Update on CHOWs and COVID-19 Funding: Apply ASAP Under Phase 3

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Healthcare providers, including assisted living facilities and nursing homes, that have undergone a recent change of ownership (CHOW) have had unique challenges as federal and state agencies have rolled out COVID-19 funding opportunities, including Provider Relief Funding and the Paycheck Protection Program (PPP).  In previous articles, we have focused on CHOW aspects; for example, Provider Relief Funding has been disbursed in waves with varying eligibility requirements, some of which intentionally or effectively barred providers that recently underwent a CHOW.  In this article, we will review additional CHOW updates, including the new Phase 3 Funding opportunity (which opens eligibility for 2020 CHOWs) and Provider Relief Funding reporting requirements, as well as a high-level review of recent PPP updates.

Phase 3 Funding and CHOW Eligibility

HHS’ eligibility requirements under Phase 3 Funding could have important ramifications for recent CHOWs and especially assisted living providers.  Under the previous Phase 2 eligibility requirements, it was unclear if assisted living providers that took over operations following a CHOW on or after January 1, 2020 were eligible because applicants were required to have “either (i) filed a federal income tax return for fiscal years 2017, 2018 or 2019 or (ii) be an entity exempt from the requirement to file a federal income tax return and have no beneficial owner that is required to file a federal income tax return. (e.g. a state-owned hospital or health care clinic) . . .”  However, under Phase 3 eligibility requirements, a similar requirement provides that the applicant must have “[f]iled a federal income tax return for fiscal years 2017, 2018, 2019 if in operation before Jan. 1, 2020; or be exempt from filing a return . . .” (emphasis added).  The “if” makes a significant difference, as the requirement for tax return filing appears to apply only if the provider was in operation before January 1, 2020.  For example, if the provider is a new entity that began operating an assisted living facility after January 1, this new language appears to make clear that a lack of a 2017, 2018, or 2019 tax return is not a barrier to application.

As recommended in our previous article related to Phase 3 Funding, all eligible providers should apply as soon as possible, especially because it is the first General Distribution that may disburse additional funding to providers that have already received 2% of annual patient care revenue (assuming there are funds left over after all applicants receive 2%).

Provider Relief Fund CHOW Reporting Requirements

On September 19, 2020, the Department of Health & Human Services (HHS) released long awaited guidance  addressing General and Targeted Distribution reporting requirements.  In the document, HHS confirms its intention to collect CHOW-related non-financial data on a quarterly basis from fund recipients who received one or more payments exceeding $10,000 in the aggregate, stating:

Reporting Entities that acquired or divested of related subsidiaries indicate the change in ownership [sic], whether the related TIN was acquired or divested, providing the following data points for each relevant TIN:

  • Date of acquisition/divestiture
  • TIN(s) included in the acquisition/divestiture
  • Percent of ownership for acquisition/divestiture
  • Did/do you hold a controlling interest in this entity? (Y/N)

Note: If the Reporting Entity itself was acquired or divested, it should self-report the change in ownership to [the Health Resources and Services Administration].

HHS has not made clear exactly how it will use the information collected.  However, given HHS’ FAQs related to changes of ownership, one likely purpose of collecting this information is to review the reports against the entities that received Provider Relief Funds to ensure that funds went to the correct entity.  For example, if a nursing facility was sold to a buyer in 2019, HHS will confirm that funding went to the buyer and not the seller and that, if the seller did receive funding, it was returned to HHS.

Paycheck Protection Program

In a new Procedural Notice, the Small Business Administration (SBA) modified its approach to requiring companies involved in buying or selling a company with a PPP loan, i.e., the requirement of the PPP Lender to obtain SBA’s “prior approval” for a change of ownership.  As mentioned in a recent article, the Procedural Notice changes, but does not eliminate, the requirement.  The Notice provides the following with respect to instances where prior approval from SBA is not required:

There are different procedures depending on the circumstances of the change of ownership, as set forth below. In all cases, the PPP Lender is required to continue submitting the monthly 1502 reports until the PPP loan is fully satisfied.

1. The PPP Note is fully satisfied. There are no restrictions on a change of ownership if, prior to closing the sale or transfer, the PPP borrower has:

  • Repaid the PPP Note in full; or
  • Completed the loan forgiveness process in accordance with the PPP requirements and:
    • SBA has remitted funds to the PPP Lender in full satisfaction of the PPP Note; or
    • The PPP borrower has repaid any remaining balance on the PPP loan. 

2. The PPP Note is not fully satisfied. If the PPP Note is not fully satisfied prior to closing the sale or transfer, the following applies:

  • Cases in which SBA prior approval is not required. If the following conditions are met for (i) a change of ownership structured as a sale or other transfer of common stock or other ownership interest or as a merger; or (ii) a change of ownership structured as an asset sale, the PPP Lender may approve the change of ownership and SBA’s prior approval is not required:
    • Change of ownership is structured as a sale or other transfer of common stock or other ownership interest or as a merger. An individual or entity may sell or otherwise transfer common stock or other ownership interest in a PPP borrower without the prior approval of SBA only if:
      • The sale or other transfer is of 50% or less of the common stock or other ownership interest of the PPP borrower; or
      • The PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. In any of the circumstances described in a) or b) above, the procedures described in paragraph #2, bullet 3,  below must also be followed.
  • Change of ownership is structured as an asset sale. A PPP borrower may sell 50 percent or more of its assets (measured by fair market value) without the prior approval of SBA only if the PPP borrower completes a forgiveness application reflecting its use of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender, and an interest-bearing escrow account controlled by the PPP Lender is established with funds equal to the outstanding balance of the PPP loan. After the forgiveness process (including any appeal of SBA’s decision) is completed, the escrow funds must be disbursed first to repay any remaining PPP loan balance plus interest. The PPP Lender must notify the appropriate SBA Loan Servicing Center of the location of, and the amount of funds in, the escrow account within 5 business days of completion of the transaction.

Individuals affected by this notice should read it in its entirety, as there is important detail related to circumstances where SBA approval is required and other requirements.  A previous AGG article also provides more information.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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