In March 2020, Sean Kennedy recognized COVID-19’s arrival as a “shattering moment for the industry.” The National Restaurant Association’s EVP of public affairs crunched numbers as officials warned against dining out, and then, piece-by-piece, mandated lockdowns across the country.
There was little time for a pipe dream. Kennedy penned a March 18 letter to Congressional leadership saying the Association anticipated sales to plunge by $225 billion over the next three months, with five to seven million jobs gone. Also, an immediate economic impact of $675 billion, given every dollar spent in restaurants generates an additional $2 elsewhere in the national economy.
Kennedy asked the Department of Treasury to create a $145 billion Restaurant and Foodservice Industry Recovery Fund and to set aside $35 billion for Community Development Block Grants for Disaster Relief assistance, like those put into action after 9/11.
Between then and January 2021, restaurant and foodservice sales ended up $225 billion down from projections. The sector closed the calendar with 2.5 million fewer jobs. One in six—or roughly 110,000—establishments were closed and not open for business in any capacity. Shuttered either temporarily or permanently. Which one exactly won’t be clear for some time.
The Independent Restaurant Coalition estimated the industry was more than $219 billion short and shed nearly 50 percent, or 5.9 million, of jobs between February and April 2020. Somewhere around 4.5 million of those belonged to independent restaurants.
But, as hard as it might be to imagine, it could have been worse if not for some “base hits and small wins,” Kennedy says in an interview with QSR. “We’ve just continually pushed for [these] knowing that in the aggregate they’re going to make a big difference.”
Kennedy’s referencing things like the Paycheck Protection Program Flexibility Act from June, which addressed glaring holes in the first attempt and has provided more than $70 billion in support for restaurants to date. A second round where restaurants could take 3.5 times monthly payroll versus two months for most businesses. The Employee Retention Tax Credit. Extension of the Work Opportunity Tax Credit. Inclusion in the Economic Injury Disaster Loans program. Keeping PPP benefits from being taxed.
If these were foundational blocks to survival, though, Thursday’s Restaurant Revitalization Fund felt like the glue operators truly need to start piecing a broken jigsaw back together.
President Joe Biden signed the American Rescue Plan Act into law Thursday, creating a $28.6 billion fund the Association called “the most important recovery tool for the industry to date.”
Kennedy admitted it’s far from the final battle. He expects to approach Congress again in the future to replenish the fund or expand it, as the $28.6 billion is sure to move fast. And frankly, it’s not enough.
Yet it’s still an “amazing step forward,” Kennedy says.
Let’s go through what’s available.
- Eligible businesses can receive a tax-free federal grant equal to the amount of its pandemic-related revenue loss, which is calculated by subtracting 2020 gross receipts from 2019 gross recipes.
- If the restaurant was not in operation for the entirety of 2019, the total is the difference between 12 times the average monthly gross receipts for 2019 and the average monthly gross receipts in 2020 (or a formula from SBA).
- If the business was not in operation until 2020, it can receive a grant equal to the amount of “eligible expenses” subtracted by its gross recipes received.
- If the restaurant was not yet in operation as of the application date, but it has made “eligible expenses,” the grant would be made equal to those expenses.
Deduction of first and second draw PPP loan funds
Pandemic-related revenue losses for businesses are reduced by any amounts from PPP first draw and second draw loans in 2020 and/or 2021.
The SBA can adjust awards based on demand and “relative local costs” in the markets where Restaurant Revitalization Fund businesses operate. Otherwise:
- $23.6 billion is available for the SBA to award in an equitable manner to businesses of different sizes based on annual gross receipts.
- $5 billion is available to restaurants with gross receipts of $500,000 or less during 2019 (this is targeted toward independent entities).
- Maximum: The total grant amount for an eligible business and any affiliated businesses is capped at $10 million and is limited to $5 million per physical location of the business.
Some other things to consider:
The program will, for a 21-day period out of the gate, prioritize awarding grants for small businesses owned and controlled by women, veterans, or socially and economically disadvantaged operators. This is an effort to include and push forward some of the same parties that felt left out by the PPP in its initial go-around.
Eligible expenses are those incurred from February 15, 2020, to December 31, 2021, or a date determined by the SBA. If all grant funds are not spent by the business, or the business permanently closes before the end of the covered period, the business must return unused funds to the Treasury.
Perhaps the biggest change from the PPP concerns eligible expenses. Restaurants can use funds on payroll; principal or interest on mortgage obligations; rent; utilities; maintenance including construction to accommodate outdoor seating; supplies such as protective equipment and cleaning materials; normal food and beverage inventory; certain covered supplier costs; operational expenses; paid sick leave; and any other expenses that the SBA determines to be essential to maintaining operations.
The PPP, after adjustments were made in June, required a 60/40 split with the higher figure spent on payroll in order to get the loan forgiven. That was reduced from 75/25 originally. Many restaurants, especially those in high-rent markets like New York City, lamented the structure. In fact, according to a survey by the NYC Hospitality Alliance, more than 90 percent of NYC restaurants couldn’t afford to pay rent in December—a number that steadily increased throughout the pandemic. In June, it was 80 percent. By July, 83 percent. In August and October, 87 and 88 percent, respectively.
“It’s an expansive definition that will provide immediate use of those funds,” Kennedy says. “As soon as they get the check they will have no problem putting those funds to work to keep their doors open.”
Unlike the PPP, the Restaurant Revitalization Fund will be administered by the SBA.
Who is eligible?
To receive a grant, you must own or operate 20 or fewer establishments (together with any affiliated businesses), regardless of ownership type of the locations and whether those locations do business under the same or multiple names, as of March 13, 2020.
The wording is critical, Kennedy says. The Association fought to open this in recent months as the RESTAURANTS Act, first proposed by thousands of IRC supporters in an April 2020 letter to Congress, moved from the House to Senate. Kennedy says they wanted to ensure franchisees could access grants, too, and chains were not excluded.
The Act that came out of the House, he says, “only picked winners and losers.”
“That’s not fair and that’s not fair for the franchise models,” he says.
The IRC, which said it’s sent more 100,000 emails to Congressional offices over the months, was initially in favor of the House version of the $120 billion grant proposal, while the Association, as Kennedy notes, supported the Senate’s more neutral take. The sides have been talking since May.
Now, under the Restaurant Revitalization Fund, if you own 20 or fewer restaurants, you’re in. That’s the line.
“It says … if you’re a suffering restaurant, you deserve equal access to federal relief as any other model,” Kennedy says. “And that is what the Restaurant Revitalization Fund reflects.”
“At the end of the day, every restaurant is a small business,” he adds.” And after 12 months, it doesn’t matter what logo is on the uniform—you’re in a world of hurt.”
With that said, eligible entities include a restaurant, food stand, food truck, food cart, caterer, saloon, inn, tavern, bar, lounge, brewpub, tasting room, taproom, licensed facility or premise of a beverage alcohol producer where the public may taste, sample, or purchase products, or other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink.
These businesses can apply using their existing business identifiers, as the SBA will avoid imposing additional burdens on applications.
One thing to point out—publicly traded companies are ineligible. Kennedy says larger restaurants will likely come up in later talks. But for now, the focus is on smaller operators and entities.
Restaurants must submit a good faith certification when applying that:
- Uncertainty of current economic conditions makes necessary the grant request to support the ongoing operations.
- The entity has not applied for nor received a “Shuttered Venue Operators” grant (generally for performing arts, live venues, theaters, etc.).
- The grants are not taxed like income, and all normal federal tax deductions are protected.
Also to consider: The ERTC, which allows employers to write off up to 70 percent of funds spent to pay employees, is extended by two months in the American Rescue Plan, through August. The credit, taken against the restaurant’s portion of Social Security Taxes, can go up to $7,000 per quarter, per employee. It targets operators who retained staff.
The PPP received an additional $7.25 billion in funding from the Plan. Deadline for applications remains March 31.
To the earlier concern of funds running dry, Riley Lagesen, national restaurant industry practice group chair for Davis Wright Tremaine LLP, told Law360 some operators could be left out. And he’s also concerned with the fund’s lack of an underwriting process that might assess a restaurant’s ability to survive even after it receives a grant. Additionally, Lagesen said businesses that took out PPP loans will have those funds deducted from any grants they receive. “It’s not the best available act, but the best act available,” he told the publication. “We’ve seen so many iterations and discussions of the House and Senate acts since May, it’s very hard to find a perfect solution to this massive problem faced by the restaurant industry.”
“For us, recovery is still going to be a priority,” Kennedy says. “But we are already looking ahead to saying what are the issues that we need to be engaged on, as it relates to workforce development. As it relates to immigration. What do we do about the minimum wage? What do we do about reopening guidance? How do we get states to have more of a science-based approach to what indoor dining capacity should be? We are really pleased with the Restaurant Revitalization Fund but our work is far from over for 2021.”
While details are not yet fully available, the program appears to be direct-to-recipient, similar to the EIDL Advance program (with applications accepted through an online portal from SBA’s site), rather than a bank-administered program like the PPP, according to Winthrop & Weinstine, P.A.
Want to start preparing to apply? Check out this resource guide from the IRC.
Looking ahead, and minimum wage
Kennedy believes the industry, even with Thursday’s positive turn, remains fragile. It needs four things to click.
One is continued vaccinations so state officials feel comfortable loosening indoor dining restrictions. The good news is Biden said all Americans should be eligible by May 1, which would put the nation on a path to normalcy by July 4.
Regardless of what innovative and creative outlets operators turn to, the sector as a whole is simply not sustainable without indoor dining, Kennedy says. Those capacity limits need to come down.
The industry also needs a return to business and travel. It needs urban markets to open and for people to dine out when they head to LA, New Orleans, New York, St. Louis, and so on.
Restaurants need people to go back out again, or a return to mobility.
And lastly, it requires a federal relief program that’s working. “Because all of those steps, those first things, they’re going to be slow in coming,” Kennedy says. “Cruise ship travel to New Orleans is not going to be where it was anytime soon.”
“We were the first industry to be shut down,” he adds. “And we’re going to be the last industry to come back on line. And we need recognition from policy makers that things are still incredibly fragile right now.”
Mark Wasilefsky, head of Restaurant Franchise Finance Group, TD Bank, echoed Kennedy’s broader take on recovery and says some changes will stick. “During COVID-19, we have seen restaurants increasingly rely on online and mobile ordering and drive thru capabilities, accelerating an already growing segment of the market,” he says. “Consumer adoption of these methods will not go away once the vaccine has been broadly distributed. Rather, people have become accustomed to these offerings and I believe online and mobile ordering will still account for a large percentage of overall, and even incremental sales, and will be complemented by more traditional foot traffic and indoor dining.”
“Brands are considering decreasing their physical store footprint in order to focus on their mobile and online ordering and drive thru capabilities,” he continues. “I expect that this trend will continue as restaurants focus on consumers’ desire for a quick and seamless pick-up experience with limited face-to-face interaction.”
Kennedy also spoke about minimum wage and the Raise the Wage Act. The Association was adamant in its “wrong bill at the wrong time” take on the effort, which did not make it into Biden’s 1.9 trillion COVID relief bill. In the initial stages, the American Rescue Plan included a $15 minimum wage increase in phases. However, the Senate parliamentarian said the provision must be removed because it doesn’t fit with budget reconciliation rules, which state all parts of the bill must affect the budget in some way. The deletion made the legislation easier to pass as a handful of Democrats weren’t in favor of the hike—key votes that were needed to pass the overall bill.
Kennedy held firm to that Friday, saying the Association was ready to have a conversation about minimum wage, but the Raise the Wage Act “is the wrong starting point.”
“It is absolutely going to make it harder for restaurants to reopen, and it’s going to make it much more likely that more restaurants will shut down altogether,” he said.
The Raise the Wage Act proposed an increase of the federal minimum rate from $7.25 to $15 an hour over the next five years. While many states have lifted wages in recent years, the federal figure hasn’t budged since 2009. The Raise the Wage Act starts at $9.50 (it also hikes the tipped wage from $2.13 to $4.95) before lifting every year through 2025, when it would then index the minimum wage to median wages.
Also, it promised to eliminate a separate minimum wage for tipped workers.
This latter point might have been the most troubling. “We need something that preserves the system of tipping, and we need to recognize that is good for operators, customers, and employees alike,” he says.
The Association previously said tipped servers make between $19–$25 per hour under the current tipped credit model, suggesting cutting it would actually hurt, not help workers. Federal law requires employees earn at least the federal minimum wage, or the higher state or local number in 28 states and 55 municipalities. If the combination of the base wage and earned tips does not total the required minimum wage, the employer must pay the tipped employee more to make up the difference.
If the Raise the Wage Act went through as proposed, the Association believes restaurants would simply terminate tipping, raise prices to cover higher wages, and move to an hourly wage-only system. The result being tipped employees would end up earning less in the long run.
No state has eliminated the tip credit in more than two decades. Recent attempts in Chicago, Maryland, Washington, D.C., Michigan, Virginia, New Mexico, and Maine all failed.
“Honestly, the server community has been absolutely critical here,” Kennedy says. “We have a network of servers nationwide that recognize how the system works, recognize that it’s good for them, and don’t want to see it eliminated, and they have been very local in sharing what the tip credit enables them to accomplish in their lives. And why that goes away immediately if the tip credit is eliminated.”