When Will Restaurants Reopen?

Time Keeps on
Slippin’ Slippin’ Slippin…

Dear HL Clients,

Is there a future?  I watched our hero Governor today and he set shit straight.  He told us about how he is thinking about opening businesses and his take on it was rational and realistic and sobering. He said he would open up businesses based on the health risk to employees and the public and how essential that business is to society.  Makes perfect sense. He didn’t give any dates because to do so would be impossible and irresponsible.

So, based on the facts and science and not bluster and tv ratings, let’s have a frank discussion about the reopening timeline for restaurants and bars.  

Here are the facts:

1.There is a virus in our midst that spreads very rapidly and easily for which we have no vaccine or medicine to treat and it has a high mortality rate. 

2. The government will not put peoples lives in danger and will open up only essential businesses until it is safe to open other ones. 

3. Because of the health risks in restaurants, they will be amongst the last establishments to open.  

4. Once restaurants are permitted to open, they will have to drastically reduce seating to comply with social distancing rules.

5.  A vaccine is 12-18 months away.   Testing and tracking everyone, which could speed up the timeline, is unlikely because it would require the federal government working with the state and it would it would be a herculean effort. 

Scary. But with those facts in mind, we have to start planning for what restaurants will look like until a vaccine is widely available.  Any sooner timeline to be back and up to normal is wishful thinking.

Here’s my take on it.  I think Cuomo will allow restaurants to slowly reopen in June.  Then, the reopening will be subject to very strict occupancy limits.  My guess is that  it won’t be based on a percentage of occupancy but rather distance requirements of at least 6 feet between all tables and stools.

Restaurant and bar traffic will be at 50% or less for at least 6 months following reopening and then, possibly for an additional 12 months until a vaccine is circulated. All in all we have to plan for 18 more months of heavily reduced revenue.

So, how on earth are we going to be able afford the rents when capacity and traffic is going to be so severely limited?  This is the question we should all be grappling with as we start to engage our landlords to talk about past rent owed and future rent.  

I am of the mind that we have to be very conservative with these timelines and if it is going to be 18 months before we get back to normal, landlords are going to have to partner with us or we will all be out of business.

The SBA money is starting to come in and I know many of you will be tempted to hand a bunch of it over to the landlord and ask for a few months of rent abatement or a slight reduction in rent moving forward but please understand that it might not be enough.  You don’t want to have to go back and try to renegotiate again in 3 months when the situation hasn’t improved.

This is why I am advocating for a percentage rent deal until we realize  full occupancy.  I just don’t see any other way forward.  We can’t predict what will happen and, until we know, we just can’t pay more than 10% of our sales to rent.  Landlords will have to understand that.  Either they will and they can keep a tenant or we will all hit them with Good Guy notices, hand back the keys and that will be that.

To that end, if anyone out there has the ear of one of our dearly elected, please ask them to consider legislation allowing for commercial tenants to simply hand back the keys and eliminate the notice requirement on the Good Guy.  Landlords will keeps the security deposit after all so it’s not like they aren’t getting anything. But to ask a tenant who is hurting to pay 4 or 5 or more months of rent on their way out is just whack.  I would love to see this idea pick up steam.  At least it gives owners a viable  and dignified exit option.

I would like to hear your thoughts on the timeline so we put together a little poll here. 
https://app.smartsheet.com/b/form/448bccc285ed4ed1907878e06ad460d8? 

Please take a moment to let us know how long you think it will take to reopen and what it will look like to your business.  We will publish the results tomorrow.  Thank you!

UPDATE: SBA Issues yet more “Final Rules”

THE SBA SPEAKS by Andrew Fine and Megan Shaw

Just when you thought that the PPP couldn’t get any more complicated, the SBA released a new set of “Interim Final Rules” yesterday (4/14). Fortunately, these rules actually shed some light on some of the longstanding questions surrounding the PPP. While the document itself is 19 pages, we’re here with the SparkNotes.(editor’s note: what happened to Cliff Notes?) The major takeaways for business applicants are:  

1. 75% Rule Applies to Total Loan. As most of you likely know, the SBA previously issued guidance requiring that 75% of the total PPP loan proceeds be used towards covered payroll costs. Other guidance, however, framed this 75% rule in terms of the amount to be forgiven, tempting the question: does the 75% rule apply to the total loan, or only to the amount I hope to have forgiven?

We have been advising clients to err on the side of caution and assume that the rule requires 75% of the total loan to be applied towards payroll costs, regardless of whether you hope to apply for loan forgiveness. Well, we’re glad we took that approach, because the SBA just confirmed: 75% of the total PPP loan proceeds must be used towards covered payroll costs, regardless of whether you’re hoping to apply for loan forgiveness.

If you are applying for loan forgiveness, banks will be requesting records to show how the entirety of the loan amount was spent. If less than 75% of the total PPP loan was spent towards payroll costs within the 8 week covered period, that will likely preclude borrowers from receiving any loan forgiveness at all.

We don’t like it, and we don’t agree with it. But at least the SBA has clarified its stance here.

2. Guaranteed Payments Count as Payroll Costs. This is a big one. Corporations and LLCs with multiple owners may include guaranteed payments as part of their payroll costs under the PPP. Previously, there was ambiguity surrounding whether ‘guaranteed payments’ to owners of the borrower entity could be covered under the PPP, which would have been bad news for business owners. Fortunately, the SBA has answered yes, guaranteed payments can count as payroll costs, even though owners of the borrower entity aren’t technically employees. This is provided that the guaranteed payments are paid in exchange for actual managerial services.

3. Independent Contractor Certification. The SBA clarified that it will be the responsibility of the borrower, and not the bank, to determine who qualifies as an independent contractor, and who qualifies as an employee. This distinction is important under the PPP, since independent contractors cannot be paid using PPP proceeds (rather, independent contractors would apply for their own relief under the PPP). This means that borrowers must be very careful that their independent contractor versus employee distinctions are accurate, as mischaracterizations could potentially subject borrowers to criminal penalties. Our labor team remains available to advise you on these distinctions should you require assistance.

4. What if I have no employees? Self-employed individuals are eligible to apply for relief under the PPP. Normally, the PPP loan amount is calculated by taking 2.5 times the average monthly payroll cost for the prior year. This, of course, wouldn’t work for applicants with no employees. The SBA finally shed light on how those loans are to be calculated. Here are the steps:

1. First, you would find your 2019 IRS Form 1040 Schedule C net profit amount. If this amount is over $100k, you would reduce it to $100k. If this amount is zero or less, the applicant would not be eligible to receive the PPP loan.

2. Second, you would calculate the average monthly net profit amount (divide step 1 by 12); and

3. Third, multiply the average monthly net profit from step 2 by 2.5.

Well, here’s hoping your money comes in soon and as Jerry and boys like to say: nothing left to do but smile, smile, smile.

Good night,
David