October ’20

The BAN Report: PPP Forgiveness / Retail Woes / Indoor Dining Expands / Office Re-Opening Slow / Booming Small Towns-10/1/20

PPP Forgiveness 

Who ever thought forgiveness would take this long?   The SBA is finally starting to approve forgiveness requests as soon as the end of this week.

The Small Business Administration will begin forgiving loans granted to small-business owners under the Paycheck Protection Program, the Treasury Department said Tuesday, following banks’ and borrowers’ complaints that the process had been bogged down.

The government expects to approve and pay forgiveness requests by late this week or early next, a Treasury spokesperson said. The applications are generally expected to be approved quickly, with the exception of loans above $2 million that will get added scrutiny.

Business advocates, banks and lawmakers have raised concerns that the process of turning the loans into grants is too complex and slow under the $670 billion federal program, designed to help small businesses respond to the economic fallout of the pandemic with forgivable government-backed loans distributed through banks.

“The ultimate success of the program will depend on forgiveness, so small-business owners are eager to learn of [Treasury officials’] decisions,” said Kevin Kuhlman, senior director of government relations for the National Federation of Independent Business, which advocates for small businesses, adding that the group welcomes the development.

Since it launched an online portal for loan forgiveness in early August, the Small Business Administration has received more than 96,000 applications from businesses seeking to have their loans forgiven—but none had been approved, William Manger, SBA’s chief of staff and associate administrator, told House lawmakers last week.

Those applications represent roughly 2% of the 5.2 million loans, worth $525 billion, issued under the program before it expired on Aug. 8.

Treasury Secretary Steven Mnuchin told Senate lawmakers last week he would support simplified forgiveness but that legislation is needed. He also said the administration would seek to monitor loans for fraud.

As Mnuchin said, there are two things holding this up.  One, Congress may act to simplify the forgiveness process by some sort of blanket forgiveness for loans under a certain threshold.   Two, the stories about fraud have forced the SBA & Treasury to beef up their protocols in order to weed out the bad actors.    It is surprising though that only 2% of PPP loans have been submitted for forgiveness so far, although this may be due to lenders not submitting the applications to SBA yet.

The delay on forgiveness is creating a problem.    Consultant and ex-banker Daniel Kaminski sent us this email:

Great report; I thought I shared with you three of my clients experience with PPP loans.

  1. Client with a loan through a large regional bank.  Was told today, they are only processing loan forgiveness applications for loans over $150,000; His is less so he is just sitting tight. Loan was distributed on April 13, 2020.  See below.
  2. Client with a loan from another large regional bank for over $225,000; Ready to file in August, was told by its banker he was not yet trained, and the bank would not be ready until at least September 28th.   Loan was distributed on April 13, 2020.  See comment below.
  3. Client had a loan under $100,000 from a community bank.  Last week they sent us an email asking us to file for forgiveness, which we did yesterday;  but also sent us an amendment to loan agreement deferring interest payment to after we received either approval or denial of loan forgiveness.    They explained that the deferment was due to the fact that the loan could start to accrue interest before the SBA approves forgiveness.  

So, my comment which is not addressed by your report, if the SBA does not start to approve, the April loans could soon be approaching interest payments before they are forgiven…then what happens?  Are other banks deferring interest payments?

Excellent points, Dan.    Banks certainly do not want to modify hundreds of loans because they have now not been forgiven prior to the first contractual interest payment.    We are hearing that the SBA is likely next week to allow up to ten months of deferment, so that loans can be forgiven prior to the first payment being made.   No one has seen anything in writing, but one bank did send this in writing to one of their customers:

SBA advises they can take up to 90 days to review loan forgiveness application which may run past the required starting of payments called for in the note you signed.   The SBA has now allowed for an extension of the start of that payment date until 10 months after your covered period ends.   To accomplish this extension we have prepared a loan modification agreement…

Oy vey!    “No one ever said this would be this hard” is an applicable phrase.    To be fair, our good friends at the SBA has been put in a very difficult position, put out a record amount of money in a short period and now process billions of loan forgiveness requests while keeping an eye on fraud while asking for Congress to make this easier.

Retail Woes

BDO’s Bi-Annual Bankruptcy Update quantified the record number of bankruptcies in retail so far this year as well as store closings.

In the first six months of 2020, 18 retailers filed for Chapter 11 bankruptcy, with an additional 11 filing in July through mid-August. These defaults were concentrated in apparel and footwear, home furnishings, food and department stores, with many prominent retailers filing during this time period, including Pier 1, J. Crew, Neiman Marcus, Stage Stores, J.C. Penney, Tuesday Morning, GNC, Lucky Brand, RTW Retailwinds (New York & Co.), Brooks Brothers, Ascena (Ann Taylor, LOFT, Lane Bryant, Justice, Catherines), Le Tote (Lord & Taylor), Tailored Brands (Men’s Wearhouse, Jos. A. Bank, Moores Clothing, K&G) and Stein Mart.

Alongside the uptick of bankruptcy filings and liquidations so far in 2020, the industry has also seen a substantial rise in the number of store closings announced, with bankrupt retailers alone announcing almost 6,000 store closings. From January through mid-August, there have been more store closure announcements in 2020 than the record 9,500 stores that closed throughout 2019. The majority of store closures have taken place in malls, which have seen far less foot traffic due to sustained COVID-19 disruption. 

However, retailers on the brink of bankruptcy are not the only ones looking to shed their brick-and-mortar locations. In fact, there are more than 15 retailers that have not filed for bankruptcy—including Macy’s, Bed Bath & Beyond and Gap—that have announced the closing of 50 or more stores, totaling a combined 4,200+ stores.

10,000 closed stores are a lot of vacant real estate.   Online retail is projected to grow 18% this year, but the physical stores are struggling.     Even Rodeo Drive in Beverly Hills, which is one of the most famous shopping areas in the world, is struggling.

Rodeo Drive, only three blocks long, has nearly a dozen vacant storefronts and has seen Michael Kors, Lacoste, Tumi, Battaglia and Piaget close; similarly, Melrose Place has seen the shuttering of BLDWN, Rebag and Violet Grey; and Robertson Boulevard has an additional Michael Kors closure, along with All Saints and Ted Baker. Stores that are open are generally limiting the number of shoppers.

The good news is closings reduce competition for retailers and make it easier for the remaining retailers to survive.    COVID-19 has accelerated a trend from brick-and-mortar to online sales that would have likely occurred anyway.

Indoor Dining Expands 

The good news for restaurants is major cities are either opening or expanding indoor dining.

New York opens indoor dining on Wednesday, restricting capacity to 25%. San Francisco may do the same as early as this week. Chicago is raising its indoor capacity from 25% to 40% on Thursday but says restaurants still can’t seat more than 50 people in one room.

It’s a dose of reality for an industry that was able to stem at least some of its losses by pivoting to outdoor dining this summer, setting up tables and chairs on sidewalks and parking lots and offering some semblance of normalcy.

But as temperatures start to slide across the country, restaurants will have to coax patrons to come back inside, and it’s anyone’s guess how many actually will. That could spell trouble for an industry that has already lost nearly 100,000 U.S. restaurants — or 1 in 6 — since the start of the pandemic, according to the National Restaurant Association. The future remains uncertain for thousands more.

“We’re all a little apprehensive, but that was the case when we started outdoor dining, too,” said Samantha DiStefano, owner of Mama Fox, a restaurant and bar in Brooklyn.

Mama Fox can only seat 18 people inside at 25% capacity, so DiStefano will still rely heavily on her 14 outdoor tables. She thinks many New York restaurants won’t open indoor dining until the limit reaches 50% because they can’t cover their costs at 25%.

In the meantime, Mama Fox and others are trying to figure out how to extend the outdoor dining season using space heaters, tents, temporary igloos and even blankets. Heat lamps are already in short supply.

Restaurants are also promoting delivery and carryout. Nearly 70% of 3,500 restaurants surveyed in September by the National Restaurant Association said they added curbside takeout during the pandemic; 54% added delivery.

US restaurants sales bottomed out in April at $30 billion, but have since rebounded to $55 billion in August, which is still $10 billion less than last year.    Fast-food restaurants with drive-thru are performing the best, as drive-thru visits increased by 26% in the second quarter according to the NPD group.    From our standpoint, it seems obvious that people miss their favorite restaurants, and are more likely than not to dine out like they always did, providing it can be done safely.   But restaurants can only do so much business at limited capacity, so a full recovery is unlikely prior to a vaccine.

Office Re-Opening Slow

The slow pace of workers returning to their offices is disappointing and causing significant damage to our major cities.    In New York City, only 10% of workers have returned.

Overall, about 10% of Manhattan office workers were back as of Sept. 18, according to CBRE Group Inc., a commercial real estate services firm.

That represents only a modest uptick from the 6% to 8% who were back in July, a month after the city allowed nonessential workers to return for the first time since offices closed in March because of the pandemic. The monthslong stretch of near-empty office buildings has had a debilitating knock-on effect in Midtown Manhattan and other business districts, leading many small shops and restaurants to shut down for good.

Nationally about 25% of office workers have returned as of this month, on average, according to real-estate services firms. Some large metropolitan areas are considerably higher, such as Dallas at 40% and the Los Angeles metro area at 32%, industry professionals say. The reoccupation rate in New York’s suburbs is 32%, according to CBRE, which manages 20 million square feet of office property in the region.

We talked to the head of a major department at a large bank and he told us that some of his employees are just traveling the country and working out of their hotel rooms.

Without kids, mortgages or offices to tie them down, some Americans are city hopping in search of new scenery and open space.

Driving that trend are a few large employers that have made clear that they don’t expect workers to return well into 2021. Even though some Wall Street banks are already putting pressure on employees to come back to the office, big tech companies including Google parent Alphabet Inc., Facebook Inc. and Amazon.com Inc. are extending work from home policies — and some are even making the arrangement permanent. 

People like Collazzi who can work remotely are finding that the restrictions placed on international travel have spurred them to go domestic sightseeing.

The complete lack of leadership amongst our large companies is incredibly disappointing, especially since these companies have done so much to invest in their workplaces.    Imagine the boost a large company could do to a major city if they announced that most workers would be returning to their offices.    Obviously, this needs to be done safely and not all workers will be able to return, but we should be doing better than 10%!

Booming Small Towns

Many small towns are seeing their populations expand dramatically, as refugees from large cities look for some more space and affordability.   Winhall, Vermont is one small town seeing an influx of people fleeing urban areas.

For years, Vermont’s population has been stuck at around 620,000, a plateau so threatening to the labor force and tax base that in 2018 the state began offering a cash incentive of up to $10,000 for remote workers who moved to Vermont.

In towns like Winhall, that is really not the problem anymore.

Instead, officials are hard-pressed to keep up with the burst of growth.

Elizabeth Grant, the town clerk, reckons that over the summer the town’s population topped 10,000. When school reopened this month, the number of enrolled students had increased by 54, a jump of more than 25 percent, so the costs to taxpayers will exceed projections by half a million dollars.

The post office ran out of available P.O. boxes in mid-June. Electricians and plumbers are booked until Christmas. Complaints about bears have quadrupled. And as far as the dump is concerned, as Mr. Bushee put it, “the closest word I can tell you is sheer pandemonium.”

Winhall is 220 miles from NYC and 140 miles from Boston. With good Wi-fi and access to the best skiing on the east coast, it’s not surprising they are seeing an influx of residents. There are examples like Winhall all over the country, typically within a 3-hour drive of a major city. But will these new residents sour on small-town life when the big cities are back again?   Time will tell if this COVID-impacted trend is a blip or a permanent shift.

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