The SBA 504 Loan for Real Estate

Tim Milazzo
April 25, 2018

Most commercial properties are owned by an investor that then rents the space out to businesses. A business however, can choose to build or purchase their own building to avoid paying rent. Not only is this strategy valid, in the US it’s actually encouraged by the Small Business Administration (SBA), who makes it easier to own a building as a small business through a couple of loan programs available nationally. They are the SBA 7(a) and the SBA 504.

We specifically explored the 504 program with an industry expert, and StackSource lending partner, Douglas Tuttle of Zions Bank.

Douglas Tuttle on the SBA 504 Loan

Doug, why does the government have the SBA 504 program?

The Small Business Administration’s goal with the 504 program is to support small businesses to grow and create more jobs. One of the key components to being able to do that is through financing the business.

What are the key components to the loan program?

The 504 loan program provides small businesses with long-term fixed rate financing up to 90% (with CDC partnership) providing longer loan amortizations and no balloon payments. The loan proceeds for a 504 loan may be used for the purchase of an existing building and land, construction of new facilities, some renovations and the refinancing of debt in connection with an expansion of the business through new or renovated facilities.

How does the 504 differ from the SBA 7(a) program?

Both the SBA 504 and the SBA 7(a) programs can help small business owners to grow or maintain their business. There are several key differences between the programs:

The SBA 504 program is better suited for long term business debt and has the advantage of having fewer fees than other SBA products and larger loan amounts with a total equity injection of 10–20%. They allow for a long term fixed rates and a 20–25 year fixed pricing on the CDC portion of the loan, at typically lower than market rates. The SBA 504 program is used for the purchase of land and existing buildings, or improvements to of land and existing buildings. It may also be also used for ground-up construction and the purchase of heavy machinery/equipment to operate the business.

On the other hand, the SBA 7(a) program allows access to working capital, funds to purchase furniture and fixtures or to make leasehold improvements, and/or acquire an existing business. It is more focused on company growth and short-term debt. These include start-up costs, purchasing new land, repairing existing capital and purchasing equipment, machinery, furniture, fixtures, supplies, or material.

You mentioned the SBA 504 loan can be used for construction?

Yes! The SBA 504 program is able to finance up to 90% of the total project costs, including the purchase of land for ground-up construction, or the purchase of an existing building needing renovations. All costs associated with the construction/renovations can be included within the loan structure, including contingencies and soft costs.

What types of properties qualify for 504?

To qualify for a SBA 504 loan the building must be 51% owner-occupied (60% for new construction). To qualify for 10% down, the property must be multi-use and include industrial, retail, offices, office/warehouses, medical offices, and preschools (other properties may also be considered).

Wait, so are you (the banker) the lender, or is the government the lender?

Both! The bank is in a 1st lien position generally at 50% with the SBA in a 2nd position generally between 30%-40%.

So why would I choose a 504 loan over a conventional bank note?

The SBA 504 loan program has many advantages over a conventional loan. SBA 504 loan rates are usually below market rates and can be fixed for the entire term of the amortization, typically 20–25 years. Whereas a conventional loan is usually only fixed for a certain length of time, after which the rate will be reset or the loan will need to be refinanced.

Conventional loans can require 20–35% down to offset the risk to the lender, whereas a SBA 504 loan can have a down payment as low as 10%, which allows for more working capital.

SBA 504 loans also have no balloons or calls and they also allow borrowers to finance closing costs such as origination fees, title, appraisals, environmental fees, etc.

Analyzing your 504 loan scenario

So, does your company qualify for an SBA 504 loan for real estate purchase or construction? Is it a better option than an SBA 7(a) in your scenario?

That’s where StackSource steps in. We streamline the process of submitting the right information, to the right lenders for your loan scenario and let you see an “apples to apples” comparison between loan programs from multiple lenders, like Zions Bank and their SBA 504 lending team.

Head over to StackSource to submit a loan request, or simply to chat further with one of our expert Capital Advisors.

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