The Woes of the Restaurant Revitalization Fund
A tale of two restaurants
One-tenth of a mile and a three-minute walk in downtown St. Paul tells the story of the Restaurant Revitalization Fund (RRF), a program set up by Congress as a lifeline for one of the hardest-hit industries of the pandemic. At the corner of Fifth and St. Peter streets sits Momento, opened in March by Morrissey Hospitality in the space of its former Pazzaluna, a long-standing icon of the St. Paul renaissance, which closed in May 2020 after 21 years.
A block up St. Peter in the historic Hamm Building sits Meritage, Russell and Desta Klein’s admired French restaurant, closed for 14 months in the pandemic and now operating four dinner services a week in what was once a lunch/dinner/brunch operation. Between availability of staff and customers, Russell Klein cannot justify operating more than this limit and jokes that he is in “semi-retirement.”
Pazzaluna received $2.9 million from the RRF, allowing its ownership to reconceive the aging restaurant as Momento, which it thinks will work better in a post-Covid downtown. Meritage received nothing due to a coding error at the SBA, though it was initially approved for a $2 million-plus grant. Klein describes the experience with ironic disgust.
What the two restaurants also have in common is that both were eligible for payouts in the top 2% of all local RRF checks. Meritage lost out yet remains open, while Pazzaluna was paid and is now a new restaurant. Because the RRF ran out of money before even half the eligible applications were funded, many restaurants got no money and ultimately closed, raising an obvious question about how the government decided whose needs took priority.
“This program picked winners and losers,” says U.S. Rep. Dean Phillips, a Democrat who represents Minnesota’s west suburban 3rd District and is one of the few small-businesspeople in Congress. “And we shouldn’t be in that business.”
The state of restaurants today
“Restaurants and bars, in the main, feel abandoned by elected officials,” says the Twin Cities’ Andrew Zimmern, who has been one of the public faces of the Independent Restaurant Coalition (IRC), which has been fighting for aid to independent restaurants throughout the pandemic.
Restaurants, bars, hotels, and performance venues have been the hardest hit of business sectors, and most importantly, they continue to suffer as other sectors rebound. An IRC study found 46% of restaurants and bars nationally had to reduce operating hours during their peak month of December, while 58% saw sales fall by more than half compared to a normal December.
Unemployment in the industry remains stubbornly high, and workforce is down 9% since 2019. Wages are up 13.4%, though, reflecting the sudden dearth of hospitality workers.
“This program picked winners and losers … And we shouldn’t be in that business.”
—U.S. Rep. Dean Phillips
The industry is running on fumes. “It was the worst January in my memory,” says attorney and restaurant investor Dennis Monroe, chairman of Monroe Moxness Berg PA in Edina. “People are worn out.”
The ongoing problems began with repeated government mandates and virus impacts. “The starting and stopping is enormously costly,” says Mike Brown, owner of Travail and Nouvelle Brewing in Robbinsdale. “Sick employees forced partial closures, going from 100 people to 12 and back to 50.” He lost $70,000 in one week this past winter. “We were down so much in January. We let 35 people go, and now we’re trying to build back up. Every hire requires a trainer, paying two people to do one job for weeks.”
Inflation is also devastating restaurant balance sheets. This past winter, Brown converted his casual full-service Robbinsdale restaurant Pig Ate My Pizza to counter-service taproom Nouvelle Brewing to capitalize on alcohol’s higher margins and deal with spiraling food costs. “Closing Pig was about responding to the market,” Brown says. “Ten years ago, Neapolitan pizza had a 20% food cost; now it’s 35%.”
“Full-service midmarket restaurants are being hit hardest,” he explains. “Labor is up 25%, food 10%. Inflation is 7%, and your margins are under 10%.”
Zimmern contends operators are eating many of these expenses: “Restaurants are still not passing costs on, because consumers would not go out to eat again” due to sticker shock.
If you’ve been somewhere warm this winter, you might have noticed a different vibe in restaurants. According to data by OpenTable as reported in the New York Times, in the country’s most liberal cities people are still avoiding restaurants. In February, seated diner counts were at least 40% below pre-pandemic levels in cities like Minneapolis, Chicago, and Boston, while they had fully recovered in places with a more libertarian approach to the pandemic, such as Phoenix, Arizona; Charlotte, North Carolina; and Austin, Texas.
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Government to the rescue
It’s undeniable that federal programs have kept many hospitality businesses afloat over the last two years. “By and large, government has provided the industry a lifeline,” says Monroe. Programs restaurants have used include:
- Paycheck Protection Program (PPP), launched in mid-2020 to keep people employed, was used widely despite periods of forced shutdowns. Some restaurants that closed by choice took PPP grants as low-interest loans, since banks rarely consider the industry debt-worthy.
- Employee Retention Tax Credit (ERTC), administered by the IRS, granted tax credits against wages for businesses that kept workers on the payroll. It was one of the few government programs that disincentivized closing.
- The RRF. Its payout metrics were generous, but it had problems. Structured with a priority application period of 21 days for women-/veteran-/minority-owned businesses, court injunctions stopped the priority after 90% of the funds were disbursed.
Peruse the huge list of grantees in Minnesota and you will see restaurant groups that serve mostly affluent customers in affluent neighborhoods that were designated low-income priority. This special status did not require restaurants to attest to a disadvantaged status; it happened automatically by location in a particular census tract. This helped well-resourced businesses get early consideration and prioritization. The provision was so poorly understood that most local restaurateurs interviewed for this story did not realize they benefitted from it.
“You definitely needed professional people lined up to press the button at midnight.”
—Dennis Monroe, restaurant owner/attorney
This mattered because RRF funds met a fraction of the eligible need. The court injunction, whatever you think of it, freed roughly $2 billion for the broader industry. Among non-priority groups, it came down to order of application.
“Pazzaluna and Central NE were the first applications we put in,” says Richard Dobransky, president of Morrisey Hospitality, which owns restaurants and operates others under contract. “It came down to timing. [When we filed] two minutes later, [our] Bad Waitress didn’t get it.”
“We filed on day one and got nothing,” says Ken Sherman, managing partner of Seven nightclub in downtown Minneapolis, which closed for the winter, its future up in the air. (Sherman said at press time he will try to reopen in April on a limited basis.)
“You definitely needed professional people lined up to press the button at midnight,” says Monroe—thus the value of prioritization for the smallest businesses.
A well-intentioned free-for-all
Rep. Phillips acknowledges the formulation of the fund was flawed. “How we qualified these restaurants is of importance because incentives can be perverse,” he says. He hopes for adjustments in future allocations, should Congress ever fund them.
The RRF’s simple algorithm—year-to-year revenue disparity—benefitted restaurants with the biggest revenue losses, which were restaurants that closed for the longest period. “Had I completely closed, I would have [been eligible for] twice as much money,” says Sherman, whose employee base was primarily young men and women of color. “If you cared about your employees, you got penalized.”
That’s a common refrain among restaurants ineligible for the RRF.
“We pivoted so hard, we didn’t lose enough revenue,” says Brown. “It was a bummer we’re getting our asses kicked [all winter], because we worked so hard to survive.”
“It incentivized staying closed,” says David Benowitz, president of Craft & Crew Hospitality, operators of five Twin Cities restaurants (including The Howe and Duke’s on 7). “But we’re better off in the long run because we gained market share and many new regulars. It’s the silver lining of Covid.”
Another problem with the RRF formulation was the decision to rebate lost revenue.
“It should have been based on profits,” says Cynthia Gerdes, the retiring CEO of Hell’s Kitchen in Minneapolis. “A lot of restaurants are not well run. If a restaurant was run as a joke or manipulated books to show no profit, they would not have gotten money” under her proposed formulation.
Although the program requires recipients to spend grants on restaurant operations, a restaurant company that had a large revenue loss but used 2020 to renegotiate leases, reduce labor costs, and refinance debt could conceivably have been operating sustainably by the time RRF checks arrived. In that case, a company could use RRF proceeds to pay bills and wages and simply bank all revenue, the equivalent of a 100% profit margin.
Such a scenario “would be like winning the lottery,” says Meritage’s Klein.
This is relevant because some types of businesses needed relief more than others, and revenue deficits aren’t the best measure of that, say observers. “It’s easier for large restaurants or groups to get access to capital than [a mom-and-pop operation] on Central Avenue,” says Zimmern. Those smaller businesses “don’t have lines of credit, software to optimize the business. The big operators, the temples of gastronomy, will always survive.”
Though some point to Pazzaluna’s grant as one of the more curious quirks of the RRF, Morrisey’s Dobransky says the company actually applied a morality metric of sorts to its applications. “We didn’t want to apply for restaurants with bright futures. We wanted to reserve it for those with limited prospects, in dire straits.” He says Morrisey did not apply for relief for The St. Paul Grill, which barely operated for 18 months, because it has no debt and its building is paid off—this despite eligibility for a huge RRF check and apparently in a priority Census tract.
Nationally, 70 entities received the top payout of $10 million, including 15 wedding venues and caterers, eight airport and sports concession companies, and some fast-food franchisees.
“It’s easier for large restaurants or groups to get access to capital than [a mom-and-pop operation] on Central Avenue.”
“To be honest, we thought it would be like PPP, sufficient funds for everyone,” says Dobransky.
“I didn’t imagine it would end up like this.”
The formula meant the fund ran out of money frightfully fast. “In hindsight, paying 50% of lost revenue to all rather than 100% to less than half might have been the better approach,” says Phillips.
To those who ask why the SBA took restaurants at their word about special status criteria and did not audit restaurant applications for relative need, the answer is simple, says the congressman: “Adding qualifications and auditing requires layers of resources the SBA didn’t have.” There was no way the government could have gotten checks in the hands of businesses within 90 days if the SBA had been auditing.
Minnesota’s top 10
The top 10 recipients of RRF funds in the state were a diverse group, including restaurant companies, caterers, and airport concessionaires. For this story, TCB focused only on the restaurant industry. Three of the seven restaurants declined comment or did not return messages to discuss how they used their grant. Most, if not all, are well-resourced operators who have alternative access to capital. There is a perception in the industry, says an owner who was not in the top 10, that this group “got so much money they don’t know what to do with it.” But more than one large recipient told TCB that its grant was the only reason it is still in business.
• Blue Plate Restaurants ($9.8 million). Blue Plate operates restaurants from Maple Grove to St. Paul, plus the Blue Barn at the State Fair. Family owned, its eateries are icons of their neighborhoods (Highland Grill, the Lowry, Freehouse, Longfellow Grill). Co-founder David Burley has been vocal about wage and cost mandates in the industry in recent years. Blue Plate issued a statement to TCB: “The RRF funds were critical to Blue Plate’s survival. The post-pandemic business environment is very challenging, and our leaders should support another round of RRF-type funding for those who weren’t included in the first round.”
• Cara Irish Pubs ($8.4 million). The proprietors of Kieran’s and The Local (Nicollet Mall and West End) continue to offer limited operations. Kieran’s in the Warehouse District is open on event nights but will return to daily hours when downtown activates, says president and director of operations Valid Serhan. The Nicollet Mall Local used RRF funds to renovate and is awaiting supply chain–delayed kitchen equipment to reopen. The Local West End reopened in 2021, operating six days a week, and business is coming back. Serhan says RRF payments continue to cover rent in shuttered restaurants and allowed the return of staff where revenue may not have justified the rehires. He says if Cara cannot use all $8 million, it gladly would return portions, but for now the company could not operate without it.
• Hell’s Kitchen ($5 million). Hell’s Kitchen was shuttered for a year and a half—no takeout, no catering, nothing. “We had $200,000 in the bank; I thought we’d be fine,” laughs Gerdes. It received the maximum grant available to a single-location business because the magnitude of its revenue loss was so stark. Gerdes says closing was hardly a tactical decision. “We’re neurotic. It was safety. We had 179 sick hours one week when we reopened, and normal is near zero. It is very hard to operate in this environment.” She says the business is on the hook for $1.7 million in PPP loans, a bank line of credit, back property taxes, and unpaid bills from 50-60 vendors. “There isn’t a week we break even still,” she says. “But I know a lot of people missed out. There’s definitely some survivor’s guilt.”
• Surly Brewing ($5 million). Surly may be a brewing company, but most of its employees and overhead are in its taproom, which is one of the largest hospitality venues in the state, at peak staffing employing in the high 300s, says founder and president Omar Ansari. Surly closed for all of winter 2020-21 and muddled through 2021-22 with half of normal revenue and staffing. The RRF “helped us weather the storm,” says Ansari. “This last winter was a disaster. You can’t lose 3, 4, 5, 6 million dollars and just keep going.” The RRF allowed Surly to end pay cuts and “make people whole. Without the government, we wouldn’t be here.”
Not every prominent local restaurateur won the RRF lottery. Parasole Restaurant Holdings (Manny’s, Good Earth, Pittsburgh Blue) was eligible for $10 million and applied on the first day but got nothing. CFO Barbara Marshall says the company is hopeful a second round of funding emerges.
Of Tim Niver’s trio of restaurants, only Mucci’s Italian in St. Paul got a grant ($99,000). Niver permanently closed Trattoria Mucci in Minneapolis this winter. It was eligible for seven times the grant of its sibling, Niver says. Had it come through, Trattoria Mucci would be open today. Instead, its staff was laid off.
The well runs dry
Ever since the RRF exhausted its funds a year ago, there has been hope that the program would be replenished. Advocates wanted to fund the remaining filed applications with a supplementary authorization of roughly $43 billion. Attempts to include it in the recent omnibus spending bill were unsuccessful. Phillips says the biggest challenge is GOP sentiment that the spending is inflationary, but anecdotal evidence from this story indicates most grants are being used to pay things like wages and rent.
Andrew Zimmern, who says he talks to politicians weekly on behalf of the IRC, says “my heart tells me it’s still possible, but my brain tells me the money is drying up.”
For a restaurateur like Niver, who closed a struggling restaurant and continues to fight the good fight at Mucci’s St. Paul and Saint Dinette in an often-deserted downtown St. Paul, any federal relief is welcome. He suggests government loan forgiveness would go a long way to stabilizing his balance sheet. But he has no animosity toward the restaurateurs who received 100 times what he did.
“I have no bandwidth to be pissed,” he says. “What’s fair? Nothing’s fair.”
Editor’s note: In early April, the U.S. House of Representatives passed a supplemental Covid business aid package that would fund the roughly $42 billion in unfunded applications to the RRF along with $13 billion for other hard-hit industries. A similar piece of legislation failed to garner the necessary 60 votes in the Senate in May, prompting Rep. Dean Phillips to note that it “all but guarantees that Congress will not rise to the occasion, leaving far too many small businesses with no other choice than to lay off additional staff, reduce service or hours, or close their doors altogether.”