SBA 504 Loans: Affordable Commercial Real-Estate Loans

If your small business is interested in expanding, you’ll want to look into the SBA 504 Loan Program, which is designed to help create jobs through long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. 504 loans are made available through Certified Development Companies (CDCs), which are community-based partners.

The typical 504 CDC loan is structured as follows:

SBA provides 40% of total project costs
Third party lender covers up to 50%
Borrower contributes 10-20%

Loans may be used to:

Purchase existing buildings;
Purchase land and land improvements;
Construct new facilities or modernizing, renovating or converting existing facilities;
Purchase long-term machinery; or
Refinance debt in connection with an expansion of the business through new or renovated facilities or equipment.

Any real estate purchased must be 51% owner-occupied. Also note that certain business types (speculative businesses, lending businesses, religious or nonprofit organizations) are ineligible for this loan (see complete list).

These loans may be made for 10, 20 or 25 -year terms with a fixed interest rate.

For the bank portion, the bank gets first lien on the collateral. That means that in the event of a default, the bank has the first right to the collateral. So in case of default, the bank would still break even on the loan as long as the property value doesn’t decrease by more than 50%. Since they are low-risk, banks often want to make these types of loans.

Another big benefit of the 504 loan program is the low downpayment required. In most cases, it’s just 10% of the appraisal value. If you’re a startup business or a specialty business (like a gas station or some medical clinics), the downpayment will go up 5% for each — so if you’re both, you would be looking at a 20% downpayment.

504 Loan Costs

Interest Rates

The 504 loan program offers interest rates that are really low and below market for small businesses. Interest rates on 504 Loans are correlated with the current market rate for 5-year and 10-year U.S. Treasury issues. There are no balloon payments.

Finding a 504 Loan

You can check with local banks to find out whether these loans are available. You can also contact your local Small Business Development Center (SBDC) or SCORE office, which can help you locate local resources.

To be eligible, you have to meet the following requirements:

Purchase must be 51% owner-occupied and used as collateral
Loans from $300K up to $5M for CDC portion (40%)
For-profit organization
Net income below $5M and net worth not more than $15M (prove by providing 3 years of tax returns and 2 years of operating history)
Business must be profitable and have enough operating cash flow to cover monthly payments
Have good character and management experience

Things to Be Aware Of

Certain activities cannot be financed with SBA 504 loans, such as: working capital and inventory; consolidating, repaying, or refinancing existing loans; or speculation or investment in rental real estate.

Also, be aware that a personal guarantee is required, but in most cases the collateral should cover you. Unlike traditional bank loans, you aren’t required to pledge your personal assets (like your home). Also note that there’s a 10-year prepayment penalty, which declines each year.

Allowable Fees That a 504 Borrower May Be Charged

Effective April 1, 2019

CDC Fees

Fee Name	Amount	Details
Processing fee (Packaging fee)	Up to 1.5% of the Net Debenture	Paid by borrower to CDC
Closing fee	Maximum of $2,500 may be financed from the debenture proceeds.	CDC may charge a reasonable closing fee –sufficient to reimburse it for the expenses of its in-house or outside legal counsel, and other miscellaneous closing costs. Paid by borrower.
Servicing fee (monthly)	Minimum of 0.625%/year. Maximum of 2%/year Note: Maximum 1.5% for rural areas and 1% for everywhere else without prior SBA approval.	Based on the unpaid principal balance of the loan – paid by borrower to CDC
Late fees	Loan payments received after the 15th of each month may be subject to a late payment fee of 5% of the late payment or $100, whichever is greater.	Collected by CSA (Central Servicing Agent) on behalf of the CDC.
Assumption fee	Not to exceed 1% of the outstanding principal balance of the loan being assumed.	Upon SBA’s written approval– paid by Borrower to CDC.

CSA Fees

Fee Name	Details
Initiation fee	In accordance with the contract between the CSA and SBA.
On-going fee	In accordance with the contract between the CSA and SBA.

Other Agent Fees

Fee Name	Amount	Who Pays
Underwriter’s fee for 20 and 25-year Debenture	Upfront fee of 0.4%	Paid by borrower to underwriter
Underwriter’s fee for 10 year Debenture	Upfront fee of 0.375%	Paid by borrower to underwriter.

SBA Fees

Fee Name	Amount	Details
SBA Guaranty Fee – (up-frontfee)	SBA charges a 0.5 percent guaranty fee on the Debenture	One-time fee
Annual Fee — (Ongoing fee)	SBA charges a fee of not more than 0.9375 percent annually	Fee is adjusted annually by cohort year (based on date the individual loan was approved) and is charged on the unpaid principal balance of the loan.
Participation fee — Senior Lienholder	0.50% of the senior mortgage loan — One -time fee	A one-time fee from the third party lender if in a senior lien position to SBA in the project. The fee may be paid by the third party lender, CDC or borrower.
CDC Fee	On-going fee to SBA of 0.125% of the outstanding principal balance of the debenture — Annual Fee	The fee must be paid from the servicing fees collected by the CDC and cannot be paid from any additional fees imposed on the borrowers (loans approved by SBA after 9/30/1996).
Debt Refinancing Without Expansion Supplemental fee	Set each FY by SBA notice	Paid by borrower.
Funding fee	0.25% of the net Debenture proceeds	Charged to cover the costs incurred by the trustee, fiscal agent and transfer agent.

Fees For Other Services

The CDC may be compensated for other services provided to a small business such as packaging and servicing a 7(a) loan or providing management assistance. Such fees are to be charged pursuant to a formal agreement between the CDC and the 7(a) Lender setting forth the roles and relationships of the parties as well as terms and conditions and must be in compliance with SBA regulations.

This article was originally written on June 5, 2014 and updated on September 13, 2019.

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