When Los Angeles County announced stay-at-home orders on March 19, restaurants faced a choice: Stay open for takeout service, or close up shop and wait to see what happens next. For Vivian Ku, whose restaurants Pine & Crane and Joy have become neighborhood favorites over the last few years, the decision was to stay open to continue paying her staff. Then Congress passed the CARES Act, which provided $350 billion in forgivable loans through the Paycheck Protection Program to cover payroll expenses for small businesses like hers.
“The moment [the bill] passed, I thought, ‘Well, if our main concern was getting people paid, and there’s our solution for that, then there’s no reason for us to stay open,’” Ku said. She sent her staff home on March 28 and paid the following payroll cycle out of her own pocket, certain that a PPP loan would be on its way soon. The program’s application opened on April 3, and Ku stayed up all night to ensure she’d be one of the first to apply; she submitted an application within 15 minutes of her bank opening the portal.
Then, silence. Nearly two weeks passed without a response about the loan. On April 17, it was announced that the program had run out of money, and the relief Ku was planning on had disappeared. “That was a really big moment,” she said. “We had blown through a ton of money at that point,” and now rent was coming due, as was payroll, utilities, and other expenses. The program designed to help was now creating more problems, and Ku was running out of options.
For many small-business owners, the initial distribution of PPP loans proved elusive. Corporations like Sweetgreen and Ruth’s Chris soaked up (then returned) much of the money as banks seemed to give them priority treatment. To remedy this, Congress approved an additional $310 billion of funding for the program with the aim of helping smaller businesses that were left high and dry. Yet, even as these loans finally reach those most in need, many questions remain for restaurant owners, and new problems are arising.
“The original idea was very good,” began John Borghetti, who employs about 130 people across four restaurants, including Trattoria Farfalla in Los Feliz. “But now there are some contradictions, because the IRS is interpreting [the program] in a different way than the Senate and the Congress.” As Borghetti noted, Social Security and payroll taxes will need to be paid by employers rather than be covered by the loan, “which makes no sense to me, because where am I going to get the money?”
Under the program, businesses are eligible for a loan of two and a half times their average payroll. That loan is converted to a grant (meaning it does not have to be repaid) if 75 percent of the money is used for payroll, 25 percent is used for rent/utilities, and all of it is spent within eight weeks. As of May 28, the House of Representatives voted on a new bill changing the grant requirement so that only 60 percent of the money must be used for payroll, and businesses have up to 24 weeks to use the funds. In addition, the overall loan payback was extended from two years to five years, in case businesses do not meet the grant level. The Senate still needs to pass the bill
“PPP is a program that was designed by the U.S. government, but they put it on the individual banks to disperse the money,” said Ryan Handel of FIXE, a bookkeeping service for restaurants. No final guidelines on loan forgiveness were released by the SBA (the government agency overseeing the program) until May 15, well over a month after money began flowing to businesses. But even with these new guidelines, Handel predicts it will be up to each individual bank to give the final yes or no on forgiveness, with the SBA automatically auditing loans over $2 million and at random for smaller loans. “It is messy and problematic,” Handel continued. “Some of these banks treated this like the Wild West and were throwing around PPP loans all over the place. I’ll be curious if they’re going to ramp up their efforts in doing the paperwork to make sure [the loans] are forgiven.”
“The problem is that there’s all these gray areas where the answer is unknown, and it sounds like it depends on a case-by-case basis, which is pretty crazy,” said Andrea Borgen Abdallah, owner of Barcito in downtown Los Angeles. The issue with the program, she believes, is that “it’s a one-size-fits-all solution for an entire country.” Borgen Abdallah, who employs 11 people at her restaurant and was awarded a $75,000 loan, is hesitant to take the money until she gets more clarity on the regulations.
Handel has his own questions, too. After receiving a $245,000 loan for Simplethings, his cafe with multiple locations and 50 total employees, he emailed a contact at the SBA to ask if he could use the money to pay rent for March through June. “Depends,” his contact’s response began. While May and June’s rent were within the loan period and thus acceptable payments to make, “March and April are less clear,” his contact continued. “Although the [forgiveness] document specifies eligible non-payroll costs must be paid during the covered period, it does not explicitly address or speak to whether payment of past due rent payments would be eligible for forgiveness.” Furthermore, the document specifies that costs incurred before February 15, 2020, are eligible for forgiveness, but what happens to March and April costs is unclear.
Still, despite lingering confusion, Ku admits it’s better to have PPP funds: “I think it’s a much more favorable position than not receiving the loan, so I’ll take whatever I can get.”
Implementing PPP has not only left business owners unsure about how to properly use the money, but has exposed the weakness of the unemployment system and created a dilemma for employees. Before the CARES Act, unemployment benefits in California maxed out at $450 a week before taxes—a meager monthly total, and an impossible income to survive on. With the passage of the CARES Act, an additional $600 a week in unemployment benefits has been granted through July 25, bringing the maximum total to $1,050 a week. This means that many are making more on unemployment than their jobs would currently provide. However, if they decide to stay on unemployment rather than be rehired by their workplace to fill the employee headcount the loan requires, they risk losing their job entirely.
“If we’re not able to fully open and give everyone the hours we need to give [our employees] to come off of unemployment, then the last thing I want to do is hang them out to dry just to help me get this grant,” Borgen Abdallah said. “But, once that [PPP] money dries up and we get into the summer months, which for us are pretty brutal in general, we are pretty nervous about what comes next.” In other words, after the duration of the period covered by the loan is over, she may have to reclose the restaurant and furlough her staff again, sending them right back onto unemployment and the potential weeks-long process of re-enrolling.
In fact, this question of what happens when the PPP money runs out is weighing on many. Handel wondered if, when his loan money runs out, “[will] we have enough sales to pay for the staff and for the food?”
According to OpenTable, restaurants in states that have begun reopening are seeing a 20 percent return of business at best. Meanwhile, additional revenue streams like takeout and grocery retail may supplement some of what is lost, but do not cover nearly the full amount.
“We’re looking for smarter ways, more creative ways, to stay employed after PPP,” Ku said. She is considering the state’s Work Share program as a possible solution.
At Barcito, Borgen Abdallah has joined the High Road Kitchens initiative — a nonprofit that subsidizes meals to those in need through a donation-based model — as a way to generate additional business.
“Do I think we could survive this? Yes. 100 percent,” Borgen Abdallah said. “What we really don’t know is what the market is going to be like on the other side of this.”
Ultimately, PPP is a stop-gap measure that “gives operators a breath to figure out how we’re going to be able to stay profitable, relevant, and adapt during these situations,” said Christy Vega, the current owner of her family’s traditional Mexican restaurant, Casa Vega, in Sherman Oaks. In anticipation of the end of her PPP loan period, Vega has begun looking at ways to accommodate more seating space in her restaurant. Social-distancing guidelines may render her relatively small dining room ineffective for the amount of business needed to stay profitable, so she’s working to turn the restaurant’s substantial parking lot into either outdoor seating or drive-in dining space.
Looking ahead, Borghetti sees a major challenge facing restaurant owners: “I don’t think anybody will be able to keep open if we have to go back and pay full rent and that whole ballgame.” He noted that rent is one of the biggest burdens on independently owned restaurants, and “landlords are going to have to reassess their charges for the restaurant business, otherwise, they will have a lot of vacancies that nobody is going to take.”
Borgen Abdallah has been getting by paying only 30 percent of rent each month, a boon to her bottom line, but admits that her hands are tied until she knows what Barcito’s new source of business will be.
“It’s impossible for a restaurant who’s used to doing $100,000 a week to know how to operate at $25,000 a week, or $30,000 a week,” Handel concluded, adding that rent must be renegotiated to match the newly reduced income. “If landlords think they’re going to keep their entire rent when the PPP is done, thinking that business is going to be back to normal, that’s crazy.”
In April, José Andrés, Tom Colicchio, and others with the Independent Restaurant Coalition lobbied Congress to amend the CARES Act to grant restaurants up to 10 years to repay their PPP loans and create a $100 billion Restaurant Stabilization Fund to ensure the long-term survival of the industry. It is an attempt to buy the industry more time to adjust, but ultimately does not solve more systemic issues. Even before the pandemic hit, restaurants were grappling with sky-high rents and rising labor costs, as well as with existential questions like the role of Instagram in the industry, and how many new restaurant openings a year even the trendiest neighborhood can sustain.
Meanwhile, a new stimulus bill, dubbed the HEROES Act, passed the US House of Representatives on May 15, and included $10 billion in additional funding for PPP. The bill is currently facing approval by a Senate, where it is unlikely to pass.
As it stands, the PPP program was an emergency solution that offered valuable, short-term relief to those lucky enough to secure it, but it’s far from perfect. Whatever a new round of support small businesses may look like, restaurants will have to adapt and rebuild with a completely new set of circumstances, from reduced capacity and employee safety measures to a dining public that might very well be hesitant to come back to the table again.