What it is
The SBA 504 program helps small businesses buy, build or improve the real estate they operate from. It's a partnership between a private lender, usually a bank, and a Certified Development Company (CDC), a nonprofit approved by the U.S. Small Business Administration. The SBA guarantees the CDC's portion.
The key word is owner-occupied. SBA 504 is for operating businesses that use the property, not for investors buying rental property.
How the structure commonly works
A typical 504 project is financed in three pieces:
| Piece | Commonly | Lien position |
|---|---|---|
| Bank loan | About 50% of project cost | First |
| CDC / SBA loan | Up to about 40% of project cost | Second |
| Borrower equity | About 10% of project cost | n/a |
Required equity is often higher, commonly 15%, for a new business or a special-purpose property, and higher again when both apply. The SBA portion also has dollar limits that vary by project type. Check the current SBA program rules for any specific deal.
The CDC portion is typically a long-term fixed-rate loan, with terms commonly offered at 10, 20 or 25 years. The bank sets the terms of its own first loan.
Who qualifies
- For-profit businesses that meet SBA size standards.
- Owner occupancy. For an existing building, the business generally needs to occupy at least 51% of the space. For new construction, the requirement is higher. The rest can be leased out.
- Eligible uses. Buying land or buildings, new construction, renovating existing facilities, and certain long-life equipment. Refinancing is allowed under specific conditions.
- Program goals. Projects are expected to meet SBA job creation or public policy goals.
Passive investment real estate, such as an apartment building or a multi-tenant strip center the business doesn't occupy, generally does not qualify.
Why borrowers use it
The main draw is low equity: around 10% down on a property a conventional lender might finance at 65% to 75% LTV. The CDC portion's long fixed rate is also attractive for businesses planning to stay put.
What lenders look at
Because the business is the tenant, lenders underwrite the business as much as the building: business financials, tax returns, cash flow coverage of the combined debt, and the owners' personal financial strength. Personal guarantees are standard.
Common mistakes
- Pitching investment property. If the business doesn't occupy enough of the building, it's not a 504 deal.
- Ignoring timing. Two lenders and an SBA approval mean more steps than a single bank loan.
- Forgetting the second lien's costs. The CDC portion carries its own fees and prepayment terms.
In the package
Present the business, its occupancy plan and its financials alongside the property. The capital stack should show all three pieces clearly.