Using SBA 504 Loans for Commercial Real Estate: Benefits & Process

The SBA 504 loan program offers some of the best financing terms available for commercial real estate purchases. With rates as low as 6%, terms up to 25 years, and down payments as little as 10%, it's the go-to option for businesses buying owner-occupied property.

What is an SBA 504 Loan?

The SBA 504 loan is a long-term, fixed-rate financing program designed specifically for purchasing commercial real estate, constructing new facilities, or renovating existing buildings. The program is administered by Certified Development Companies (CDCs) in partnership with traditional lenders and the Small Business Administration.

The Three-Party Structure

SBA 504 loans are unique because they involve three parties, each providing a portion of the financing:

• Your down payment: 10% (or 15% in some cases)
• Senior lender (bank): 50% of the project cost
• CDC/SBA 504 loan: 40% of the project cost

Example: For a $1 million property:

• Your down payment: $100,000 (10%)
• Bank loan: $500,000 (50%) at current market rates
• SBA 504 loan: $400,000 (40%) at below-market fixed rate

Key Features of SBA 504 Loans

Loan Amounts

• Standard maximum: $5 million SBA portion ($5.5 million CDC debenture)
• Manufacturing/energy projects: Up to $5.5 million SBA portion
• Small manufacturers: Special programs available
• Total project cost: Can reach $12-15 million with proper structure

Interest Rates

• SBA 504 portion: Fixed rate based on 5 or 10-year Treasury + spread
• Current rates (2024): Approximately 6-7% fixed for life of loan
• Bank portion: Market rate (variable or fixed, negotiable)
• Rate advantage: Typically 0.5-1.5% below conventional commercial mortgages

Loan Terms

• SBA 504 portion: 10, 20, or 25 years fixed
• Real estate: Typically 20 or 25 years
• Equipment/improvements: Typically 10 or 20 years
• Bank portion: Negotiable, often 10 years with amortization up to 25 years

Down Payment

• Standard: 10% down
• New business (less than 2 years): 15% down
• Special use property: 15% down
• No prepayment penalty on the down payment or equity investment

What Can SBA 504 Loans Finance?

Eligible Uses

Real Estate

• Purchase of land and existing buildings
• Construction of new facilities
• Expansion of existing facilities
• Renovation and improvements to owned property
• Site improvements (parking, landscaping, utilities)

Long-Term Equipment

• Machinery and equipment with useful life of 10+ years
• Must be purchased in conjunction with real estate (typically)
• Includes installation costs

Soft Costs

• Architectural and engineering fees
• Appraisal costs
• Environmental studies
• Title insurance and closing costs
• Some CDC processing fees

Ineligible Uses

• Working capital
• Debt refinancing (with limited exceptions)
• Investment or speculative properties
• Properties held primarily for sale or lease to others
• Property outside the United States

The 51% Owner-Occupancy Rule

One of the most important requirements of SBA 504 loans is the owner-occupancy rule:

You must occupy at least 51% of the property for your business operations (60% for new construction). This is measured by square footage, not rental income.

What This Means

• You can lease up to 49% of the building to other tenants
• Your business must use the majority of the space
• The occupancy requirement must be met at time of loan closing
• You must maintain this occupancy throughout the loan term

Examples

✅ Eligible Scenarios

• Buy 10,000 sq ft building; use 6,000 sq ft for your business, lease 4,000 sq ft to another tenant
• Purchase retail space where you operate your store in 100% of the building
• Buy office building, occupy 70%, lease 30% to other businesses

❌ Ineligible Scenarios

• Buy building to primarily lease to other tenants (even if you occupy some space)
• Purchase multi-family property to rent out (not owner-occupied business use)
• Buy building for your business but plan to occupy less than 51%

Benefits of SBA 504 Loans for Real Estate

1. Lowest Down Payment in Commercial Real Estate

While conventional commercial mortgages typically require 20-30% down, SBA 504 loans require only 10% (or 15%). This preserves capital for operating expenses, equipment, and growth.

2. Below-Market Fixed Rates

The SBA 504 portion has fixed rates that are typically 0.5-1.5% below conventional commercial mortgage rates. This can save tens of thousands of dollars over the loan term.

3. Long-Term Fixed-Rate Financing

Unlike many commercial loans that have 5-7 year balloon payments, SBA 504 loans are fully amortized over 20-25 years with no balloon payment. This provides:

• Predictable payments for the life of the loan
• No refinancing risk when rates rise
• Lower monthly payments due to longer amortization
• Protection from interest rate increases

4. Preserved Cash Flow

The combination of low down payment, low rates, and long terms means lower monthly payments compared to conventional financing:

*For $1 million property, 25-year amortization

5. Frees Up Bank Lending Capacity

Since the bank only lends 50% instead of 70-80%, you preserve borrowing capacity with your bank for other business needs like working capital, equipment, or inventory lines.

6. Job Creation Benefits

SBA 504 loans promote economic development. For every $65,000 in SBA financing (or $100,000 for small manufacturers), you must create or retain one job. This is usually easy to satisfy for growing businesses.

Qualification Requirements

Business Requirements

• For-profit business: Must be operating for profit
• Size standards: Must meet SBA size standards (varies by industry)
• Net worth: Less than $15 million
• Net income: Average net income less than $5 million after taxes (past 2 years)
• Owner-occupancy: Must occupy 51%+ of the property

Owner Requirements

• Credit score: 680+ preferred (680-700+ for best terms)
• Down payment funds: Must demonstrate source of 10-15% down payment
• Management experience: Demonstrated ability to run the business
• Personal guarantee: All owners with 20%+ ownership must personally guarantee
• No recent bankruptcies: Typically must be 2+ years past discharge

Property Requirements

• Owner-occupied: 51%+ occupancy by borrower's business
• General purpose property: Easier to finance than special-purpose
• Useful life: Must exceed loan term
• Environmental: Must pass Phase I environmental assessment
• Location: Must be in the United States

Financial Requirements

• Cash flow: Debt service coverage ratio of 1.15-1.25+ required
• Financial statements: Must provide 2-3 years of business and personal financials
• Tax returns: 2-3 years business and personal tax returns
• Business plan: May be required for new construction or newer businesses

The SBA 504 Application Process

Timeline: 60-90 Days

SBA 504 loans take longer than conventional financing due to the three-party structure and SBA requirements. Plan for 60-90 days from application to closing.

Step 1: Find a CDC and Lender (Week 1)

• Identify a Certified Development Company (CDC) in your area
• CDC will help you find a participating bank lender
• Or work with a broker who specializes in SBA 504 loans

Step 2: Submit Application (Weeks 1-2)

Required documentation typically includes:

• Completed SBA and CDC application forms
• 3 years business tax returns
• 3 years personal tax returns (all owners 20%+)
• Year-to-date profit & loss statement
• Current balance sheet
• Personal financial statements (all owners 20%+)
• Business debt schedule
• Purchase agreement or construction plans
• Resume for all principals

Step 3: Lender Approval (Weeks 3-4)

• Bank reviews and approves their 50% portion
• Bank issues commitment letter
• Appraisal ordered
• Environmental Phase I ordered

Step 4: CDC Review and Packaging (Weeks 4-6)

• CDC reviews full application
• CDC prepares SBA authorization package
• Economic development analysis completed
• Job creation/retention calculations verified

Step 5: SBA Approval (Weeks 6-8)

• SBA reviews and approves the loan
• SBA issues authorization
• Final conditions specified

Step 6: Closing (Weeks 8-12)

• Title work and legal review completed
• Final conditions satisfied
• Three closings: Bank loan, CDC loan, and property transfer
• Funds disbursed

Costs and Fees

CDC Processing Fee

• Typical range: 2.5-3% of SBA 504 loan amount
• For $400,000 SBA portion: $10,000-$12,000
• Can be financed: Usually included in the SBA 504 loan

Lender Fees

• Origination fees on the bank portion (0-1% typical)
• Application and processing fees
• Varies by lender

Third-Party Costs

• Appraisal: $2,500-$10,000+
• Environmental Phase I: $1,500-$5,000
• Title insurance: Varies by property value
• Survey: $500-$3,000
• Legal fees: $2,000-$10,000

Ongoing Fees

• SBA guarantee fee: Approximately 0.5% annually on SBA portion
• CDC servicing fee: Small annual fee for loan servicing

Total Closing Costs

Expect total closing costs of 3-5% of the total project cost. Many of these costs can be financed into the loan.

SBA 504 vs. Conventional Commercial Mortgage

Common Mistakes and How to Avoid Them

1. Not Planning for the Timeline

SBA 504 loans take 60-90 days. If you need to close in 30 days, this isn't the right option. Start the process early, ideally before you've even found the perfect property.

2. Underestimating Total Project Costs

Include all costs in your loan request: purchase price, closing costs, initial renovations, and working capital reserves. It's much harder to get additional funding after closing.

3. Misunderstanding the 51% Rule

The 51% occupancy rule is based on square footage, not rental income. If you plan to lease out more than 49% of the space, you won't qualify.

4. Poor Documentation

Incomplete or poorly organized financial documentation delays the process. Work with your accountant to prepare clean, complete financials before applying.

5. Choosing the Wrong Property

Special-purpose properties (car washes, gas stations, churches) may require 15% down and face more scrutiny. General-purpose properties are easier to finance.

Is an SBA 504 Loan Right for You?

SBA 504 is Ideal If:

• You're buying owner-occupied commercial real estate
• You want to minimize down payment (10% vs 20-30%)
• You want long-term fixed-rate financing
• You want the lowest possible rates
• You have 60-90 days to close
• You'll occupy 51%+ of the property
• You have good credit (680+) and strong cash flow

Consider Alternatives If:

• You need to close in less than 45 days
• You're buying investment property (you won't occupy 51%)
• Your credit is below 650
• You're refinancing existing debt without expansion
• The property is outside the U.S.

Frequently Asked Questions

Can I use an SBA 504 loan to refinance existing commercial real estate?

Generally no, but there are exceptions. You can refinance with an SBA 504 if you're also financing expansion, renovation, or equipment purchases as part of the transaction. Pure refinances are not eligible.

What if I want to lease out part of my building?

That's fine, as long as you occupy at least 51% of the building for your business. The rental income can actually help your debt service coverage ratio and improve your qualification.

Can I get an SBA 504 loan for a building my business currently rents?

Yes! Buying the property you're currently leasing is a common use of SBA 504 loans. It's often called a "lease-to-purchase" and is very straightforward.

What's the prepayment penalty on SBA 504 loans?

The SBA 504 portion has a declining prepayment penalty:

• Years 1-3: Premium equal to the present value difference
• Years 4-10: Declining penalty based on remaining Treasury rate difference
• After year 10: No prepayment penalty

The bank portion terms vary; many banks don't charge prepayment penalties.

Do I need perfect credit for an SBA 504 loan?

No, but you need good credit. Most lenders want to see 680+. If your score is 650-679, you may still qualify with strong cash flow and collateral. Below 650 is very difficult.

Can I buy bare land with an SBA 504 loan?

Only if you're also using the loan to construct a building on it. You can't buy land to hold or for future development—there must be an active construction project.

The Bottom Line

SBA 504 loans offer the best terms available for purchasing commercial real estate:

For most businesses buying owner-occupied commercial real estate, the SBA 504 loan is the smartest financing choice. The low down payment and below-market rates save tens of thousands of dollars over the loan term.

Get Matched with SBA 504 Lenders

Not all lenders participate in the SBA 504 program, and not all CDCs are created equal. Finding the right partners can make the difference between a smooth process and a frustrating one.

Connect with experienced SBA 504 specialists who can guide you through the process, help you find participating lenders and CDCs, and ensure you get the best possible terms. Our service is free and connects you with professionals who close SBA 504 loans every day.

Ready to buy your building? Let us match you with SBA 504 experts who can make the process smooth and get you the best terms available.