SBA appeals: What hotel executives should know

The U.S. Small Business Administration is conducting an ongoing review of Paycheck Protection Program loans and issuing “final SBA loan review decisions” that trigger important deadlines for exercising administrative appeal rights. Special rules apply to PPP loans for businesses in the hotel and accommodations industry. If businesses fail to act promptly, they may miss the opportunity to challenge an unfavorable SBA loan review decision. Executives should be mindful of several issues that will help guide a decision and approach to appeal.

Which special rules apply to the hotel and accommodations industry?

Businesses in the hotel and accommodations industry—generally those businesses that are assigned a North American Industry Classification System code beginning with 72—may benefit from a special statutory waiver from the “affiliation” rules, which would otherwise require aggregation of the number of employees of all affiliated businesses when determining size for purposes of PPP eligibility.

Generally, an entity is eligible for the PPP if it has 500 or fewer employees for first-draw PPP loans. A similar threshold of 300 employees is imposed for second-draw PPP loans. Importantly, businesses are generally required to include employees of affiliated businesses in their employee count. Businesses that exceed this 500- or 300-employee threshold, when including the employees of affiliated business, may be faced with an appealable decision by the SBA that the borrower was ineligible for the PPP loan and thus does not qualify for forgiveness.

Who is considered an employee for purposes of determining eligibility based on the “size” of a business? 

In determining the number of employees of a particular business, the SBA counts all individuals employed on a full-time, part-time or other basis. This includes employees obtained from a temporary employee agency, professional employee organization, or leasing concern. The SBA will consider the totality of the circumstances, including criteria used by the IRS for federal income tax purposes, in determining whether individuals are employees of a business.

How does the SBA determine whether businesses are “affiliated” for purposes of counting employees? 

Entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. Affiliation may be based on ownership, such as where an individual, concern, or entity owns or has the power to control more than 50 percent of the business’s voting equity. Affiliation may also be based on management, such as where officers, managing members or partners of the business also control the management of one or more other businesses. 

What types of businesses are NAICS Sector 72 businesses eligible for an “affiliation” waiver?

The PPP affiliation rules contain a waiver for businesses that are assigned an North American Industry Classification System code beginning with 72, whereby these businesses generally do not need to include the employees of affiliated entities for purposes of determining their “size” for PPP eligibility.

NAICS sector 72, the Accommodation and Food Services sector, comprises establishments providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption. The sector includes both accommodation and food services establishments because the two activities are often combined at the same establishment. Industries in the accommodation subsector provide lodging or short-term accommodations for travelers, vacationers, and others. 

There is a wide range of establishments in these industries. Some provide lodging only, while others provide meals, laundry services, and recreational facilities in addition to lodging. Lodging establishments are classified in this subsector even if the provision of complementary services generates more revenue. The types of complementary services provided vary from establishment to establishment.

Which deadlines are triggered by receipt of a “final SBA loan review decision”?

An appeal must be filed within 30 days after receipt of a “final SBA loan review decision,” which is an official written decision by SBA regarding the PPP loan. These loan decisions may find that the borrower was ineligible for a PPP loan if, for example, the borrower was not a small business under SBA’s employee-based size standard. 

The borrower may have appeal rights arising from the NAICS Sector 72 affiliation waiver discussed above. An appealable decision may also result where the SBA finds the borrower was (a) ineligible for the PPP loan amount received or used the PPP loan proceeds for unauthorized expenditures; (b) ineligible for PPP loan forgiveness in the amount determined by the lender in its full or partial approval decision issued to SBA; or (c) ineligible for PPP loan forgiveness in any amount when the lender has issued a full denial decision to SBA. 

Special administrative rules apply to the filing and management of an appeal, which are governed by the Code of Federal Regulations. An appeal extends the deferment period of the PPP loan until an appeal decision is rendered. 

Who must file the appeal? 

The borrower entity or its legal successor in interest has standing to appeal. Lenders and individual owners of a borrower entity do not have standing to appeal.

How long will the appeal take? 

A decision by an administrative law judge or administrative judge should be issued within 45 calendar days after the close of the administrative record. An appeal is an administrative remedy that must be exhausted before seeking judicial review in a federal district court.

The Code of Federal Regulations and regulatory guidance contain other detailed information regarding SBA appeals. Borrowers should consult counsel for a determination regarding SBA loan appeal rights and remedies.

Graham Ryan is a partner in the litigation practice group at Jones Walker in New Orleans.