Big Restaurant, Hotel Chains Won Exemption to Get Small Business Loans
The Paycheck Protection Program is aimed at businesses with 500 or fewer employees, but large restaurant and hotel chains can participate
Shake Shack Inc. hardly seems like a small enterprise, with 7,600 employees, about $500 million in annual revenue and net income last year of $24 million. Even so, it plans to apply for a new government-guaranteed small-business loan.
The New York-based fast-food chain says it needs the help to get through the new coronavirus pandemic. Many of its roughly 140 company-owned U.S. stores are in high-traffic urban areas now largely shut down by the virus. Sales are down 70% on average, the company said, and it has furloughed or laid off 20% of its corporate staff.
“We’re looking at it all,” said a company spokeswoman. “To the extent we believe we’re eligible and parts of the package will benefit the company, then we’ll look to pursue applicable options.”
While the new $350 billion Paycheck Protection Program is aimed at businesses with 500 or fewer employees, language in the $2 trillion federal stimulus bill allows big restaurant and hotel chains to participate regardless of how many people they employ.
Sean Kennedy, executive vice president for the National Restaurant Association, which lobbied for the restaurant-and-hotel exception, says size shouldn’t matter.
“The restaurant industry is uniquely affected by this pandemic,” he said. “It was the first industry to shut down. We think we deserve a unique response from the federal government.”
But John Lettieri, president of the Economic Innovation Group, a Washington think tank, says big companies should rely more on their own resources or other federal stimulus programs.
The small-business-loan program is “the only lifeline we’re offering to these classes of businesses,” he said. “It stretches the intent of statute beyond recognition to apply it to national entities.”
Some smaller franchisees and owners worry that the big firms could elbow them out for loans if the fund gets depleted.
“This stuff is meant for me, the little person,” said Daniel Krause, who owns two Cracked breakfast restaurants in Illinois. “If it all ends up going to the big dog, that’s so hard,” he said. With sales down 80%, he worries others will beat him out of the funding and then he will be further in the red.
On Monday, more than 5,000 chefs, restaurateurs and food-service workers sent a letter to Congress asking for fixes to the program that could help smaller establishments tap the funds, including one that would allow for a longer window to reopen.
Stephanie O’Rourk, a partner in the hospitality division of consulting firm Cohn Reznick LLP, said she has talked to hundreds of clients with concerns about the program. “The conversation is literally from 8 a.m. until 1 in the morning. Everybody is concerned,” she said.
Portland, Ore. restaurateur and cookbook author Naomi Pomeroy said she filed for a loan with her bank Friday, and was told that funds were already drying up. She and other prominent chefs fear that bigger chains will have an advantage to access funds over smaller institutions, many of which don’t have sophisticated accounting operations.
“A lot of people are applying, and that money is running out very, very quickly. We are going to need more money for restaurants to get open again,” Ms. Pomeroy said. “It’s just kind of a nightmare the way it’s set up.”
Nearly all U.S. states last month banned eating in restaurants, although preparing food for takeout or delivery was allowed. Many independent restaurants chose to close their doors rather than trying to slap together carryout programs—and thus need more time to rehire staff and be eligible for loans. Large fast-food chains, particularly those with drive-throughs, remain operational and have retained more of their staff as demand hasn’t declined as steeply.
“We know Chili’s and Denny’s are looking at this. Everyone has access to this same, finite pie,” said Cheetie Kumar, owner of Raleigh, N.C.-based restaurant Garland, who put in her application for the payment program last week but fears the funds will dry up. Ms. Kumar has shut her operation, furloughing most of her workers.
Trump administration officials have said they would seek additional funding if the money runs out. Congressional support is likely, said an aide to Sen. Marco Rubio, the Florida Republican who chairs the Senate Committee on Small Business and Entrepreneurship. “It was by far the most bipartisan initiative” in the stimulus bill, he said.
The loans are made by banks, credit unions and other lenders and have a 1% interest rate. They are designed to keep employees on the payrolls for eight weeks. If a borrower doesn’t lay off workers, the government plans to forgive the loan, including interest. Borrowers may also use the money for rent and utilities. The maximum loan is $10 million.
In addition to the exemption for hotel and restaurant chains, a second exemption was granted for franchise owners in any line of business who employ more than 500 people, as long as no single outlet employs that many.
That provision will help Todd Recknagel, who employs more than 2,000 people at the 68 Massage Envy outlets he owns around the U.S. Mr. Recknagel says he has been able to pay his employees so far, but he can’t continue to do that without a loan.
“We’re a collection of small businesses,” said Mr. Recknagel, who says he will seek the maximum loan of $10 million.
While officials from the Small Business Administration, which oversees PPP, didn’t comment, a spokeswoman for Sen. Rubio said that Mr. Recknagel would only be entitled to a loan based on a single location and that Shake Shack wouldn’t qualify for a loan because it wasn’t listed on an SBA franchise directory.
Rep. Kevin Hern (R., Okla.), a McDonald’s franchisee, pushed hard for the franchisee exception. He says it is justified because franchisees operate as small businesses in different communities. If they don’t have access to PPP, they would be forced to lay off workers, deepening the downturn, he argues.
“Franchising has been the true gateway to get into small business with limited risk,” he said.
But he says he doesn’t agree with the exemption for large company-owned stores, such as Shake Shack.
‘‘ The restaurant industry is uniquely affected by this pandemic. It was the first industry to shut down. We think we deserve a unique response from the federal government.
SEAN KENNEDY
Executive vice president for the National Restaurant Association
“The intent was for franchisees” to be included in PPP, Mr. Hern says. “There are other opportunities for those companies above 500 employees.”
The Federal Reserve and the Treasury, for instance, are putting together a Main Street Lending Facility for midsize companies, though it has yet to be unveiled.
Dine Brands Global Inc. had revenue of nearly $1 billion last year. It owns Applebee’s including 69 restaurants operated by the company in the U.S.; about 1,600 Applebee’s are franchised. Dine also owns IHOP, which is a franchise operation. A spokeswoman said the company is considering applying for its company-owned locations but is first focused on making sure its franchisees have access to the funds.
“The goal here for all of us in this industry is to keep restaurants open and minimize as much impact for all restaurant team members and guests,” she said.
Other big restaurant companies contacted by The Wall Street Journal say they won’t apply for the loans for the company-owned locations even though they are eligible.
They include McDonald’s Corp., which owns about 700 of its fast-food restaurants, and Chipotle Mexican GrillInc., the California-based burrito chain that owns all of its 2,600 U.S. locations.
“We don’t think it’s the right thing to do right now,” said David Tovar, McDonald’s vice president of U.S. communications. “We feel like we are in a good financial position right now.”
McDonald’s owns the real estate of its franchisees and is deferring rent payments for its roughly 2,000 U.S. owners for April and May, Mr. Tovar said.