The New Federal Loan Program Just Might Give NYC Restaurants a Fighting Chance

The federal government’s lifeline to an economically-hammered hospitality industry has finally transformed into a program poised to do some serious good for a sector that feeds and employs millions. Combined with new guidelines for outdoor dining, the revamped loan program might actually give New York City’s bars and restaurants a fighting chance.

On June 3, the Senate approved a House-passed bill that overhauls the $669 billion Paycheck Protection Program. President Donald Trump signed it into law today.

The initial policy was widely criticized for strict loan terms that were ill-suited for the hospitality industry, requiring venues to use the vast majority of funds on payroll — even though most of those establishments were closed. The new PPP, as it’s sometimes called, loosens many of those restrictions, ensuring that more venues will be able to convert the burdensome loans into grants.

Here’s the TL;DR: Restaurants now have to spend just 60 percent of funds on payroll to qualify for forgiveness, down from a crushing 75 percent. Venues will have most of 2020 to spend those funds, versus eight-weeks, which is good considering many restaurants will still be shuttered by the end of that shorter period. Forgiveness is still dependent on staffing up back to pre-pandemic levels, but there’s an exception for businesses hurt by state-mandated social distancing measures. Finally, restaurants that don’t qualify for full forgiveness will have a longer window to repay the loan.

This is a shockingly smart, albeit imperfect piece of legislation.

There are downsides. The new plan still unfairly bars people with felonies or who are on probation from applying. An earlier House bill would have erased the requirement to spend 60 percent on payroll, rightfully bringing that number down to zero. That would have given venues the freedom to save their restaurants as dictated by their individual businesses needs, rather by the political leanings of Congress — who wanted to keep workers off unemployment. But perhaps the biggest threat is that the program, initially plagued by fast tracking big businesses like Shake Shack and Morton’s (who returned their loans), has just $120 billion or so left to disburse.

With newly favorable terms, every small bar, cafe, fast-casual spot, bodega, speakeasy, and sushi bar that was scared off by the original restrictions will be fighting for that last piece of pie. Not everyone will luck out. And businesses still haven’t received direct help on one of the most crushing costs: rent.

For now, here’s a closer look and how much the revamped paycheck program will help New York City restaurants.

What are the new rules on what restaurants must spend?

It depends on the size of the loans, but it should be a reasonably good deal for everyone. Under the new guidelines, restaurants have to spend 60 percent of the loans on payroll expenses to qualify for forgiveness, down from 75 percent. The remaining 40 percent can go to other expenses like rent, utilities, and mortgage interest payments. So if a restaurant received $114,000 — the average size of a loan as of May 30 — that venue, under the old rules, would have needed to spend $85,500 on payroll to qualify for full forgiveness. Now, it only has to spend $68,400, with an extra $45,600 to use on everything else. That’s an extra bump of $17,100.

The new terms are much better, arguably enough to help even some higher-rent venues pay a month or two back to their landlords. It’s not clear, however, how restaurants that already spent the bulk of their funds will benefit. Also keep in mind that loans are still calculated the same way: two-and-a-half times a venue’s monthly payroll (not a ton of money). Finally, a restaurant won’t qualify for any forgiveness if it doesn’t hit the 60 percent payroll spending goal, but Congress might find a way to change that through technical revisions.

But businesses will have a longer time to use the funds too, right?

Yes. Under the old plan, the covered period for use of funds was just eight weeks. That time frame has been extended to 24 weeks, or until the end of December 2020. The change is hugely important for New York restaurants because many of them would have (or will have) remained closed throughout that eight-week period. Even with outdoor dining, many bars and eating places might not open until later in August or September.

What about the strict timeline for rehiring staff?

To qualify for full forgiveness under the original program, restaurants were obligated to return staffing levels to pre-pandemic levels by the end of June. This was a tough provision for the New York City restaurant industry, which will still be largely shuttered by then, even if outdoor dining returns. Under the new legislation, restaurants will have until the end of 2020 to rehire.

Put in more blunt terms: Spending 65 percent of loan funds to help pay staffers after opening — when they’re actually working — is an entirely better arrangement than paying 75 percent of loan proceeds to keep staffers on payroll for no reason while closed.

Of course, even with the longer timeline, returning to any type of normalcy in a generational economic downturn still might not be possible. The Congressional Budget Office expects fourth quarter consumer spending to be down 2.9 percent from the same period in 2019. Thankfully, the new paycheck bill accounts for that. Specifically, a restaurant’s forgiveness won’t be reduced if it was unable to staff up due to “the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.” So if a restaurant has to reduce its workforce because the venue is mandated by the state to cut its occupancy, that should theoretically not impact forgiveness. That’s a good thing.

Without forgiveness, what’s the timeline for restaurants that have to pay the loan back?

Restaurants that don’t qualify for full forgiveness will have five years to pay back any outstanding portion of the loan. That’s a far cry from the 10-year period mentioned in the first bailout bill, but it’s much better than the two-year period that the Small Business Administration ended up enacting.

How much money has the restaurant industry actually received from the paycheck program?

That’s unclear, due to the way that the Small Business Administration breaks down the data, but what is clear is that the industry hasn’t received enough. The national accommodation and food service industry has received just over eight percent of the $510 billion in funds disbursed so far, or roughly $41 billion, while construction has received over $63 billion. Just for a point of reference: The April unemployment rate for construction was 16.6 percent. For accommodation and food service it was a whopping 37.3 percent.

Ironically, those jobless numbers likely explain why some restaurants were hesitant to take out the paycheck loans in the first place. With such strict requirements, many venues likely calculated that the loans weren’t worth the risk. So the question for now is: With the newly improved terms, how much of the remaining loan funds — roughly $120 billion — will go to the country’s beleaguered restaurants, particularly those hit hardest in New York City?

One wonders whether a larger slice of the hospitality industry would have applied from the get go if there were better terms and outreach earlier on — and if literally anyone in Congress thought to consult more closely with the businesses that would be affected by COVID-19 closures the most.

This article has been updated to reflect the fact that President Donald Trump has signed the paycheck overhaul bill into law