SBA 504 Restaurant Feasibility Study

Low restaurant losses under 504

The 504 restaurant record is read apart from the 7(a) record. Of 1,379 restaurant loans disbursed from FY2017 to FY2021 under 504, the charge-off floor is 0.94%, and 0.44% were lost within five years of approval. That is far below the restaurant rate across both SBA programs, and it also differs from the 504 program as a whole, so it is a feature of this cell and not of 504 in general. In all, 504 approved 3,515 restaurant loans for $2.87 billion over FY2017 to FY2026.

One reason the 504 restaurant record looks so different is the structure of the program. A 504 borrower has to occupy the building it buys, so these loans finance owned restaurant real estate, with a bank's first lien and a certified development company's second lien behind real property, rather than leasehold improvements in rented space. The median loan is $606,000, with the middle half between $346,500 and $1.1 million, and franchised units account for 8.2%. The lenders are the large CDCs. Granite State Economic Development Corporation is the current holder of 192 restaurant loans worth $105.4 million, Empire State Certified Development Corporation of 163 worth $143.7 million, and The Mortgage Capital Development Corporation and Florida Business Development Corporation of 149 each; Florida First Capital Finance Corporation, Inc. holds 147 worth $168.8 million. California has 408 loans, Florida 271 and Massachusetts 252, with Illinois at 214 and Minnesota at 164. Approvals reached 465 in FY2022, and FY2025 brought the most dollars, $396.5 million.

Cancellations and the restaurant study

The cancellation record is ordinary for the program: a floor of 13.2% on restaurant approvals of FY2017 through FY2024, and a ceiling of 17.6% if every undisbursed approval cancels. For a borrower, that is still a real chance of losing months on a deal that does not close, and the study is the place to find the weak point first. A feasibility study for a 504 restaurant has to show demand by daypart from the trade area, the competition within a short drive, and the concept's record if the operator already runs a unit. It has to cost the building, the kitchen and the build-out against bids. It has to test debt service coverage with the mortgage replacing rent, at sales below the operator's best year. The appraisal is the last test: a restaurant building is often worth less to the next owner than to this one, so the study should show what the property is worth without the current concept, the value a lender falls back on.