SBA 504 Loans: "Owner Occupied" Commercial Mortgage Loans

504 Loan

Of the 2 SBA commercial real estate programs - the 504 and the 7a - the 504 loan is the less popular of the two, but not because it is isn't useful.

Both programs have proven to be very valuable to small and mid-sized businesses for the purchase of owner-user or "owner occupied" commercial real estate for borrowers looking to conserve their cash.

What Is A 504 Loan?

The 504 (aka CDC 504 loan) is a small business mortgage loan program for "owner occupied" business real estate with a 2 loan structure that includes a first mortgage that can be fixed or adjustable and a 20 or 25 year fixed rate 2nd mortgage.

The first mortgage is a traditional/conventional bank loan without an SBA guaranty but the 2nd mortgage is 100% guaranteed by the SBA and this is what makes the program worth doing for lenders, because it simultaneously substantially reduces the risk for the lender while allowing the borrower to put less down with the possibility of getting a fully fixed first and second mortgage for 25 years.

The minimum down payment is 10% for a multi-use/multi-purpose property (a property that could be used by almost any type of business), while the the down payment for single use (or special use) properties is 15% or as much as 20% in the case of a single use property that is a true startup or first acquisition - for example, a borrower buying or building their first hotel.

Also, most lenders will not offer a 25 year fixed rate first mortgage but there are those that will, but they are selective about the type of property as they prefer multi-use/multi-purpose properties.

Borrowing the Down Payment

Typically a borrower must come in with 10% down from either their own cash or the cash on their buisness's balance sheet, but there are some lenders that allow the down payment to be borrowed as long as your business can afford the payments on the borrowed debt.

By comparison, the 7a program is just one loan and it can also be used for real estate.  There are advantages and disadvantages with it, but in some cases you can get 100% financing (or higher) and it is also sometimes available as a 25 year fixed rate.

Complete info re: the 7a:  SBA 7a loan requirements.

The 504 25 Year Fixed Rate Option For Multi-Use Buildings

As mentioned above, a low 25 year fixed rate 504 first mortgage loan is available on a nationwide basis for owner occupied "multi-use" properties. When combined with the below market 504 second mortgage, you can get true fixed financing that will never adjust or balloon.

The loan can be used for the purchase, refinance or construction* of a building and it can also be used to refinance an existing 504 first mortgage, so if you used the 504 program to finance a building in the past and you have a higher than market rate, a variable rate or a balloon coming due, you can refinance just the first mortgage into a new 25 year fixed rate and "re-subordinate" your existing 504 2nd mortgage.

For more information on the refinance program which includes cash out up to 90% of the property value click here.

Floating Rate and Other Options

Many lenders offer the 504 first mortgage as a floating rate or with a fixed rate of 5, 7 and sometimes 10 years. You can typically expect this type of structure if your property does not fall into one of the categories below.

SBA Commercial Real Estate Loan Requirements

Examples of Eligible Property Types for 25 Year Fixed Rate:

  • offices
  • warehouses
  • light industrial buildings
  • retail buildings
  • manufacturing facilities
  • distribution facilities
  • medical buildings
  • dental office buildings
  • research and development facilities

Please note:

  • In general, there is no minimum across the board credit score to get a 504 small business mortgage loan, but lenders expect "good to very good" recent credit and good explanations for any past negative info on credit report. Some lenders will have tougher requirements than others and generally the lenders offering better terms will scrutinize your credit more than those offering higher rates and some lenders will allow a previous bankcruptcy and some won't.
  • multi-tenant properties are acceptable as long as the owner-occupant business occupies at least 51% of the space (60% for new construction)
  • in some cases (and with some lenders), the majority of tenant income can be considered for underwriting
  • Buildings in the $20+ million dollar range are financeable with 15% to 20% down.

More Info on the 25 Year Fixed:

This program is only available for multi-use buildings and it can be difficult to do in rural areas or areas with a population of less than 50,000. It is also available as a floating rate or a 3, 5 or 10 year fixed with a 25 year amortization. This fixed rate is not available for special use properties like hotels, self storage, gas stations, convenience stores, restaurants, care facilities, car dealers, schools, etc.

The majority of 504 first mortgage loans are only fixed for a period of time before adjusting - typically 5 years - so this is a excellent option to lock in your mortgage costs for the long term while rates are historic lows.

*for projects involving ground up or extensive construction or renovations, you may not be able to lock permanent loan until close to completion of construction

Loans For Single Use Buildings

504 loans are also widely used for single-use or special purpose buildings (hotels, mini-storage, gas stations, etc). The difference is that It is difficult to get a 25 year fixed rate for these types of properties, but they are very definitely used and are especially useful for high leverage/lower down payment situations.

Higher Loan Amounts, Larger Businesses & Refinancing Possible With the 504 Loan

$20 million+ transactions are now possible via the 504 small business real estate loan program as a result of changes to SBA guidelines. The new maximum 504 (second) mortgage loan is now $5 million for "regular" loans and $5.5 million for Green/Energy Efficient businesses and also for qualifying Small Manufacturers.

Energy Efficient businesses and those who produce their own renewable energy, as well as Small Manufacturerswith primary NAICS codes of 31, 32 and 33 are also eligible for larger and multiple SBA 504 loans without running out of eligibility. (see info at bottom of page for more info).

504 Refinance

Update: January 2021: The refinance program guidlines have been changed to allow for the refinance of 7a loans.  Full guidelines will be forthcoming soon.  Please contact us for additional info.

504 Refinancing is also available for businesses acquiring or building new locations or properties or renovating existing locations/properties IF they are refinancing a location or property simultaneously. The key is that the cost of the new project must be twice what is currently owed.

Recent Fixed Rate Fundings

  • We recently assisted a client with the refinance of their approximately 60,000 square foot Class A office building in Florida. The combined loan amounts were just under $8 million and it was structured as a 504 transaction. The building is approximately 51% owner occupied by the client and tenants occupy the rest. Among the benefits to the client were the following:
    • The loan was a dramatic improvement over their previous loan both in rate and term. We were able to assist them in securing a first mortgage that was fixed for the first 5 years with a 25 year amortization and the second mortgage funded at just under 4.5% on a 20 year fixed rate.
    • They were able to pull out some cash to make some improvements to building.
    • They were able to pay off their CMBS loan which had a balloon and a very inflexible lender who demanded to be paid off.
  • Ground up construction of a $15 million hotel project with 20% down. The clients were frustrated after speaking to many banks and were getting ready to go with a very expensive private money and equity solution when they found us. 
  • 10% down purchase of new building for plumbing business in Florida
  • 10% down building acquisition for law firm 
  • 10% down for psychiatrist purchasing new building
  • 15% down on a rural dog kennel and training facility in North Carolina
  • 10% down for a self storage facility purchase

504 Loan Guidelines

This program is for viable U.S. businesses that have a tangible net worth of less than $15 million and net - after tax- income of less than $5 million on average for the last 2 years. (In other words, most healthy businesses).

The business must occupy 51% of the "owner occupied" commercial property if financing an existing building and must occupy 60% of the building if it is new construction.

The SBA 504 is a commercial property loan for small and mid-sized businesses.

It can be used for:

30 year Amortization, Interest Only, Lower Rates Available

If you are looking to finance a "Multi-Purpose" building in a "Low Income" census tract then excellent long term financing is available via the 504. This program offers a 30 year amortization, a low 7 year fixed rate with a 3 year interest only period on the front end of the loan.

Please contact us for more info at 1-800-414-5285

Advantages of the 504 Loan

  • Low down payment - low equity injection of as little as 10% and in some cases the down payment may be borrowed
  • Most Closing and "soft costs" can be financed - allowing a 90% loan to cost transaction
  • Second mortgage is fixed for 20 or 25 years with a below market interest rate - no balloon or call later
  • The first mortgage is typically a 25 year term allowing for lower payments
  • Multiple options for title and ownership giving you flexibility with tax benefits
  • Maximum project costs as high as $20+ million

SBA 504 Loan Structure

The 504 is typically a 50/40/10 structure which means there are 2 loans:

  • First mortgage loan at 50% loan to cost
  • Second Mortgage loan at 40% loan to cost from a CDC - Certified Development Company and backed by the SBA

You put down 10% or possibly more depending on age and viability of business, credit and type of facility.

Maximum loan amount and project costs

504 Loans are typically used to finance projects in the $500,000 to $12 million range, but much larger projects are possible.

504 Loans are 80 to 90% "Loan to Cost

Loans are typically 80 or 90% "loan to cost."

Loan to Cost is different from "loan to value" since the 504 program allows you to "roll in" or finance most closing costs, soft costs and construction and renovation costs.

Technically, there isn't a maximum first mortgage loan amount, but the pool of available lenders shrinks considerably for first mortgage loans above $6 million.

The maximum 504 second mortgage is $5 million, but bumps up to $5.5 million if you meet one of the following conditions:

  • if you can reduce your energy needs by 10% by making your property more energy efficient during construction or renovation.
  • If you are purchasing, building, renovating or doing a purchase/renovation of a manufacturing facility.*
  • if your business produces Green or Renewable Energy. ("Producing" green energy does not mean that the production of alternative energy has to be your primary business).

As an example an $10,000,000 purchase or purchase/renovation at 90% loan to cost would look like this:

1st Mtg                 $5,000,000

SBA 504 2nd       $4,000,000

Equity                    $1,000,000

Total                      $10,000,000

As you can see, the 504 is a loan for small and mid-sized businesses because of the large possible project size.

Because of it's limited equity requirements, low rates and long term amortization, the 504 is an excellent option for a mid sized business to finance a relatively large project.

Typical Uses of the SBA 504 Loan

  • The Purchase of a Building, Land and Improvements*
  • Renovation, Remodeling, Modernization or Conversion of Existing Facilities
  • Construction of a New Building
  • The Purchase of "Build to Suit" Facilities
  • The Purchase of New (Long-Term) Machinery and Equipment with a useful life greater than 10 years

*"Land and Improvements" may also include current/existing buildings on property, street improvements, grading, parking lots, utilities and landscaping.

SBA Real Estate Loan - Additional Guidelines

Multi-use vs. single purpose

If you are looking at construction or renovation of a commercial building that would not be considered "multi-use" (able to be used by multiple businesses without much need for re-construction) then you will likely be required to put down 15% or possibly 20%.

Recourse vs. Non-recourse, Prepayment Penalty & Assumability

The first mortgage in a 504 transaction may or may not have a prepayment penalty and a personal guarantee and any prepayment penalty would be reasonable and typical for commercial financing and would phase out over time.

The second mortgage (or debenture) has a 10 year declining prepayment penalty and a personal guarantee, but it is also assumable which could be helpful when selling your property.  (FYI: SBA 7a loans are also assumable).

The personal guarantee is something that many lenders got away from during the past decade but now almost all commercial loans require it. (See bottom of page for more info).

Required Documentation

The following documentation is typically requested for prequalification:

  • Three years Business/Corporate Tax Returns and financial statements (Schedule C’s for sole proprietors)
  • Personal Financial Statement(s)
  • 3 years Individual Tax Returns for business owners with 20% or more ownership in the company
  • Interim Financial Statement - no more than 60 days old

The 504 SBA Real Estate Loan provides commercial mortgage financing for many types of businesses and facilities including:

  • Ambulatory Surgery Centers
  • Accounting Practice
  • Amusement Park
  • Assisted Living Facility
  • Attorney
  • Audiology Clinic
  • Auto Body and Auto Repair Shops
  • Boat Storage
  • Bowling Center/Alley
  • Brewery
  • Internet Service Provider/Broadband Business
  • Car Dealership
  • Car Wash
  • Chicken Egg Production
  • Chiropractors
  • Convenience Stores
  • Cold Storage Facility
  • Commercial Laundry
  • CPA's
  • Day Care Facilities and Child Care Facilities
  • Dance School
  • Doctors
  • Dentists
  • Doggy Day Care facility
  • Drug Store
  • Engineering Service
  • Equipment Rental Business
  • Executive Suites
  • Family Entertainment Center
  • Ferry Operator
  • Fishing Boat
  • Fishing Vessel
  • Fitness Center and Fitness Clubs
  • Flex Space
  • Free Standing Emergency Rooms
  • Food Distributors and Food Wholesalers
  • Funeral Home
  • Furniture Store
  • Furniture Manufacturer
  • Gas Station
  • Golf Course
  • Grocery Stores and Grocery Wholesalers
  • Gym / Health Club
  • Health Practitioners of all types
  • Heavy Equipment Manufacturer
  • Highway, Street and Bridge Construction
  • Hotels/Motels
  • HVAC Service and Installation
  • HVAC Equipment Manufacturer
  • Kennel
  • Industrial Building
  • Indoor Raceway/Go Karts
  • Landscape Business
  • Laundromat
  • Machine Shop
  • Machinists Tool and Die Maker
  • Manufacturing Facility
  • Marina
  • Marine Cargo Handling
  • Medical Facility and Medical Buildings
  • Mini-Storage Facility
  • Motor Vehicle Wholesaler
  • Movie Theatre
  • Music School
  • Occupational Therapy Clinic
  • Office Space
  • Optometrist
  • Ophthalmologist
  • Oral Surgeon
  • Outpatient Surgery Centers
  • Pet Boarding
  • Pharmacy
  • Physicians
  • Physical Therapy Clinic
  • Plumbing/Plumbers
  • Port and Harbor Operation
  • Poultry Processing
  • Poultry Product Wholesaler
  • Preschools and Schools
  • Retail
  • Restaurant
  • RV Storage
  • RV Park and Campground
  • Rural Properties - especially those that elect to use renewable energy
  • Senior Care Facility
  • Self Storage and Mini Storage Facilities
  • Shooting Range/Gun Range
  • Skilled Nursing Facility
  • Solid Waste Collection
  • Speech Therapy Clinic
  • Software Businesses
  • Soybean Processing
  • Surgery Center
  • Tax Advisory
  • Tech Companies
  • Testing Laboratory
  • Trampoline Park
  • Travel Plaza
  • Truck Stop
  • Urgent Care Centers
  • Veterinarian
  • Warehouses
  • Winery
  • Many Others

More About The Green Energy Incentive

You do not have to cover your roof with solar panels to qualify for the Green Energy Incentives - although you might consider it, since you could cut your energy bills, save money on maintenance, make less of an impact on the environment and take advantage of some extremely generous tax deductions on both the state and federal level for installing green or renewable energy in a commercial environment.

The SBA's Energy Efficient Public Policy Goal states that you can qualify for a larger loan if your business reduces it's energy consumption by a mere 10% with the use of green or alternative energy. You might be able to do something as simple as:

  • Installing a new and improved HVAC system
  • Installing better insulation or windows
  • Putting in more energy efficient lighting

Or you could do something on a larger scale to qualify by using or producing solar power, wind power, biomass, hydropower, geothermal power or ocean thermal power.

Keep in mind that businesses generating renewable energy can be, but do not have to be in the energy business, it just has to be a method of decreasing your own energy needs.

* please contact us for details or to see if your business is eligible

Working Capital

Working capital is only available via the 504 refinance program although some lenders will offer a 7a loan for working capital in tandem with a 504 small business mortgage loan - click here for more info about the 7a.

Small Manufacturers

Small business real estate loans are available via a little known feature of the 504 that allows "small manufacturers" to borrow more money under the program than other types of businesses. Specifically, if you have an NAICS code of 31, 32 or 33 and all of your production facilities are in the United States, then you can borrow as much as $5.5 million on a 504 2nd mortgage and you can do it multiple times without having your eligibility "capped."

This guideline is designed to promote manufacturing in the U.S. by small and mid-sized businesses.

For more information about the types of businesses that are considered "manufacturers" click this link to the US Census Bureau site

More info on Personal Guarantee

A little used to be that most commercial mortgage loans required a personal guarantee. It was a provision of a loan that gave a bank or lender an extra layer of protection in the event of default. As you can imagine, it was a large deterrent that prevented people from biting off more than they could chew, because if a business owner defaulted on the loan they could lose personal assets.

Prior to the Great Recession the commercial loan market was dominated by loans backed by commercial mortgage-backed securities (CMBS's) without personal guarantee requirements and all kinds of commercial loans were more or less invented - including commercial loans with no down payment and loans where you did not have to verify income or provide tax returns.

These practices eventually caught up with everyone and just like in the residential market, defaults on commercial mortgages skyrocketed. Part of the problem with all of the defaults that have occurred is that without the guarantee it was too easy for business owners to walk away from their obligation on the property.

As a result of all of the defaults, commercial lenders are back to more common sense underwriting and requiring the guarantee.

More Info

Please visit the following pages for addl info or contact us at 1-800-414-5285 for more information:

SBA 504 Purchase

SBA 504 Refinance

Small Business Construction Loans

Energy Efficient Commercial Financing

Commercial Renovation and Remodel Loan

The passage of recent legislation has also improved these programs. Here is a brief summary of the changes: Small Business Bill.