This article appeared in The Bankruptcy Strategist, featuring the strategies and techniques devised by the country's top bankruptcy lawyers and reports on innovative procedural techniques, legislative developments and recent judicial rulings — plus what they mean for you and your clients.

Many communities have been experiencing a growing restaurant scene over the last few years. In fact, recent years have been considered the "golden age" for restaurants. For now, that restaurant scene is virtually non-existent, and it looks nothing like it did six months ago because of the COVID-19 novel coronavirus. Restaurants have lost nearly three times more jobs than any other industry since the beginning of the COVID-19 pandemic. While some restaurants are trying to keep their employees employed and their doors open with take-out only concepts, many have closed their doors, for now.

Restaurants are already fragile businesses, not known for lucrative revenue, but instead known for surviving on tight margins. As the industry reopens to the "new normal," will restaurants be serving at full capacity? What extra expenses will restaurants have to endure to reopen? Will people want to dine in? Will restaurants survive with increased expenses and government-imposed capacity limits? And, if they don't, what other businesses that support restaurants could fail with them?

Financial Relief During the Pandemic

The restaurant industry contributes an estimated 4% of the United States' GDP — or roughly one trillion dollars. As an industry, it is the nation's largest private employer and the third largest employer overall. Since the end of March 2020, 3% of restaurants have permanently closed as a result of COVID-19, according to the National Restaurant Association, the main trade association for the industry. For the other 97%, governments at the local, state and federal levels have put some protections in place over the last few months, which have likely prevented more restaurants from permanently closing.

Some businesses are getting Paycheck Protection Program (PPP) loans, or other state or local funding; employees are getting stimulus checks and unemployment checks (and in some cases in an amount in excess of what they would be getting if they were working because of the short term federal increase); there are moratoriums in place on collections, foreclosures, garnishments and evictions in many jurisdictions. What happens, however, when these protections no longer exist? The National Restaurant Association has predicted that 11% of restaurants will close this Spring as a result of the pandemic. By Fall 2020, it is likely that this number will increase, especially if there is another wave of COVID-19 infections, as predicted. The financial loss by the end of 2020 for the restaurant industry is predicted to be $240 billion.

Restrictions Will Create Reopening Challenges

In the initial re-opening of dining in options, restaurants will likely experience decreases in clientele and revenue, either because of government restrictions, customers' fears of dining in close spaces, or both. Further, restaurants, already running on thin margins, will have to incur new unexpected costs, such as facemasks, disposable menus, disposable silverware, extra cleaning supplies, hand washing stations and other previously unforeseen business expenses, which may or may not be government mandated depending on where the restaurant is located. Can smaller operations, which have been closed and have startup costs from those closures, take the strain of less revenue and more expenses and remain open for an extended period of time? Most restaurants that have been closed will need $25,000 or more to reopen their doors.

Further compounding the industry's problem are unknown answers to the questions of how long restrictions on public gatherings may last; how long it will take people to feel comfortable eating at a crowded restaurant; and how long restaurants will need to incur additional expenses. Lack of public confidence may be related, in part, to inadequate COVID-19 testing in many areas and the predicted 12 to 18 month time frame for a vaccine to be available.

In some jurisdictions, governments are allowing dining rooms to re-open, but at a mere 25% capacity. In such locales, restaurants that normally serve 100 customers, may now serve only 25 at a time. In smaller restaurants that normally serve 40 customers at a time, they can now only serve 10 people at a time. While a PPP loan may allow (and in fact require) the restaurant to employ its employees as it did pre-COVID-19, how long can the restaurant industry realistically run on twenty-five percent of its prior capacity while maintaining pre-COVID-19 employment? Not long, think some restaurant owners. See, "Limiting Capacity May Be Death Sentence for Suffering Restaurants," by Elazar Sontag, Eater.com (May 1, 2020); "Dallas Restaurateurs Say 25 Percent Capacity Isn't Worth the Risk," by Eve Hill-Agnus and Rolan Saez, D Magazine (April 27, 2020).

Successful restaurants, pre-COVID usually make a 10% profit with a full restaurant. With these government-mandated restrictions, it is likely that this 10% profit will be gone and most restaurants will be operating at a loss, at least in the short term, in reopening in the new COVID-era.

Impact from the Supply Chain

To further complicate the financial strain on the restaurant industry, the supply of meat products such as pork, beef, and chicken is being significantly hampered by COVID-19 related closings of processing plants primarily in rural areas. For example, Wendy's announced that some of its traditional burger items may not be available because of beef supply disruptions. According to CNN, more meat processing and packaging plants have suspended operations temporarily due to coronavirus outbreaks in the workforce. Some of the country's largest processing plants and slaughterhouses have been forced to cease operations temporarily after thousands of employees across the country have tested positive for COVID-19. Pork processing plants have been hit especially hard, with three of the largest in the country going offline indefinitely — Smithfield Foods in Sioux Falls, SD; JBS pork processing in Worthington, MN; and Tyson Fresh Foods in Waterloo, IA. Together, these three plants account for approximately 15% of pork production.

These impacts on decreased food supply, restaurant capacity, and customer preferences do not just affect the restaurant, its employees, and its customers who dine there. The failure of the restaurant industry could have a significant impact on various other parts of the economy. The restaurant industry is a pipeline for food production, food distributors, meat processing factories, farmers, alcohol distributors and shippers, uniform suppliers, cleaning companies and the list goes on and on. Moreover, if a restaurant is not open (or only open at 25% capacity), it may not be able to pay its lenders, its landlords, its equipment financers, its insurance carriers, its utilities, or its taxes. The impacts of each of these is significant. For example, the failure of even a portion of the restaurant industry will have, and has had, a significant impact on the food distribution network. Many farmers and processing plants supply to either commercial or consumers distributors and the supply for each is very different. See, "Here's Why You Can't Find Frozen Fries While U.S. Farmers Are Sitting on Tons of Potatoes," by Lisa Boertlein, Reuters.com (April 24, 2020); "Why Farmers Are Dumping Milk While Grocery Stores Report Dairy Shortages," by Jessica Fu, The Counter (April 8, 2020). Those distribution chains are not the same, and the failure of restaurants to order massive quantities of fries has left potato farmers with excess supply while leaving grocery stores, and consumers, lacking supply. Now, rather than just a restaurant industry problem, we have a much bigger problem with the food distribution network as a whole.

Fallout for Real Estate Markets and Government Financing

An industry-wide failure would lead to a decrease in production and employment for other industries, but it would also cause issues in the real estate market when restaurants cannot pay their loans or landlords. There are over a million restaurants in the United States, according to restaurant.org. If there is a wide scale failure, this could lead to an increase in commercial foreclosures and evictions. (Not to mention the 15.6 million people employed by the industry, the resulting unemployment, and these employees' inability to pay their mortgage or rent if unemployed.) In the 2008 financial crisis, the country faced a foreclosure crisis that depressed property values for years and changed foreclosure litigation, consumer debt collection and lending. Will a significant downturn in the restaurant industry force us there again?

Then, there are the taxes: sales tax, income tax, and real estate taxes, among others. When taxes are not paid or generated, the local, state, and federal governments suffer, which in turn affects every taxpayer. COVID-19 has already caused a strain on government income. A further failure in an industry of this size could have significant implications.

Conclusion

It is too soon to say how COVID-19 will transform the restaurant industry, but for the next year, things will be anything but stable for restaurants, their employees and those industries that support them.

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Gerald Davis and Amy Drushal are shareholders at Trenam Law and represent financial services institutions in creditors' right and bankruptcy matters. Davis may be reached at [email protected], and Drushal can be reached at [email protected].