How Restaurant Titans Like Shake Shack and Sweetgreen Ended Up With Small-Business Loans

April 23, 2020 Admin 0 Comments

It was the Independent Restaurant Coalition that first proposed that restaurants could qualify for small-business loans based on employees per location, not employees total

Major restaurant chains like Ruth’s Chris Steakhouse and Potbelly have been publicly excoriated for receiving millions in government loans intended to buoy small businesses during the COVID-19 crisis. But a rule that allowed them to participate in the Paycheck Protection Program, which determined a restaurant’s eligibility based on its number of employees “per physical location,” rather than in total, wasn’t originally introduced by these chains or their lobbying groups, as they emphasized to the LA Times. Instead, it came at the suggestion of the Independent Restaurant Coalition, a new trade group co-founded by respected industry leaders like Tom Colicchio, Naomi Pomeroy, Kwame Onwuachi, and José Andrés.

An early draft of the CARES act, which established PPP, would have limited funding to hotel and restaurant groups with 500 or fewer employees total — but it was later amended to allow for larger restaurants to apply, provided they didn’t employ more than 500 workers at any given location. As Colicchio told Eater in a podcast appearance on April 7, “We had to explain that yes, a restaurant may have 2,000 employees, maybe spread over 18 restaurants. And so we lobbied to look at the individual restaurant numbers, as opposed to the whole enterprise.”

The change, which pertains only to the “accommodation and food services sector,” or hotels and restaurants, essentially opened the floodgates to include the industry’s largest players, including publicly traded companies like Shake Shack, which received a $10 million loan it later returned under public pressure. But the IRC implies that such consequences were unintended.

“When we advocated for that [500 per location rule] on the Senate side, it included a $500 million cap to ensure that the smaller restaurants and businesses could be assured protection,” an IRC spokesperson clarifies. “Unfortunately, it was removed in the House and not included in the final package. Most small restaurants didn’t get funding because Congress made PPP so broad that businesses took funds whether they have been hurt by this crisis or not.”

Loans for locations of Shake Shack, which says it’s losing $1.5 million per week due to COVID-19 closures, wouldn’t necessarily be a problem if funds were unlimited. But the opposite is true: The $350 billion initially invested in the program ran out on April 16, less than two weeks after the program was announced. Shake Shack and others, like publicly-traded sushi chain Kura, and 100-plus location Sweetgreen, have returned PPP loans, blaming the government for underfunding the program.

“When we applied for the [Small Business Administration] loan, our goal was to use it as it was intended — to take care of our restaurant teams during this crisis,” Sweetgreen’s founders wrote in an open letter announcing they would return their $10 million loan. The decision was made when they learned that PPP funding had run out, and that “small businesses and friends in the industry who needed it most did not receive any funds,” according to the letter. If PPP loans are returned, they go back into to the PPP fund, a Small Business Administration representative says.

Major banks like J.P. Morgan Chase have also been criticized for allegedly helping to secure loans for larger businesses instead of smaller ones. A California lawsuit seeking class action status claims that banks gave priority to applications from larger businesses, which were seeking bigger loans, in order to gain larger processing fees for themselves.Those processing fees, one to five percent depending on the loan amount, encourage banks to administer the loans. Banks handling the loans have already collected $10 billion in fees, according to an NPR analysis. But PPP funding comes from taxpayers, not banks, and the loans are guaranteed by the SBA, so for J.P Morgan Chase and the like, it’s risk-free money.

The PPP fund, meanwhile, is poised to receive a $320 billion refresh — and the same troublesome wording, “500 employees per physical location,” remains in the draft legislation. But two recent changes could help PPP loans reach more small businesses this time. First, $30 billion is explicitly reserved for community-based lenders, with another $30 billion for mid-sized banks and credit unions, a response to criticism that the previous system advantaged businesses with existing banking relationships. Second, newly issued guidance from the SBA says borrowers must certify that they need the loans and can’t get funding from other sources — Shake Shack, for instance, said it was ultimately able to find private funding elsewhere, allowing it to give up its PPP loan.

“[It] is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith,” SBA guidance reads. We’ll have to see about that.

• Tom Colicchio on Where the Stimulus Falls Short for Restaurants [Eater]
• Facing Criticism, Shake Shack Returns $10 Million Small Business Loan [Eater]
• ‘Shake Shack loophole’ stays in new small business bill. No one accepts blame [LA Times]