South Florida companies got big PPP bucks. New rules are leaving employees sidelined

The iconic Biltmore Hotel in Coral Gables had shrunk to around 50 employees when it learned on April 13 it had been approved for a loan of more than $4 million through the U.S. Cares Act’s Paycheck Protection Program.

The 270-room landmark qualified as a small business; the loan made it possible to bring its workforce back up to as many as 275 workers — an impossibility without the cash infusion.

“The [COVID] restrictions have been crushing,” said Tom Prescott, the hotel’s executive manager. “For instance, we can’t do banquets, and we’re a place that usually does a lot of weddings.”

A number of other local hotels, alongside other businesses, also landed PPP loans. But even as they got the funds, some have continued massive layoffs — a practice that not only may be perfectly legal but comes with no financial penalty.

State data show at least nine South Florida hotels received loans for a combined total of between $15 million and $33 million, even as they announced worker separations or furloughs totaling more than 3,300 employees.

Congress originally designed the PPP program, launched in early April, to help small businesses keep employees on payrolls as coronavirus initially raged.

Many familiar with the PPP effort say the program worked as intended: providing as much funding to as many recipients as possible, as an unprecedented economic calamity bore down. A new study by an MIT economist says the program may have boosted employment by more than 3 million jobs. The same study also found each job came at a cost of $224,000, a figure some have suggested is unreasonably high given other alternatives.

But the final rules for loan forgiveness, issued in June, allow businesses to pay fewer employees than originally envisioned when Congress passed the program—and gives businesses broad leeway in how to calculate payroll on their forgiveness form.

That has sparked further debate about the efficacy of a program that faced criticism from its start.

MAXIMIZING FORGIVENESS

The original PPP rules mandated that 75% of funds be spent on payroll within eight weeks to bring employees back from the sidelines; the other 25% was to be used on other business expenses. Any deviation from the terms would transform the funds from a grant to low-interest-rate loan.

But as the PPP program was rolled out, it became clear that many companies would not be able to meet that initial 75% threshold, especially in the eight-week window.

In a revision signed June 5, Congress reduced the payroll threshold to 60%. That same week, the U.S. Treasury Department and Small Business Administration extended the window to reach that threshold from eight to 24 weeks, and added safe-harbor provisions that stated loans could be forgiven if a business remained so severely impacted by the pandemic that it would be unable to bring back even 60% of its payroll.

It also clarified that a business is able to calculate its forgiveness eligibility not only on headcount, but on amount spent on payroll.

In other words, a firm could forego bringing back hourly employees in favor of salaried ones — so long as the sum of those salaries met the 60% requirement.

“To maximize forgiveness, businesses do have the option to do that, and then they’re not penalized for reducing headcount,” said Chris Meccariello chief operating officer of New Jersey-based Innovating Financing Solutions, a firm that consults for banks on government lending programs.

Even prior to the revisions, the greatest penalty a PPP borrower could face for not using all its funds on payroll was a conversion of the grant to a 1% interest loan that would mature after two years.

But Meccariello says the new rules mean most firms will now seek 100% forgiveness — and most likely get it.

“The SBA was pretty loose with its definitions, and loosened them even further with its forgiveness language,” he said.

Not to mention, the banks also have an interest in fully discharging the loans.

“The banks’ and borrowers’ interest are aligned to maximize forgiveness,” Meccariello said. “A lot of banks don’t want to hold these loans on their books.”

LARGE RECIPIENTS

These changes may help explain why businesses that received large loans have still ended up laying off workers.

Over the past few months, the iconic Fontainebleau Miami Beach Resort has laid off some 2,000, even as its developer received a government loan totaling as much as $2 million. It has also sought to cut benefits for those it has laid off.

On April 6, Fontainebleau Development LLC, owned by longtime South Florida developer Jeffrey Soffer, received between $1 million and $2 million in taxpayer dollars through the PPP initiative, according to data released earlier this month by the U.S. Small Business Administration and the U.S. Treasury Department. Government data show the funds were to be used to support a total of 87 jobs.

Soffer’s Turnberry Hotels Management Group received a separate loan of between $5 million and $10 million.

Soffer accepted the loans from City National Bank of Florida, the data show. The government did not specify exact PPP loan amounts for loans larger than $150,000.

Because the Fontainebleau itself employed more than 500 workers, the hotel itself was not eligible for PPP funds. Soffer’s firm also operates other entities, including his development and management office, and the JW Marriott Miami Turnberry Resort & Spa.

A spokesperson for Fontainebleau Development LLC, declined to comment. Through a representative, Miami-based City National Bank of Florida, which approved Fontainebleau Development’s loan, declined to comment.

Morgans Hotel Group Management, which operates The Delano on Miami Beach’s Collins Avenue, received a loan worth between $2 million and $5 million to support 97 jobs, government data show. In June, The Delano announced it was laying off nearly 200 workers. Morgans, which operates boutique hotels in the U.S., Europe and the Middle East, is owned by hospitality giant sbe.

Other large firms outside the hospitality industry received loans too. Coastal Building Maintenance of Florida, a contractor responsible for cleaning many of Miami’s downtown high-rises, also received a loan worth between $2 million and $5 million even as it laid off an unspecified number of workers.

In a statement, the company said: “As one of the oldest and largest cleaning companies in South Florida, our workforce had grown extensive so payroll is our biggest expense. The PPP loan gave us the ability to bring people back to work and has been used exclusively for payroll, as per the policy’s guidelines.

“As schools begin to re-open next month we expect to return to nearly 80% of our pre-COVID employee levels. This includes both salaried as well as hourly staff.”

WORKED AS INTENDED?

Tom Wells, CEO of First American Bank, which has branches in Chicago and South Florida, said layoffs amid the pandemic represent business realities and are not a reflection of the PPP program’s success or failure.

“There’s nothing wrong with giving money to allow a business to reopen, even if it didn’t keep everyone on payroll,” he said. “Everybody at one level or another has been impacted adversely.”

He cited the example of the April bailout of airlines, which received $25 billion. The rules of that program forced airlines to keep employees on payroll until Oct. 1. In practice, the airlines have merely delayed the layoffs until that date.

“I’m talking about how it really works, and how the economics really work,” he said. “The economics don’t care. The airlines are a good example. They got a whole bunch of money to keep people on the payroll, but they ended up sitting in a rubber room doing nothing while getting paid. That runs out Oct. 1, and on Oct. 1, they’re going to have a whole bunch of layoffs because they have to.”

Indeed, the travel and hospitality industry remains in free-fall. Most of the recent layoff notices filed with the Florida Department of Economic Opportunity have been at hotels; a recent report from The Real Deal showed some properties are now being sold for discounts of up to 30%. According to travel data group STR, hotel occupancy in Miami-Dade remains stuck at about a 30% average.

Meccariello, the banking consultant, says the rule changes were simply responses to facts on the ground.

“A prudent business owner probably shouldn’t keep their employees employed while generating zero revenues,” he said, “and that’s the reality for how this situation continues to deteriorate.”