WASHINGTON – The federal government gave national hotel and restaurant chains millions of dollars in grants before the $349 billion program ran out of money Thursday, leaving thousands of traditional small businesses without funding and leading to a backlash that prompted one company to give the money back.
As Congress and the White House near a deal to add another $310 billion to the small business program, some are calling for additional oversight and rule changes to prevent bigger chains from accepting any more money.
Ruth’s Chris Steak House, the chain that boasts 150 locations and is valued at $250 million, reported receiving $20 million in funding from the small business portion of the bailout legislation called the Paycheck Protection Program. The Potbelly chain of sandwich shops, which has more than 400 locations and a value of $89 million, reported receiving $10 million last week.
Shake Shack Inc., the $1.6 billion New York City-based burger-and-fries chain, received $10 million. After complaints from small business advocates after the fund went dry, company founder Danny Meyer and Chief Executive Officer Randy Garutti announced Sunday evening that they would be returning the money.
They said they had no idea when the program was created it would run out of money so quickly and that they understood the uproar.
“Late last week, when it was announced that funding for the PPP had been exhausted, businesses across the country were understandably up in arms,” the two wrote in a letter posted online. “If this act were written for small businesses, how is it possible that so many independent restaurants whose employees needed just as much help were unable to receive funding?”
“We now know that the first phase of the PPP was underfunded, and many who need it most, haven’t gotten any assistance.”
Treasury Secretary Steven Mnuchin, who has tried to defend the program in recent days, wrote on Twitter that he was “glad to see” Shake Shack return the money.
In all, more than 70 publicly traded companies have reported getting money from the program, according to filings with the Securities and Exchange Commission.
Sen. Marco Rubio, R-Fla., chairman of the committee overseeing small business, addressed the criticism Monday morning on CNN, saying that hotels and restaurants were some of the first and hardest hit companies in the country and that many of their locations were owned by true small businesses or individuals.
But he said that there have been “some people approved, some companies, that I believe should not have been, even under the intent of the law, and that comes down to the certification process and how they were certified into the system.”
A number of the companies receiving money are clients of J.P. Morgan Chase, adding fuel to criticism that Wall Street banks had aided their clients in securing large amounts. The bank put out a statement Sunday saying that it is “proud to have secured more funding for small businesses than anyone else in the industry” and that 80 percent of its PPP loans have been for businesses with less than $5 million in revenue.
J.P. Morgan explained that larger companies may have been served more quickly because its commercial banking unit, which serves larger clients, was able to complete “most of the applications it received” while many more applications poured in from traditional small businesses.
The PPP program was intended to benefit workers at businesses and non-profit employers with fewer than 500 employees that are unable to obtain credit elsewhere, according to the Small Business Act, which formed the basis for the program.
But after intensive lobbying by the restaurant and hotel industries during the weeks leading to the passage of the Cares Act, Congress allowed separate subsidiaries and locations to apply as businesses, even if they were part of a national or international chain.
Thus multiple Ruth’s Chris could apply under separate entities even though its parent company employed some 5,740 people at the end of last year, according to public filings. Other industries and advocates lobbied against affiliation rules as well, including the private equity industry.
Hotels, with three-quarters of their rooms empty and nearly 4 million people out of work, have been taking advantage of the program. Philadelphia’s Hersha Hospitality Trust, and Condor Hospitality Trust, a Maryland-based owner of 15 hotels in eight states, reported last week they had applied for their properties.
Treasury Secretary Steven Mnuchin has called the PPP program a success, saying in a statement Friday that the program provided funds to more than 1.6 million small businesses in all 50 states.
“The vast majority of these loans – 74% of them – were for under $150,000, demonstrating the accessibility of this program to even the smallest of small businesses,” Mnuchin said. He told CNN Sunday that another $300 billion “should be sufficient to reach almost everybody.”
Executives at some chains have defended the rule the way it is written, saying the size of the parent company matters little since most of the money is required to go to workers, as a minimum of three-quarters of each loan is required to go to payroll in order for the government to forgive the debt.
“Employees don’t care if we’re big or we’re a small business. They just want their job back,” said Jon Bortz, founder and chief executive of the Pebblebrook Hotel Trust and board chair of the American Hotel and Lodging Association, the industry’s top lobbying group. AHLA has also argued that hotel owners should not have to spend three-quarters of stimulus funds on payroll.
Ruth’s Chris, a steakhouse chain based in New Orleans, sought the stimulus money so that the company “is well positioned to emerge from this situation a strong and viable entity,” it said in a statement to the Wall Street Journal.
As the program ran out of money however, leaving thousands of small businesses without money to pay their workers, criticism mounted about some of funds going to national brands.
The initial PPP program “was flawed from top to bottom,” said Florida small business owners Duncan and Rita MacDonald-Korth. “The program has done very little to help genuine small businesses and instead has benefited large companies who have used subsidiary entities to benefit disproportionately and unfairly.”
They created a petition asking that the program be limited to companies with fewer than 250 employees and half of it should be reserved for those with 50 employees or less.
Some critics point out that executives at larger chains often enjoy multi-million dollar annual compensation packages. Other chains, such as Marriott and Hilton, have been criticized for inflating the values of their shares in recent years with share buybacks and dividend payments that left less cash on hand to pay workers once the pandemic hit.
In their letter, the Shake Shack executives said they were trying to do the best they could for their employees under the rules created by the government, but they acknowledged that other businesses could use the money more than they could.
“Our people would benefit from a $10 million PPP loan but we’re fortunate to now have access to capital that others do not. Until every restaurant that needs it has had the same opportunity to receive assistance, we’re returning ours,” they wrote.
Transparency of the small business spending has also become a paramount issue, as the legislation does not require the Small Business Administration to disclose the recipients, even thought the agency typically discloses the name, address and executives of loan recipients.
Leading Congressional Democrats are pressing the Trump administration to provide more data on how the funds are being distributed.
Senate Democratic Leader Chuck Schumer, D-N.Y., alongside senators Ben Cardin, D-Md., Jeanne Shaheen, D-N.H., and Ron Wyden, D-Ore., wrote to Mnuchin and Small Business Administration Administrator Jovita Carranza Friday asking that funds be replenished.
Trump said at his daily coronavirus briefing Sunday that he hoped to reach an agreement for additional funding sometime Monday.
“I think we are getting close to a deal,” he said.
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The Washington Post’s Eric Werner contributed to this story.
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