The Restaurant Revitalization Fund was underfunded and oversubscribed. Why didn’t it spread the wealth better?

All is not rosy in restaurant land. Nationally, 90,000 spots have closed permanently or long term. Locally, employment in food-service and accommodation is down by 33%, and the number of businesses behind on their bills rose by 66%. Sales are slowing, labor and food costs are growing, and winter is on the horizon again as the pandemic plows on.

The bleak forecast is yet another cause for concern for the industry, one of the hardest hit by the pandemic. That’s why Congress singled it out in March’s American Rescue Plan, earmarking $28.6 billion for restaurant relief.

The pot of money was pitched as a lifeline for businesses large and small, from swanky steakhouses to halal carts and holes in the wall. For many, the Restaurant Revitalization Fund (RRF) was just that, helping 101,000 businesses recover their financial losses.

But the federal program left many more eateries unfunded, frustrating bar and restaurant owners trying to stay afloat. With barely enough money to meet the needs of the struggling industry, the fund was besieged by litigation and drained within weeks.

Philadelphia’s RRF distribution reflects a national trend: Half of the total funds sent to the region went to just under 10% of recipients, according to a Philadelphia Inquirer analysis of Small Business Administration data.

While advocates defend the program’s design, critics have questioned why the funds weren’t distributed more equitably.

Among the big winners was the eight-establishment Schulson Collective, which applied for seven discrete grants through assorted LLCs. In total, the Philadelphia restaurant empire received roughly $17 million in RRF grants by properly filling out the paperwork and complying with the rules, the SBA confirmed.

“Our restaurants went through the required processes and paperwork to be considered and were fortunate to receive funds,” Schulson said in a statement.

One of those restaurants, Via Locusta, opened mere months before the pandemic hit; it received almost $350,000.

“That was real shocking to me,” said Chad Todd, owner of Sulimay’s Restaurant in Philadelphia’s Fishtown neighborhood. “I don’t understand how you have a three-month-old restaurant get that.”

Todd is one of more than 175,000 applicants who didn’t get any RRF money. When he first learned he had missed out, Todd said he thought, “Maybe somebody needs it more than me.”

But when he dug into the data released on recipients, his feelings changed. The Schulson total exasperated him, but he was especially disheartened to find that an area strip club collected $2 million.

“I’m sure their buffalo-wing hot bar really struggled over there,” Todd joked in frustration. “When you see a strip club get $2 million to revitalize restaurants. … You just want some clarity on how they chose it, you know?”

Underfunded and oversubscribed

In some ways, the restaurant relief program was flawed from the start.

Lawmakers in Washington initially proposed spending $120 billion to aid eateries but ultimately set aside $28.6 billion for the program. That was hardly enough to meet the demand of hundreds of thousands of businesses that collectively asked for $72 billion in financial help.

“RRF was not a typical grant program,” said Patrick Kelly, associate administrator for the SBA’s Office of Capital Access. “We processed applications based on their time submitted and, provided the applicant was eligible and there were funds available, they received their award.”

Unlike many grants, neither business model nor mission was considered in awarding RRF money. The program was effectively first-come, first-served. And although it fully funded each recipient based on formulas that determined their financial losses, it left far more businesses desperate for relief.

“They should have been able to give people what we needed, but not excessive — and then spread the wealth,” said Luis Liceaga, owner of Loco Lucho’s in the Reading Terminal Market in Philadelphia’s Center City, which did not receive any RRF money.

Liceaga applied for about $300,000, a figure that accurately reflected his losses — his 2020 sales were down 90% — but he could have gotten by with half that, he said. “I just wanted to be able to keep the business running and make [informed] decisions.” (Loco Lucho’s closed permanently this month, according to a market spokesperson.)

An SBA official said the agency didn’t receive feedback from restaurant trade groups to cap grants at lesser amounts in order to fund more applicants. Representatives from the National Restaurant Association and the Independent Restaurant Coalition (IRC) confirmed that.

Philadelphia chef-owner and IRC board member Tyler Akin points out that the RRF’s structure was derived from the $120 billion Restaurants Act and that its inclusion in the March stimulus package was last-minute, past the point of revision.

“(Senate Majority Leader Chuck) Schumer didn’t call us and say, ‘Hey, we can only get $25, $30 billion into this one. … What would you like us to do?’”

The primary formula for calculating RRF grant amounts — the difference between an applicant’s 2019 and 2020 gross sales — was deliberately straightforward, Akin said. “Our feeling was that it was an elegantly simple way to encapsulate the extent of losses that restaurant operators withstood during the pandemic.” (Akin’s own RRF application went unfunded.)

Troubles from the start

The SBA awarded RRF grants according to the American Rescue Plan, which outlined some limitations, including a $5 million cap for individual restaurants and a $10 million cap for restaurant groups. Restaurants with more than 20 locations were excluded to prevent high-profile chains from collecting significant sums, which happened with the Paycheck Protection Program.

The RRF was aimed at businesses whose primary purpose is to serve food or drink; even inns were eligible if more than 33% of 2019 sales consisted of food and beverage. The fund opened with a three-week window during which applications from women- and veteran-owned establishments, as well as “socially and economically disadvantaged” small businesses, would be prioritized.

Though criteria for eligibility were minimal, they invited lawsuits almost immediately.

In May, strip clubs in five states sued the SBA for access to the RRF, claiming the agency overstepped its authority in excluding them. In response, the SBA has argued patrons don’t go to strip clubs for the primary purpose of eating or drinking.

The suit is ongoing. Regardless of its outcome, strip clubs did receive RRF money, including $2 million to Club Risque on Columbus Boulevard and lesser amounts to Club Risque’s Tacony location and the Purple Orchid in Southwest Philadelphia, records show.

The SBA’s priority-applicant guidelines were borrowed from existing government-contracting framework, but they proved vulnerable to legal challenges. Conservative groups backed suits that alleged the priority window, during which these applications would be processed first, was discriminatory. One suit argued the fund would be depleted before white men such as its plaintiff would even be considered for relief.

In May, a federal court in Texas ruled this argument was valid and issued an injunction on processing priority applicants. The SBA subsequently awarded RRF grants to the plaintiffs in the suit, including the Penn Hotel & Raw Sports Bar in Hershey, Pennsylvania, which received more than $640,000. Another area business — OCF Cafe LLC from Philadelphia developer Ori Feibush — that joined the suit later also received a grant for its coffee shops, to the tune of $946,000.

Feibush and OCF were first named as plaintiffs in the Texas suit after the injunction. When asked for comment, Feibush responded that he had signed an engagement letter with a lawyer in May. “I was subsequently funded (as I believe all who applied on the first day were) and I am not interested in being party to litigation with the SBA,” he wrote. The suit is pending.

Funding whiplash

Rebecca Foxman, co-owner of Fox & Son in the Reading Terminal Market, also applied for the RRF on the first day it opened — the first hour and a half, in fact. Both women- and Asian-owned, Fox & Son qualified as a priority applicant, and Foxman’s request for more than $250,000 was initially approved. She declined to state the exact figure.

The grant was a godsend. Foxman’s sales declined 80% in 2020, but she remained committed to paying higher wages and offering benefits through the pandemic. She also lost tens of thousands of dollars in 2019 after purchasing a food truck from a builder who never delivered.

She had successfully applied for various grants and PPP loans, but the RRF was substantially more. When she first tabulated the amount, she was shocked. “It was hard for me to believe,” she said. “It would literally fix us.”

When the money didn’t show up in her bank account after a couple of weeks, Foxman called the SBA hotline to make sure everything was OK. She called four times, each time receiving assurance the money was on its way. She went ahead and gave her staff raises, hired more workers, and bought new equipment.

It was only weeks later, after contacting U.S. Rep. Dwight Evans, a Democrat representing Philadelphia, that she learned what had happened. “‘I have some really bad news,’” Foxman remembers a representative from Evans’ office saying. “‘It seems like there’s a few people who are not getting the grant because of litigation happening.’”

“It was like being told you won the lottery, and then the lottery ran out of money,” she said.

Foxman is one of 2,965 priority-window applicants whose RRF applications were initially approved but ultimately unfulfilled. She’s happy for her fellow business owners who did get grants, and she appreciates the program’s intent, but she questions the fund’s design, given the amount of money it had.

“I honestly wish that it was structured differently,” she said. “I wish they [had agreed to cover] more like 20% or 50% or 30% [of our losses] so it would go further to help people in the country.”

RRF and restaurant economics

Chad Todd of Sulimay’s came to a similar conclusion when he crunched the hypothetical numbers — dividing the full fund by 370,000, the highest number of reported applicants — and found every applicant could have gotten at least $70,000.

“How many restaurants would have stayed open with $70,000?” he asked. “Why reject over 70% of the applicants? That’s insane.”

Like Foxman and Liceaga, Todd experienced sticker shock when he filled out his RRF application and found he was eligible for more than $200,000. “I don’t need that much money. It’s crazy,” he thought. Unlike other grant applications he had filled out, there was no prompt asking how much money one needed.

And the formula for the award calculation seemed designed to produce a high figure: Large restaurants — especially those with liquor licenses — could be poised to request more. And if a restaurant was shuttered for most of 2020, its RRF grant would nearly match its 2019 sales in one lump sum. That may explain why Schulson’s Giuseppe & Sons, mostly shuttered since March 2020, received nearly $3.8 million alone. (The average RRF grant was $283,000.)

“The gross minus gross (calculation) … that was the No. 1 error,” Todd said. “It’d be dumb not to apply for free money.”

IRC executive director Erika Polmar has heard these critiques of the RRF. “This wasn’t intended to make sure that people had profit,” she said. “It was intended to make sure that they had the baseline of revenue.” Revenue is easily measurable and a heftier sum to help cash-strapped owners outlast the pandemic than, say, a metric like profit.

“We created a program that would make sure that this industry had the tools they needed to survive the rest of the pandemic. So when you talk about making changes — whether it’s $30,000, $5,000, $70,000 — that’s a different program. Those are Band-Aids.”

Restaurants have razor-thin profit margins, but the amount of money that flows through them can be staggering. In 2020, the National Restaurant Association predicted the industry would generate $899 billion in sales (the total ended up at $659 billion). Most of that revenue quickly vanishes, however, if it hasn’t already been spent. Foxman lists some monthly expenses off the top of her head: $22,000 for labor, $10,000 for produce, $10,000-plus for meat and dairy, not to mention rent, utilities, and more.

Food and labor costs have increased sharply in 2021, and many restaurants invested significant amounts in pandemic adaptations such as outdoor dining chalets, ventilation, and modifications to their interior layout. And the pandemic is not over, many point out; this winter presents just as much uncertainty as last year’s.

But for most of the RRF applicants The Inquirer spoke to, $17 million for eight restaurants seemed excessive. It’s also greater than the $10 million cap for restaurant groups.

Although eateries that fall under the Schulson Collective collectively received $17 million, they are not “affiliated businesses” as the program defines it. That’s because the locations don’t share the same common ownership, according to an SBA official, who requested anonymity to discuss specific applicants. For instance, Schulson owns just 30% of three restaurants he’s associated with, the agency official said.

Schulson said he is working to hire staff and open his restaurants back to pre-pandemic capacities “so we can use those funds as they’re intended.” “Per the SBA/RRF, we have until March 2023 to do so (or, per the program’s rules, any unused funds received must be returned to the government), and I’m hopeful and confident we’re on track to do so.”

Schulson also echoed a point raised by virtually everyone The Inquirer spoke to for this article: “The RRF needs to be replenished by our government so more who also deserve the help may receive it.”

More money?

In April, Sen. Schumer released a much-cited statement about the RRF that called the $28.6 billion fund “a down-payment.”

It’s a characterization that originated with the National Restaurant Association, according to public affairs executive Sean Kennedy. The organization “said from the beginning, ‘That’s not going to be enough.’”

Given Congress knew the funds fell short of the need, “should the SBA have tried to slice and dice and give everyone a haircut?” Kennedy asked. “There’s no equitable way to do that.”

Trade groups with influence over the RRF’s design maintain that its large payouts (with relatively few strings) are what made it so singularly helpful.

Akin, of the IRC, both admits and defends the program’s imperfections. “On a personal level, I’m frustrated on behalf of everybody who did not get funded. I’m frustrated that some people appear to have been perhaps overfunded by any reasonable measure. But at the end of the day, I hope that part of the story is the miracle that took place.”

The miracle he refers to is twofold: that the restaurant industry — which traditionally hasn’t wielded much political power — organized and received billions in relief; and that the RRF has put 101,000 recipients back on steady footing.

Take Winnie Clowry of Winnie’s Manayunk, who said the RRF grant finally healed the gaping wound that the pandemic inflicted on her business. Winnie’s had $1 million of 2020 catering orders fall through; at one point the restaurant averaged just 5% of its normal sales. “It was just a disaster,” she said.

Clowry and business partner Joan Lutzow applied successfully for two PPP loans. They also received a $150,000 Economic Injury Disaster Loan, which they had hoped not to need but which ultimately helped them survive the sudden shutdown of indoor dining last winter.

With those funds spent, the RRF grant was all the more crucial. They applied as soon as the portal opened and received a $313,000 grant. “It was amazing,” Clowry said. “It made me whole for what I lost and what the insurance company didn’t pay.”

“But we also had that pang of guilt,” said Lutzow, alluding to the many left unfunded.

Clowry has joined the chorus of restaurateurs and trade groups calling for Congress to fund the remaining eligible applicants, representing an additional $43 billion in grants. The National Restaurant Association and the Independent Restaurant Coalition are hopeful the remainder will work its way into the Democrats’ forthcoming infrastructure bill, arguing the remainder is far less than they originally thought the industry would need.

Empty-handed applicants are less optimistic, for good reason: Bipartisan legislation to replenish the fund has collected dust since the summer.

“I don’t think the government wants to give any more money away,” Liceaga said. “I think everyone has moved on.”