Shake Shack is Returning Its $10 Million Paycheck Protection Loan. Will It Help?

Shake Shack rendering

The Paycheck Protection Program (PPP) funds initially intended to help small businesses with less than 500 employees survive the COVID-19 crisis dried up as of last Thursday. However, few independent restaurant owners benefited from the loan program. This situation has put a negative spotlight on large chains that received millions in PPP funds, including New York-based burger chain Shake Shack, which has 189 locations and received $10 million. Now, owners Danny Meyer and Randy Garutti are pledging to return the money “immediately.”

After lobbying for an exemption from the Small Business Administration (SBA), big restaurant chains, as well as hotel chains, were allowed to dip into funds originally earmarked for small businesses. In addition to Shake Shack, other large, corporate recipients include Potbelly Sandwich Shop, Taco Cabana, Kura Sushi and Ruth’s Chris Steak House. Although the loan cap was supposed to be $10 million, Ruth’s Chris managed to get $20 million by using a loophole and applying through two subsidiaries. It’s a bitterly ironic move for a company founded by an independent restaurateur who took out a $22,000 mortgage against her own home to fund the original location in New Orleans.

Ruth's Chris steakhouse
Steakhouse chain Ruth’s Chris received two $10 millon Paycheck Protection Loans by applying through two subsidiaries. Photo by Karl Baron via Flickr Creative Commons.

 

A letter, published on Garutti’s LinkedIn page, cites a few reasons Shake Shack applied for the funds. For one, at the time there was no way to predict that the program would run out of money so quickly. Second was the lack of rules and clarity. Garutti wrote, “The onus was placed on each business to figure out how, when, or even if to apply. The ‘PPP’ came with no user manual and it was extremely confusing.”

Now that the funds are being returned, what about Shake Shack and its 8,000 plus employees? According to the company’s public announcement, “Shake Shack was fortunate last Friday to be able to access the additional capital we needed to ensure our long-term stability through an equity transaction in the public markets.”

Taco Cabana sign
Regional fast-Mexican chain Taco Cabana received $10 million in PPP funds. Photo by Channone Arif via Flickr Creative Commons.

At this time, it’s impossible to know whether or not the returned money will actually be funneled to small, independent eateries. During the initial application period, many restaurant owners found themselves with little to no leverage with the banks issuing PPP loans.

With no requirement to give special consideration to smaller businesses, banks have preferentially distributed the money to larger, existing customers. About 45% of the PPP fund went for loans of over $1 million.

Last week, a Baltimore judge rejected a request from multiple small businesses to ban Bank of America from prioritizing its own customers. According to a Bloomberg report, “the judge acknowledged that ‘BofA’s rigid eligibility criteria have undoubtedly made it materially harder for some small businesses to access’ the loan program. But she concluded that the duty to fix any flaws in the law falls on Congress, which is ‘better positioned to remedy any defects in the CARES Act, and to pass the supplemental legislation it believes best aimed at ameliorating the effects of the COVID-19 crisis.’

However, more lawsuits are being filed against banks, including one in California against Wells Fargo that points out that the SBA explicitly stated in its final interim rules that PPP loans were to be, “first come, first served.” The lawsuit alleges that the bank, “concealed from the public that it was reshuffling the PPP applications it received and prioritizing the applications that would make the bank the most money.”

Currently, though, nothing prevents banks from preferentially lending to big, established customers. Congress is reportedly closing in on a deal to replenish the PPP funds with an additional $450 billion dollars — but simply throwing more money into the PPP is not likely to help small restaurants. The measure was not crafted in a way that would allow most restaurant owners to qualify. One requirement was to retain existing staff — an incompatibility, considering that mass layoffs occurred before CARES was approved and there’s no way to know when dining rooms can reopen and business levels return to normal.

A press release issued on April 17 by the James Beard Foundation stated, “without important fixes to
the Paycheck Protection Program (PPP) independent restaurants won’t be able to reopen, putting
at risk an important $1 trillion driver of the economy or 4% of the nation’s GDP.”

“The data is clear: The Paycheck Protection Program isn’t working as designed for restaurants and Congress needs to fix it,” said Clare Reichenbach, CEO of the James Beard Foundation. The Independent Restaurant Coalition, a grassroots organization with members that include celebrity chefs Marcus Samuelsson, Sean Brock and José Andrés, shares this point of view.

With Congress and the White House potentially coming to an agreement for new funding for the PPP as early as this afternoon, those who want to see small, independent restaurant and bar owners get a fair shot at receiving emergency funds will need to speak up sooner rather than later.


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