Though the COVID-19 outbreak has wreaked havoc on the U.S. economy as a whole, restaurants have been among the hardest hit. Many were forced to close their doors or revert to a takeout and delivery only model earlier in the year, and while some food establishments managed to thrive under those restrictions, others -- particularly higher-end eateries -- struggled immensely. In fact, 53% of the restaurants that shut down during the COVID-19 pandemic have already closed permanently, according to Yelp (NYSE: YELP), and in the absence of additional relief, many more risk a similar fate.
That's bad news for restaurant owners, but also for the commercial landlords who rent to them. If restaurants can't stay open, or can't cover their rent payments, landlords lose out.
The good news, however, is that there may be additional relief in store for restaurants thanks to a second COVID-19 stimulus plan that's currently in the works. But whether that relief will be enough is a different story.
Will a second round of PPP loans help restaurants?
In March, the CARES Act was passed, and it included an important relief program for small businesses: the Paycheck Protection Program (PPP). Under the PPP, businesses with up to 500 employees could apply for forgivable loans equal to two and a half times their monthly payroll costs. The remaining funds could be spent on rent and other qualifying expenses.
At this point, though, many of the businesses that received PPP loans have exhausted those funds, and without additional relief, they risk falling behind on their expenses, like rent, or shutting down altogether.
Meanwhile, last week, Republican lawmakers introduced the HEALS Act, which calls for a second round of PPP loans, albeit with tighter requirements than the first round. Specifically, to qualify for a second PPP loan, a business can't have more than 300 employees and will need to show that it's suffered at least a 50% reduction in revenue since the pandemic started.
Clearly, a lot of restaurants will fit that bill, and that may prevent widespread rent delinquencies, at least for a period of time. On the other hand, a second round of PPP loans may not be enough to prevent countless restaurants from permanent closures during the latter part of 2020, and that's something landlords need to keep on their radar as well.
Though PPP loans are extremely useful for payroll-heavy businesses, restaurants don't tend to fall into that category. It's an oft-bemoaned complaint that restaurants are notorious for underpaying staff and forcing them to rely on tips instead. While it's unclear what the requirement for loan forgiveness will be under a second PPP round, if the rules mimic those of the first round, restaurant owners will need to spend at least 60% of their loan proceeds on payroll to have that debt wiped out, and that's somewhat unlikely.
Still, PPP loans are attractive even if they don't wind up forgiven. The first round of loans came with interest rates of 1%, which means restaurant owners may get a second chance to borrow affordably -- and secure enough funds to prevent permanent closures.
So far, the HEALS Act has not been passed into law, but if it does go through, restaurants may be thrown a lifeline. And that means the landlords who rent to them may breathe a bit easier knowing that they won't have their own immediate financial crunch to contend with.