GOP face heat

White House, GOP face heat after hotel and restaurant chains helped run small business program dry

Jonathan O'Connell

The federal government gave national hotel and restaurant chains millions of dollars in grants before the $349 billion program ran out of money Thursday, leading to a backlash that prompted one company to give the money back and a Republican senator to say that "millions of dollars are being wasted."

Thousands of traditional small businesses were unable to get funding from the program before it ran dry. As Congress and the White House near a deal to add an additional $310 billion to the program, some are calling for additional oversight and rule changes to prevent bigger chains from accepting any more money.

Ruth's Chris Steak House, a chain that has 150 locations and is valued at $250 million, reported receiving $20 million in funding from the small business portion of the economic stimulus 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, a $1.6 billion burger-and-fries chain based in New York City, received $10 million. After complaints from small business advocates when the fund went dry, company founder Danny Meyer and chief executive Randy Garutti announced Sunday evening that they would return the money.

They said they had no idea that the program 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 receiving money from the program, according to filings with the Securities and Exchange Commission.

Sen. Rick Scott, R-Fla., criticized the program, saying that "companies that are not being harmed at all by the coronavirus crisis have the ability to receive taxpayer-funded loans that can be forgiven."

"I am concerned that many businesses with thousands of employees have found loopholes to qualify for these loans meant for small businesses," Scott said. "Unfortunately, when it comes to the PPP, millions of dollars are being wasted."

Sen. Marco Rubio, R-Fla., chairman of the committee overseeing small businesses, addressed the criticism Monday morning on CNBC, saying that hotels and restaurants are some of the first and hardest-hit companies and that many of their locations are 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."

Some of the companies receiving money are clients of JPMorgan Chase, adding fuel to criticism that Wall Street banks had helped their clients obtain 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% of its PPP loans have been for businesses with less than $5 million in revenue.

JPMorgan 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 nonprofit 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 $2 trillion Cares Act economic stimulus package, 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 locations could apply under separate entities even though the parent company employed about 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 that they had applied for loans.

Mnuchin has called the PPP a success, saying in a statement Friday that the program provided funding 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 on Sunday that an additional $300 billion "should be sufficient to reach almost everybody."

Executives at some chains have defended the PPP the way it is written, saying that the size of the parent company matters little because most of the money is required to go to workers, as a minimum of three-quarters of each loan must 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 Bethesda, Maryland-based Pebblebrook Hotel Trust and board chairman for the American Hotel & Lodging Association, the industry's top lobbying group. The AHLA has also argued that hotel owners should not have to spend three-quarters of stimulus funding on payroll.

Ruth's Chris, a steakhouse chain based in Florida, sought the stimulus money so that the company would be "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 the money going to national brands.

The initial PPP "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."

The couple created a petition asking that the program be limited to companies with fewer than 250 employees and that half of it be reserved for those with 50 employees or fewer.

Some critics point out that executives at larger chains often receive multimillion-dollar annual compensation packages. Other chains, such as Marriott and Hilton, have been criticized for inflating the value 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.

Some chains, including those big hoteliers, have since cut executive pay and paused buybacks and dividends. Hilton said it is not seeking support from the Treasury Department.

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 though the agency typically discloses the name, address and executives for loans received.

Leading congressional Democrats are pressing the Trump administration to provide more data about how the money is being distributed.

Senate Minority Leader Chuck Schumer, D-N.Y., along with Sens. Ben Cardin, D-Md.; Jeanne Shaheen, D-N.H.; and Ron Wyden, D-Ore., wrote to Mnuchin and Small Business Administration Administrator Jovita Carranza on Friday asking that PPP be replenished.

President Donald Trump said at his daily coronavirus briefing Sunday that he hoped to reach an agreement for additional funding on Monday.

"I think we are getting close to a deal," he said.