For the city’s small restaurants, federal aid falls flat

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Molly’s Rise and Shine on Magazine Street is temporarily closed to protect employees and customers.  (City Planning Commission photo)

 

Mason Hereford shut down the dining rooms of his two restaurants by a vote. Days before Mayor LaToya Cantrell ordered restaurant dining rooms closed, Hereford gathered the staff of Molly’s Rise and Shine and Turkey and the Wolf, and, united and socially distanced, they elected to shift operations to take-out only. Hereford thought his establishments would operate this way for a week or two. They lasted only three days, before, with safety in mind, he shut them down completely.

In 2017, full-service restaurant jobs constituted 7% of New Orleans’s workforce according to a report by The Data Center. The report calls these restaurants a driving force of tourism, New Orleans’s biggest industry.

Today, those jobs have dramatically decreased as the coronavirus pandemic has forced restaurants closed and decimated the profits of those that are still operating.

Restaurant owners are now looking for an economic path forward, and what they see has some, including Hereford, concerned. Hereford has joined a chorus of others claiming the financial aid offered by the federal government, namely its Paycheck Protection Program through the Small Business Association, may not be enough to allow independent restaurants to survive the pandemic.

“Because of [our] unique operating challenges and vulnerabilities, the language of the PPP doesn’t let restaurants access the benefits that are meant for all small businesses,” Hereford said.

The PPP is a cornerstone of the CARES Act, Congress’s life-preserver thrown to small businesses struggling in the pandemic-induced economic downturn. It allows businesses with 500 employees or less to apply for a loan of up to $10 million dollars to cover the cost of payroll and select additional expenses, including rent and utilities, for eight weeks. Recipients must start spending the money the day they receive it and spend it in eight weeks.

This loan can be forgiven if the business uses 75% to keep all of its full-time staff on payroll for the entire loan period. Businesses do not have to retain the same individuals, only the same number of employees, and can hire new people if an employee does not want to remain with the company.

Any portion of the loan not used in the allotted eight weeks or used on unapproved expenses must be paid back. All unforgiven portions must be repaid in two years at 1% interest, a timeline Hereford said makes the money more like “a line of credit” than a loan.

If the doors are closed …

Hereford said the model may work for businesses that can still operate, but, under the strain of social distancing and shelter-in-place orders, many restaurants have closed.

It is ineffective, he said, for shuttered restaurants to re-hire their employees, only to fire them again in eight weeks when the loan runs out if restaurants are still closed or operating below full capacity, and unable to retain all of their staff.

In Texas, which will begin reopening today, restaurants in urban areas are only allowed to operate at 25 percent capacity.

“At a time where our restaurants can’t produce revenue, it doesn’t put us in a position to actually like get any stimulus out of the money,” Hereford said.

Moreover, by re-hiring employees, many restaurants are asking them to take a pay cut. The CARES Act added an extra $600 to state unemployment benefits, which, in Louisiana, takes the maximum payment of $247 per week and bumps it up to $847. This is more than the average service industry worker earns and, subsequently, more than what restaurants can provide their employees using the PPP.

Under these circumstances, bringing employees back onto the payroll is like asking them to forgo money in order to secure their job, a job that might disappear again once the PPP loan expires.

“No business owner wants to have to tell one of their very awesome friends, workers — whatever they are in your business — to make that decision,” Hereford said.

Online sales of gift cards and branded merchandise is one of the few revenue sources for restaurants that closed during the pandemic. (turkeyandthewolf.com)

 

When a restaurant does reopen, it must do more than simply turn the lights on. Reopening, Hereford said, necessitates re-training staff to operate in the new, socially distanced reality and re-prepping food. That is, if it can afford food.

Restaurants buy food in cycles. They purchase a bulk order of product, then pay it off over a 14- or 30-day period using the profits generated by the sale of that product. When that ticket is paid off, they place another order, and the process repeats.

When coronavirus hit, food meant for paying customers perished or was donated. Restaurants did not generate the income necessary to pay off their vendors and, until those tickets are paid off, cannot purchase more food. Per its guidelines, money from the PPP cannot be used to pay vendor invoices.

The PPP is designed to work with the Economic Injury Disaster Loan, a program that was expanded under the CARES Act. The EIDL offers a loan of up to $2 million to businesses that have weathered a disaster. It can be paid off over three decades at 3.75% interest. When used with the PPP, portions of the EIDL become forgivable. Those who apply for the EIDL are supposed to receive a $10,000 grant upon application.

Michael Ricks, the Louisiana district director of the SBA, said the money from EIDL loans, which is less restrictive than PPP loans, can be used to pay vendors.

At the time of his interview, Hereford had been approved for the PPP loan and was still deciding whether or not to accept it. He had not applied for an EIDL loan.

“I’m like a sole operator,” Hereford said. “I own 100% of both my businesses, and I owe money to the bank for one of them. And, to me personally, taking on debt right now [in the form of an EIDL loan], it’s just not the smartest thing.”

If the doors are open …

The above issues assume that independent restaurants can access a loan. The initial PPP quickly ran out of money after loaning $349 billion in 13 days. The program has faced national backlash as loopholes allowed publicly traded corporations with deep pockets to receive $10 million and $20 million loans.

Amanda Toups, who co-owns Toups Meatery in Mid-City with her husband, chef Isaac Toups, has spent her days in isolation with their two kids, monitoring the restaurant’s finances, handling the paperwork of her federal aid application, and watching her email like a hawk as she awaits news from the SBA.

She applied for the PPP the morning its application was released, then again when her credit card company, American Express, offered to file another application on her behalf.

Despite Toups’ preparation, compiling information and working with lenders so she could quickly submit her papers, both applications were held up due to technicalities and logistics — a box not checked in one, a long line of applicants ahead of her for the other. Neither application was approved before the first round of PPP funding ran out.

Unlike Hereford’s, Toups’ restaurant is still operational and, with employees to pay. Toups said a PPP loan would be beneficial for them.

Isaac Toups accepts a donation from the Camellia Beans company. (via Instagram)

To stay open, Toups Meatery has revamped its business model down to the nature of the food its cooks. The menu now consists of food that can be prepared and plated quickly to prevent people from lining up outside and breaking social distancing guidelines.

The restaurant now revolves around providing “family meal” — free meals to unemployed hospitality workers and others in need — and filling in financial gaps with crowdfunding campaigns, full-price to-go meals and bulk orders from large institutions and the Krewe of Red Beans’ Feed the Frontline campaign. Toups is hoping to add UberEats and World Central Kitchen, an emergency food relief program, to the restaurant’s revenue sources.

“Maybe between family meal, between Red Beans, between WCK, between to-go service, maybe we’ll survive — but I got to get a loan, too. I got to get the PPP,” Toups said.

Toups did apply for an EIDL loan. She received its $10,000 grant, but the application requirements changed after she submitted her information. Toups was not notified of this change until she reached out to the SBA a week after she applied. At the time of her interview, she has not yet been approved for an EIDL loan.

Both Hereford and Toups worry for the mom-and-pop shops that may not have the same access to an accountant, lawyer, bank or willing credit card company to help them figure out the federal aid programs.

In the case of the PPP, failure to understand and follow its terms could stick these smaller establishments an unforgiven loan on top of the economic distress of the pandemic.

Payments on unforgiven PPP loans will be deferred for six months.

Relief for state funds

Ricks said the purpose of the PPP is not to put people back to work, but to lessen the burden on state unemployment insurance trust funds — the funds used to pay unemployment benefits — and allow businesses to retain their employees.

“We’re burning through unemployment funds,” Ricks said. The PPP provides “an eight-week buffer for unemployment benefits” so that if things do not return to normal in two months and the current need for unemployment persists, those funds will still be available to support Louisiana residents.

In Louisiana, 302,000 residents have received unemployment benefits, according to the Louisiana Workforce Commission. On April 20 — on one single day — it paid more money in unemployment claims than it did in all of 2019.

According to the Wall Street Journal, almost half of states have seen a double-digit percentage drop in their unemployment insurance trust funds as 30 million people across the country have filed for unemployment. Louisiana is among these states.

The LWC reported a 14% decline in its trust fund, dropping from $1.05 billion to $901 million. However, in a statement provided to Uptown Messenger, the LWC said Louisiana’s unemployment fund “is not at risk of running out in the foreseeable future.”

State solvency aside, Ricks acknowledged that — due to its high demand, quick development and fast implementation — the PPP and EIDL application process can be muddled. New clarification on how the programs work are released every day.

He commended lenders who, he said, granted 27,000 PPP loans totaling up to $5 billion, 20 percent more than he expected, before the first round of PPP funding ran out.

“You can do something fast or you can do perfect,” Ricks said. “You can’t do both.”

For those who don’t have relationships with lawyers, accountants or banks to help them navigate the application process, can get free support from the taxpayer-funded Louisiana Small Business Development Center.

In the end, whether or not to apply for or accept a PPP or EIDL loan is a personal decision for each business. Those wary of the PPP conditions are not obligated to accept it, Ricks said, even if they apply and are approved.

“Rather than looking at this as a crisis, and something that’s being an end — it could be an end of the way you do business now, but it could also open the doors to new opportunities,” Ricks said. The businesses that are “willing to adapt” and “explore different streams of revenue” are the ones Ricks believes will be successful.

Adapting to the new normal

Toups, Hereford and other restaurants owners who have shifted to take-out, online revenue generation, and other activities.

Toups Meatery sends off meals to hospital workers as part of the Krewe of Red Beans’ Feed the Frontline initiative. (via Instagram)

“We’ve been able to keep [most employees] employed and paid as of right now because we’ve turned the restaurant into a soup kitchen, essentially,” Toups said. By her count, they provide 300 free meals a day.

Hereford, on the other hand, has been selling merchandise to support his business. He’s raised enough money that, if he takes the PPP loan, he will be able to not only pay his employees their weekly wages, but match what they receive on the buffed-up unemployment benefits.

Hereford has also used his time to advocate for the needs of independent restaurants. He, along with Neal Bodenheimer, owner of Cure and Cane and Table, are the local representatives for the Hospitality United Alliance, a national coalition of independent restaurant owners.

The alliance collaborates with the Independent Restaurant Coalition, an association led by a group of celebrity chefs, which has made headlines for lobbying the federal government for a $120 billion “restaurant stabilization fund.”

When it comes to the PPP, Hereford would like to see its origination date moved back. Instead of the eight-week clock starting to tick the day a business receives PPP money, he would like the loan to start the day restaurants are legally allowed to open. He’d also like 10 years, not two, to repay parts of the loan that are not forgiven.

A second round of funding was approved last week, infusing the PPP with another $320 billion. Treasury Secretary Steven Mnuchin said this round would tighten guidelines and keep large companies from receiving loans. Even with this boost, the money is once again predicted to run out quickly.

For Hereford, it is not just restaurants he’s concerned about, but also the businesses that depend on them.

When Hereford shut down Turkey and the Wolf and Molly’s Rise and Shine, he knew he was not only sending his employees home without a job, but taking a customer away from numerous local farms, from commercial repair companies, from wine purveyors and many more who rely on New Orleans’ expansive restaurant industry.

Both Toups and Hereford worry about what will happen if restaurants in New Orleans don’t make it. Even a 20% decrease in these establishments that make up New Orleans’s social and economic fabric “is devastating to think about” Toups said.

“We don’t want to see a bunch of Chili’s move into New Orleans,” she said. “That’s what going to happen in a lot of different places if we don’t save small restaurants.”

Reporter Emily Carmichael can be reached at emilycarmichael19@gmail.com.

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