Coronavirus Update: Hope for Restaurants
By: Lawyer Brian Mahany
March had to be the worst month on record for the foodservice industry in modern history. April is poised to be even worse. Almost every state has issued tough mandatory stay at home orders for residents. Even though takeout and deliveries are allowed in most locales, people aren’t patronizing restaurants. Many would be patrons are out-of-work or hoarding their cash out of fear for the future. For restaurant owners, this means more scrambling to make rent payments and retain valued staff members. Is there any hope on the horizon?
Congress and state governments are racing to protect jobs and businesses and to preserve our economy. Everyone understands the particular strains suffered by the restaurant industry. Although relief programs centered on the coronavirus pandemic change daily, there is much needed good news for restaurant owners. In the paragraphs below we discuss the Coronavirus Aid, Relief and Economic Security Act (CARES), rent and mortgage concerns and business interruption insurance.
On Friday, March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES). Many provisions of the law should prove helpful to hotel owners and their employees. CARES is a $2+ trillion business loan, tax and unemployment bill.
Tax Credits for Employer Maintaining Their Payrolls
CARES provides powerful incentives for employers to maintain their payroll during disruptions cause by the pandemic. It does this through a refundable tax credit for businesses harmed by government emergency orders or businesses who saw their gross receipts decline by more than 50%. Almost all restaurants in the United States qualify.
The tax credit is a payroll tax credit equal to 50% of qualified wages. It is available up to $10,000 per employee between March 13 and December 31, 2020. Different rules apply depending on whether the employer has more or less than 100 employees.
Unlike many tax credits, this one is refundable. That means that even if the credit is larger than the tax you owe, you can get a check for the difference. For example, if you owe $10,000 in taxes and qualify for a $20,000 credit, you would receive a $10,000 refund.
CARES also gives employers an interest free grace period of up to two years to pay FICA and Social Security taxes.
Paycheck Protection Program
While tax credits are great, many restaurants need cash now. Restaurants with 500 or less employees are eligible to receive loans for most payroll costs as well as other business expenses including utilities, rent, mortgage payments and interest on debt. No personal guarantee or collateral pledge is necessary and loans are available up to 2.5 times the average payroll costs over the last year. Loans are capped at $10 million. Rates won’t exceed 4%.
Want more good news? Your first payment can be deferred at least 6 months and perhaps as long as 1 year. The deferment is especially important for restaurant owners. We believe that even if a coronavirus cure or vaccine was discovered tomorrow, it will still take months before restaurants are back on their feet.
If you keep your staff on the payroll, part of the loan can be forgiven. Already laid people off? You might be able to rehire them and still qualify. (Final rules have not been issued as of this writing.)
Corporate restaurants with more than 500 employees may also qualify for payroll relief.
These payroll loans are available from SBA approved banks and credit unions. Although any bank can issue these loans on behalf of the SBA, many banks don’t have experience working with the SBA. If your bank doesn’t, you may wish to consider working with one that does. It could speed the process considerably
SBA Economic Injury Disaster Loans
Restaurants with 500 or fewer workers may also qualify for SBA Economic Injury Disaster Loans. Loans are capped at $2 million. Loans of less than $200,000 do not require a personal guarantee. Rates are quite reasonable (3.75%) and can be amortized for up to 30 years.
Many of the typical stringent SBA lending requirements have been eliminated but credit scores are still important. Although the total price tag of the coronavirus relief package tops $2 trillion, we urge anyone considering one of these loans to do so as quickly as possible. Once the money is gone, it’s gone.
Emergency $10,000 grants are available with as little as three days’ notice. Repayment can be waived if used for payroll or mortgage debt.
The Fine Print
The government has reduced much of the red tape typically associated with relief efforts but there is still some fine print. No longer do you have to exhaust traditional lending sources before going to the SBA. The rules are still being worked out and may change. Make sure you speak to a lawyer or tax advisor to see what relief is best for you.
Rent and Mortgage Relief; Help with Bank Loans
Most of the restaurant owners we spoke with made their April payments or have obtained a deferment with their landlord. Absent a miracle, they won’t make May’s payment.
Congress and several states are discussing additional relief for small business owners such as restaurants. For now, here is our best advice:
Restaurants will probably be able to work things out with their landlord in the short term. Savvy landlords know that it will take months for our economy to recover. Goldman Sachs predicted the nations GDP will plunge 24% in the second quarter, the largest drop in U.S. history. This is not the time landlords want empty space.
The Federal Reserve and Congress has made sure that small businesses have the opportunity to borrow money for short term needs. While the media focus has been on retaining jobs, the SBA’s Paycheck Protection Program monies can also be used for rent.
If you can’t make your rent, try to work things out with your landlord. If all else fails, your lease may contain a “force majeure” clause. That clause allows parties to get out of their contract if there is an act of God or some other unforeseeable event that prevents a party from fulfilling the contract. Running out of money isn’t a force majeure event but a government order telling people to shelter at home probably is.
Many states that have imposed foreclosure or eviction stays but some only apply to residential properties and don’t stop default interest and fees from accruing. Don’t rely on a foreclosure moratorium, now is the time to work something out with your landlord or mortgage company.
Many restaurants have bank financing. Several of the larger lenders have already announced that they are offering relief of up to 90 days to borrowers. Typically, banks ask borrowers who are in default to sign a “forbearance” letter. We urge restaurants owners to have those agreements reviewed by a lawyer. Many lenders include language that waives all claims you may have against the lender. The “deal” you make today could come back and bite you if things don’t improve quickly.
Finally, some large big box restaurants that own their properties have so called CMBS financing (Commercial Mortgage Backed Securities). These loans are much trickier and the loan “servicers” that service the loans are not regulated. Seek help from an experienced CMBS lawyer.
Business Interruption Insurance
Many restaurants have business interruption clauses or riders in their insurance policies. This insurance makes up lost profits if your business is “interrupted” or if a government authority mandates a closure or prevents people from traveling. Typically, these policies require a physical loss to the property.
Although we believe that contamination from coronavirus is a physical loss, we know insurance carriers are gearing up to deny claims. If your claim is denied, demand the denial be in writing and specify the reasons for the denial of coverage. Then seek a lawyer. Many policies require that claims be filed quickly.
Several states have acted to legislatively require insurance companies cover coronavirus losses. While these legislative attempts may appeal to voters and business owners, most have little chance of being upheld by courts.
We aren’t saying that you shouldn’t pursue business interruption claims, just be realistic in your expectations. In 2006 an industry group proposed policy language that explicitly bars claims arising from viruses. If your policy has such an exclusion, don’t expect that your state legislature is going to be able to be of much help.
Restaurant owners are not alone. Everyone in our industry is suffering. Take a deep breath. See what insurance and government grants and loans are available and talk to your landlord and lenders. Resist the temptation to panic and act impulsively. Know that you are not alone and seek help from your lawyer and accountant.
About the author.
Brian Mahany is a lawyer who helps restaurants and hotels deal with lenders and insurance companies. In 2014 he was part of the legal team that recovered $16.7 billion from Bank of America, the largest recovery against a single bank in history.