The Paycheck Protection Program (PPP) is a critical part of the CARES Act, which helps individuals and organizations ride out Covid-19’s initial damage to the U.S. economy. PPP provides for loans to small businesses, and Congress should focus on keeping money available and making it easier for small businesses without pre-existing bank relationships to get loans. (One way to do that would be to waive the anti-money-laundering rules and instruct bank regulators to create a comprehensive online list of lenders willing to make PPP loans to new clients).
Instead, the PPP is beset by controversy. Big restaurant chains like Ruth’s Chris Steak House and Shake Shack were approved for millions of dollars in loans intended for small businesses. Though some of the chains are now renouncing the proceeds, the damage is done. Many small businesses were left waiting for loans that they could have gotten weeks earlier had the big chains not cut in line. How did this happen?
The PPP exempts “business concerns” in the food and hotel industries[1] from affiliation provisions used in determining whether a business qualifies for SBA assistance. Those provisions define what counts as a separate business, to which the small-business size limits are applied. Suppose, for example, that a restaurant chain is organized through wholly-owned subsidiaries, one for each local or regional location. Normally, all of those subsidiaries would be considered part of a single company that would not qualify as a small business. The PPP exemptions change those rules for the food and hotel industries. The Treasury Department’s frequently asked questions (FAQ) about PPP loans (here) describe two basic situations in which the chains can apply this exemption. Both are discussed in Question 24 of the FAQ. One seems merely problematic, but the other is downright puzzling.
The first situation is where a parent company runs either individual locations or segments of its business operation through separate legal entities. That’s Example 2 in Question 24, and it seems correct that waiving the affiliation rules means that each legal entity should be considered separately and qualify for a PPP loan if it has fewer than 500 employees. That’s not a great policy choice (wholly-owned subsidiaries are legally separate entities but typically not meaningfully separate organizations) but it’s what the statute says.
The second, more puzzling situation is where the individual locations are not legally separate entities, but are simply owned and run as part of the parent company. Example 1 in Question 24 says that the parent company is eligible for PPP loans so long as each individual location has no more than 500 employees (that includes the headquarters, which would be an obstacle for some companies). That seems an incorrect interpretation of the statute. Perhaps each location could be considered a “business concern”, so that each is treated as a separate entity, although that pushes that term too far. But even if one accepts that definition, it would only seem to allow each location to apply separately not the whole company.
From news accounts (here, for example) it is hard to tell which of the two situations the chains are invoking, and it may be different for different chains. If some are invoking the second, more questionable situation, it’s not clear whether they are doing so location by location (Fogo de Chao, for instance, seems to have gotten loans for two individual locations) or for the company as a whole.
Going forward, the broadest fix would be to remove the affiliation exemption for restaurants and hotels. That can and should be done in the nearly inevitable third round of legislation for PPP funding. A more narrow fix that should be done immediately (as Senator Marco Rubio suggested in a Twitter video, here) would be to change the Treasury guidance. That would take care of the second situation (where locations are not separate entities), but probably not the first, the separate legal-entity case that the current statutory language would seem to cover.
One may respond that restaurants and hotels are particularly badly hit and need help. PPP loans are used primarily to cover payroll, along with rent and utilities, so the loans to the chains are helping workers. That’s true, but PPP is a limited pot of money meant specifically for small businesses. They have much more limited access to other sources of emergency financing than does Ruth’s Chris, and they need that money more quickly, before they disappear. Big businesses already have access to a different pot of money in the CARES Act. If the needs of large restaurant and hotel chains are special, then they should get targeted aid focused on their circumstances, as happened with the airlines industry. One exception to that is for franchisees, a common arrangement in the hotel and restaurant industries. Franchisees do look like small businesses, and deserve to be included in PPP. But franchises are covered by a separate exemption to the affiliation rules, and that is worth keeping.
ENDNOTE
[1] Questions are not limited to restaurants and hotels. Many public companies in other industries also received large loans, as one can see in the list here. Many of these raise a tricky question: What counts as a “small” business? Most of the non-food or hotel companies on that list have fewer than 500 employees, and some with somewhat more than 500 employees still qualify as small businesses under the SBA’s industry-specific size standards. In a few cases, it is hard to tell from the stated information how a company qualified. For instance, Hallador Energy, the biggest non-food company on the list, has more than 500 employees and annual revenue far above its industry-specific size standard.
This post comes to us from Professor Brett McDonnell, the Dorsey & Whitney Chair at the University of Minnesota Law School.