New restaurant owners get shut out of PPP loans despite their financial losses

With no bank loans available to bridge the gap, Darneille and his family have been covering the monthly shortfall. He doesn't have much choice: It's either cover the expenses or watch his dream project go down in flames, after investing three years and nearly $2 million in the full-service restaurant, which showcases a refined version of the barbecue that has earned Darneille dozens of awards on the competitive circuit.

Darneille had hoped the second round of the Paycheck Protection Program would get him to the other side of the coronavirus pandemic, or at least to spring, when he could reopen his patio. But he learned the Small Business Administration program excludes businesses such as his. He opened Smokecraft on July 31. All PPP applicants had to be operating by Feb. 15, 2020. The cutoff date made sense for the initial draws of PPP loans last spring and summer, Darneille thought. But 10 months and a lot of pandemic-related debt later, he doesn't understand why the new round continues to honor the same date.

"There is no avenue to appeal. They said I have to write my congressman. I said, 'Write my congressman? Do you think my congressman will read a letter from me?'" Darneille said. "They're not going to change the law just for me."

Other restaurateurs and entrepreneurs who launched businesses after Feb. 15 are scratching their heads over the rule, too. The latest $284 billion round of the PPP was designed, in part, to blunt the criticisms of previous draws: There are new rules to favor community lending institutions and women- and minority-owned businesses, rules to prevent public companies and generally thriving businesses from securing second loans, and rules to give hard-hit restaurants and other food establishments a little extra money.

But in rewriting the guidelines, lawmakers also stuck with the same operating date for eligible businesses, even though countless new restaurants and companies have opened in the interim and have been subjected to the same pandemic-related restrictions and shutdowns that have impacted more-established businesses.

It's difficult to determine how many small businesses - hundreds of restaurants alone have opened since Feb. 15 in cities around the country - may be impacted by the operating-date rule. Darneille said representatives of his bank told him thousands of new businesses were in a similar situation as Smokecraft. (The Washington Post could not confirm that figure; the SBA said it doesn't have those statistics.) But Molly Day, vice president of public affairs for the National Small Business Association, says she hasn't heard widespread complaints from members, but that may be because first-time small business owners don't typically join an organization focused on federal advocacy.

"We are hearing there's that frustration," Day said. But she added that "when crafting the PPP, the whole point of it was to try and keep employees employed at their small businesses. . . . It wasn't necessarily to start a new business and bring on new employees."

A representative of the SBA said the agency's hands are tied. The SBA - and by extension the PPP lenders that act as agents for the government - are just following the rules as established by Congress. "The SBA is working to ensure the economic aid is accessible to all that are eligible, including those hit hardest, while protecting program integrity and ensuring as quick release as possible of the aid," emailed SBA spokeswoman Shannon Giles.

New businesses may not have access to PPP money like their more-established peers, but they bleed red ink just the same. In some ways, new restaurants such as Amigo by Nai in Manhattan are at a disadvantage as they try to survive the pandemic, said chef and co-owner Ruben Rodriguez.

Amigo by Nai is a partnership between Rodriguez, the chef behind the Spanish fine-dining concept Nai Tapas, and Juan "Billy" Acosta, co-owner of Carnitas El Momo, a beloved Los Angeles taco shop. Amigo debuted on Oct. 1 in the East Village, more than 10 years after Rodriguez opened Nai Tapas just blocks away.

Nai Tapas has been approved for a PPP loan, Rodriguez said, but Amigo by Nai was declined because of its launch date. He's frustrated by the seemingly arbitrary nature of the cutoff date. As the proprietor of an established restaurant and a new one, Rodriguez knows the former has some advantages over the latter.

Over the years, Nai Tapas has developed a sense of trust and loyalty among employees and suppliers, who will, as a result, stick with the business in tough times. Amigo, by contrast, debuted during a pandemic when everything is uncertain, most notably revenue. As such, suppliers "don't give you as much leeway for payments," Rodriguez said, and employees may not stick around if their hours are getting cut.

Not only that, but Amigo has a greater need than Nai Tapas, which has been closed since mid-December, when Gov. Andrew Cuomo shut down indoor dining (though the restaurant will reopen on Feb. 14). Amigo has 14 to 15 employees on the payroll, at a time when sales are only about half of the projected $30,000 to $35,000 a week. "We're left with a deficit every month," Rodriguez said. "The PPP was definitely a lifeline I was hoping for."

Sen. Marco Rubio, R-Fla., former chairman of the Senate Committee on Small Business and Entrepreneurship, was a principal architect of the PPP. From the beginning, Rubio viewed the program as a way to keep Americans employed during the pandemic as well as a way for small businesses to avoid "the start-up costs and impediments businesses face while hiring and training new employees." These views were sometimes at odds with those of restaurant owners who saw the PPP as a lifejacket to prevent them from going under.

A congressional aide involved with the PPP said the Feb. 15 operating date was put in the original rules for a number of reasons. Among other things, it was there to prevent scam artists from establishing new companies just to get their hands on PPP money.

The aide, who spoke on the condition of anonymity because he was not authorized to speak, added that "the program was intended to provide relief to businesses that were hurt by the pandemic, meaning they had to be in operation before the pandemic to be hurt by it. By definition, you can't be hurt by the pandemic if you opened after the pandemic because there's nothing to compare to."

The PPP is "not a revenue replacement program," the aide said. "You can't be looking at the PPP as a way to supplement your revenue." He doesn't foresee Congress pushing back the operational date to accommodate new businesses.

Despite the tough talk on rules, the SBA and participating banks have shown flexibility in applying them. The official rules state a business had to be "in operation" by Feb. 15, 2020. But SBA spokeswoman Giles says lenders have discretion in how they interpret that language: Some banks use the company's first day of business, while others use the day the company was incorporated.

This explains why the owners of Petite Peso, a modern Philippine restaurant in downtown Los Angeles, are so bullish about securing a PPP loan even though they opened in April, two months after the cutoff date. The restaurant's accountant, said president and co-owner Robert Villanueva, has worked with the bank to use Petite Peso's January incorporation date on the PPP application.

The owners need the cash to help prop up their business, which has struggled to survive through stay-at-home orders and bans on both indoor and outdoor dining in Los Angeles County. Petite Peso is closed but still selling some products online. Without PPP money, "it's going to be an extremely tough road," Villanueva said. "Financially we're getting very very low on our resources."

On the other hand, Patrick Crump, chef and owner of the Renegade in Arlington, Va., penciled in his first official day of business on the PPP application. The Renegade, a restaurant and live music venue, debuted on Oct. 24, 2019, well ahead of the loan program's eligibility date. But here's the thing: For small businesses that are trying to secure a second PPP loan, such as Renegade, they have to prove a 25 percent drop in revenue in one quarter of 2020 compared to the same quarter in 2019.

That calculation would have been almost impossible for the Renegade: Its revenue from the fourth quarter of 2019 covered just over two months, compared to the full quarter in 2020. So of course the revenue was higher in 2020. But because the Renegade used its first day of business, rather than its incorporation date in March 2019, the company was able to compare its only operating quarter in 2019 against any other quarter in 2020, said Yuri Calustro, a partner and business manager with Renegade. They opted to compare it to the second quarter, when Renegade's revenue plummeted 36 percent compared to 2019 due in part to Virginia's stay-at-home orders.

The Renegade just had its application approved and is now expecting $156,000 in PPP funds.

"I'm not questioning it," Calustro said about the flexibility over the revenue-loss rules. "I'm happy that we had the opportunity to do so because otherwise, we would have seriously been looking at closing our doors, and that's terrible."

For new restaurants, all this hand-wringing may soon be moot. On Thursday, the Senate passed an amendment during the marathon budget resolution session to provide targeted relief to restaurants and bars. The amendment directs the relevant committees writing the new budget to establish a specific fund to support restaurants. The relief package is expected to top out at $25 billion. There is an air of confidence on Capitol Hill that this will finally be the direct financial relief that restaurants have been lobbying for, though it's not clear if, like the PPP, it will include new restaurants.

At the same time, lawmakers in both the House and Senate introduced an updated version of the Restaurants Act. The $120 billion program would direct grants, up to $10 million, to independent bars and restaurants, which they could use on a wide range of expenses. Better yet, the revamped act includes new language inserted by Rep. Earl Blumenauer, D-Ore., after he spoke to frustrated restaurateurs in Portland: Restaurants that opened after Jan. 1, 2020, would be eligible for the relief money.