered into prior to February 15, 2020.
As a result, owners of businesses that received a PPP loan who own their building in a separate entity free and clear with no mortgage will receive NO credit towards forgiveness for rent paid to the related entity. This rule is made even more penal since the above limitation applies if there is ANY common ownership between the two entities, meaning that the limitation applies even if an individual owns just 1% of the entity receiving rent payments.
Further, the IFRs provide that mortgage interest payments to a related party are not eligible for loan forgiveness.
The SBA provided their reasoning for the above limitations in the IFRs stating that “PPP loans are intended to help businesses cover certain nonpayroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured. This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.”
Many borrowers will be shocked to find out that expenses paid pursuant to arm’s length lease or debt arrangements with related parties that have been in place for many years will now not be counted towards forgiveness.
The SBA continues to change the rules that apply, leaving borrowers and banks that are tasked with administering PPP loans wondering what will change next, and how they are supposed to submit or accept forgiveness applications with pending legislation in Congress and rules that are continuing to change. We recommend that all PPP borrowers wait until at least September 2020 to start filing loan forgiveness applications. We will continue to provide updates as the SBA issues more IFRs so stay tuned!