The Small Business Administration (SBA) and U.S. Treasury Department PPP Loan Forgiveness Application was released on May 15, 2020 (request for forgiveness). The long-awaited guidance does little to address the unique challenges plaguing the restaurant industry. Under current guidelines, restaurants may find themselves unable to take advantage of one of the cornerstones of the PPP program: loan forgiveness.

The restaurant sector has been particularly affected by COVID-19. Some staggering statistics about the restaurant industry during this pandemic include:

• Restaurants, on average, have laid off 91% of their hourly workforce and 70% of salaried employees due to COVID-19-related closures (James Beard Foundation)

• The biggest challenges restaurateurs believe they will face when reopening are: slow return of customers (41%), money to pay suppliers (35%), rehiring staff (16%), retraining staff (three%) and health inspections (two percent) (James Beard Foundation)

• Restaurant owners said their biggest immediate cash flow challenges are: rent (39%), payroll (34%) and taxes (9%) (James Beard Foundation)

Unfortunately, the forgiveness app poorly addresses key challenges facing the restaurant industry:

• Restaurants closing or opening at limited capacity making it difficult to spend PPP loan proceeds on time;

• Rehire employees when they are incentivized to stay on unemployment insurance; and

• Inability to use PPP loan funds to pay overhead costs above certain thresholds.

Period covered

Requiring restaurants to spend PPP loan proceeds on forgiveness, during a period when they are closed or operating at limited capacity, is at odds with reality.

SBA guidance provides four broad categories of costs eligible for rebate: (1) payroll expenses; (2) commercial mortgage interest payments; (3) commercial rent or lease payments; and (4) utility payments to businesses. Subject to certain exceptions, the remission is generally available for eligible costs incurred or paid during the eight-week period that begins on the date of disbursement of the PPP loan (“Covered Period)” or during the eight-week period weeks beginning on the first day of the first pay period following the PPP loan disbursement date (“Alternate Pay Period”).

Average full-time equivalent reductions

To complicate matters further, many hourly workers may not want to return to work until coronavirus exposure is mitigated, especially given the emergency unemployment benefit increase of $600 a week. made available under the CARES Act.

The CARES Act stated that the amount of a borrower’s forgiveness is limited if there is a reduction in the average number of full-time equivalent (FTE) employees during the covered period compared to a retrospective period.

The pardon application provides an exception to the FTE reduction in the following circumstances:

(1) discounts related to any position for which the Borrower has made a good faith written offer to rehire an employee during the Covered Period (or Alternate Payroll Covered Period) that was rejected by the employee; and

(2) reductions related to any employee who, during the Covered Period or the Alternative Pay Period (a) was terminated for cause, (b) voluntarily resigned, or (c) voluntarily asked for and obtained a reduction in his hours.

The forgiveness application provides that a borrower is exempt from the ETP reduction provided the safe harbor is satisfied. Under this safe harbor, a borrower is exempt from FTEE-based loan forgiveness reduction if both of the following conditions are met: (1) the borrower has reduced their FTEE levels during the period commencing on February 15, 2020 and ending on April 26, 2020. 2020; and (2) as of June 30, 2020, the Borrower has restored its FTE level to the FTE level that existed during the Borrower’s pay period which included February 15, 2020.

FTE reduction exceptions partly address the restaurant industry’s challenge of rehiring employees when they make more money from staying at home. However, assuming that a restaurant experiences a reduction in FTE during the covered period compared to the look-back period, despite the exceptions available as noted above, it is very possible that restaurants will not be able to restore the fully serviced by June 30, 2020, either due to continued shutdown orders or due to customers’ efforts to socially distance, and therefore will not be able to take advantage of the FTEE discount safe harbor.

75% pay threshold

Many restaurants incur high occupancy costs such as rent. Additionally, during times when restaurants are closed, operating their dining rooms at limited capacity, or only offering take-out and delivery, meeting the 75% of payroll threshold would only be possible if restaurants paid their employees even if they weren’t actually working.

The SBA requires that at least 75% of the amount remitted be attributable to payroll costs. Additionally, the CARES Act and SBA guidelines have stated that amounts eligible for the rebate must be both incurred AND paid during the covered period.

While the Pardon Application did not change the 75% of payroll requirement, it did change its definition to include non-payroll costs paid during the Covered Period OR incurred during the Covered Period and paid no later than the next regular billing date, even if the billing date is after the Covered Period. As a result of this change, borrowers can now include amounts accrued before the Covered Period and paid during the Covered Period. The forgiveness request does not allow borrowers to prepay mortgage interest, but says nothing about prepayments on salaries and other non-salary costs. Therefore, it appears that you can prepay rent and utilities during the covered period, or pay interest, rent and utilities late, as long as the total non-payroll costs remain equal to or less than 25% of the amount of the requested discount.

What can restaurants expect?

Lawmakers should make changes to PPP forgiveness rules. Restaurant industry leaders and associations are pushing for these changes to include an extension of the covered period by eight weeks[1], flexibility in starting the period covered so that restaurants can use the loans to replenish staff when social distancing has eased and restaurants can fully reopen, and lowering the requirement to spend 75% on costs related to payroll. The SBA said it “will also soon issue regulations and guidelines to further assist borrowers in completing their applications and to provide guidance to lenders on their responsibilities.”