SBA 504 Rates
The 504 loan program offers long term fixed interest rates of up to 25 years for commercial real estate, equipment or machinery.
To understand how 504 interest rates are determined, one must understand the program structure.
It consists of 2 loans:
- a first mortgage for 50% to 60% of the purchase price (or total project costs) provided by an SBA Lender
- a second mortgage for 30% to 40% of the total projects costs that is 100% guaranteed by the SBA
First mortgage rates can be fixed for 25 years for certain businesses and property types and the second mortgage rate is always fixed.
- First mortgage rates can be anywhere from approx 2.75% for well-qualified businesses to over 6% if you have credit or cash-flow issues.
- Second mortgage rates are set once a month and are generally the same for all transactions across the entire U.S.
For January 2021, 504 (second) mortgage rates are as follows:
- 25 year fixed: 2.692%
- 25 year fixed (refinance): 2.733%
20 year and 10 year loans are also available with similar rates.
Loan to Cost and Loan to Value
The SBA 504 program requires a down payment (or equity in the case of a refinance or a business expansion) of 10% to 20% depending on the type of business, type of building/commercial property, but it is possible for a business to borrow the down payment if the cash flow of the business can support the payment on the borrowed funds.
If you need a smaller down payment or don't have enough equity then you might want to consider the SBA 7a loan as it is available up to and well over 100% loan to value in many situations.
Current Rates At or Near All-Time Lows
SBA 504 rates for both the first and second mortgage are near all time lows and there are first mortgage lenders offering 25 year fixed rate loans that when combined with the low rate 25 year fixed rate second mortgage allows you to lock in to an all time low rate for a full 25 years.
504 Rates For First Mortgages
SBA 504 first mortgage interest rates have been trending lower over the past 1.5 years.
Solid borrowers financing the type building that can be used by most many types of businesses (think general office space, free standing retail, doctors offices, office with warehouses, etc.) can get 25 year fixed rate 504 first mortgages in the 3.25% - 4.5% range depending on where you are located.
Alternatively, the next best thing - a 10 year fixed with a 25 year amortization - could be available at even lower rates depending on what is going on with the Treasury markets.
Current rates for more specialty use properties (think hotels, assisted living, bowling alleys, family entertainment centers, etc.) can be anywhere from approx 3.75% to 6.0%+ depending on the lender, the quality of the borrower, the loan to value, the property type and how long the loan is fixed.
The reason for the wide range of SBA 504 loan rates is that borrowers and lenders come in all shapes and sizes as outlined below.
25 Year Fixed Rate 504 First Mortgage Lenders
A small percentage of lenders offer low 25 year fixed rate first mortgages. These loans, in combination with the low 25 year fixed second mortgage, provide almost unbeatable long term financing.
Some of these lenders require very good credit and credit scores (680 or better) and will only lend to certain types of businesses and on certain "multi-purpose" property types. The reasoning here is that if they only lend on properties that are more generic, then it will be easier to market and sell the building quickly should a borrower default. This is because multi-purpose buildings have more potential buyers since many types of businesses could operate out of them. A few examples of the types of buildings that are eligible for these extremely low rate fixed rate loans:
- owner occupied office buildings
- office condos
- office with warehouse space
- light industrial buildings
- buildings used by wholesalers and distributors
- manufacturing facilities
- retail spaces
- owner occupied medical office buildings
- dental offices
- medical offices
- R & D facilities
This is not to say that 25 year fixed rate lenders will only lend on the above property types as there are lenders who will offer 25 year fixed rate first mortgages on any SBA eligible property, but they will not usually do it without a larger down payment or enough equity to get them comfortable with the loan.
For instance, SBA self storage loans are offered by some 504 lenders at 90% loan to cost/loan to value, but there aren't many that will go to 90% on a long term fixed rate.
A Caveat: The SBA 504 Loan Program Is Only for "Owner Occupied" Business Property
Keep in mind that the SBA 504 loan program is only available for "owner occupied" business properties.
"Owner occupied" is defined as an existing building that is at least 51% occupied by a business owned by the building owner or 60% in the case of new/ground up construction. The remaining square footage can be occupied by tenants and in some cases with some lenders you can count a high percentage of the income from the tenants (usually 75%) as long as your business has strong enough cash flow (net operating income) to cover the new mortgage debt on a "1 to 1" basis.
"1 to 1" means that if your new mortgage payments including property taxes and insurance are $100,000 for the year than your Net Operating Income or "NOI" (which is defined as your "net profit after addbacks") must be at least $100,000 as well.
"Net profit after addbacks" is less complicated than it sounds, but essentially means your bottom line net profit during your most recent calendar year/tax return plus "addbacks" for rent (assuming the new location will replace the one you are renting), interest, depreciation, amortization and any "one time expenses" that aren't likely to recur anytime soon.
The above is a bit of an oversimplification, because there are other factors used in underwriting these loans, but the point is that it is sometimes possible to have tenants help cover the mortgage, especially given the current low SBA 504 loan rates.
Loans For Single Purpose Properties
504 first mortgage rates for properties like hotels, assisted living facilities, self storage facilities, gas station/convenience stores, bowling alleys, family entertainment centers, etc. will vary based on the quality of loan, but long term fixed rates are possible.
Rates Also Vary Depending on the Type of 504 Lender
Conservative 504 Lenders
There are numerous different varieties of 504 lenders with different business models and different appetites for certain types of loans. Some lenders - both big and small - will only do "relatively easy" loans. They keep these loans on their balance sheet and they typically have a lot of freedom with what rate they offer depending on their source of funds.
Other lenders will have very restrictive guidelines for the types of properties they will lend on. For instance, many lenders do not like to lend to the hotel industry. Some do not like anything to do with assisted living. Others will not consider gas stations or convenience stores or car washes.
Every lender is different, but if your loan request fits a lenders "credit box" (and sometimes this just means having a low loan to value) then you can end up getting an outstanding rate.
Again, 504 lenders come in all shapes and sizes. Sometimes a big bank is the right fit, sometimes they aren't. Typically, the bigger the bank, the more conservative the lender (and the underwriting) and the lower the loan to value.
Small, mid-size and regional banks also have their place in the market and some offer outstanding terms.
There are also some niche lenders and smaller lenders who can be very aggressive with their rate offerings or offer much more flexible credit and underwriting guidelines.
Secondary Market Lenders
Secondary market lenders might sell the first mortgage but keep the servicing. Selling the loan enables them to make a profit up front giving them more flexibility with what rate they can offer.
The secondary market for 504 first mortgages can really vary depending on economic conditions, so the amount of profit and quality of the loans can vary and the market for "multi-purpose" properties is certainly larger than the market for single purpose properties like those mentioned above.
Private lenders offer the highest rates, but the most flexibility. They typically get their money from investors or private funds and their rates are generally a little higher because they are typically doing harder loans and demand a higher return to account for potential borrower defaults. These are lenders that will do special property types, unusual transactions, poor credit, etc.
Rates for Borrowers with Low Credit Scores or Poor Cash Flow
There are numerous lenders who only close loans for "difficult" transactions - typically for borrowers who have a more non-conforming scenario. i.e. borrowers who perhaps do not have perfect credit, or consistent, stable income for their business, or maybe they have an unusual property. Often times these borrowers will gets loans from a "niche" lender who will charge them a higher rate.
It is worth noting that if you fall into this category and you end up with a first mortgage that is less than ideal that this is not a permanent situation as all borrowers get the same second mortgage and the SBA 504 loan rates for second mortgages have always been a below market long term fixed rate, so you end up with a "blended rate" that is usually quite good regardless of your circumstances.
For example, let's say you are buying a building for $1 million with 10% down and have low credit scores and some uneven earnings over the last few years. Odds are you don't qualify with a low rate lender, so let's say you end up with a rate at 6.5% that is fixed for 3 years with a 25 or 30 year amortization and a 3 year prepayment penalty. This is not a great rate in the current low rate environment, however because this is a 504 loan you get the same low 25 year fixed rate as a borrower with excellent credit, cash flow, etc.
So, if we do the math using the SBA 504 loan rate (April 2020) of 3.029% fixed for 25 years for 40% of the total project costs and the above mentioned 6.5% rate for the other 50% (90% total), then you end up with a blended rate of 4.956% for the first 3 years, which is actually not that bad a rate in the current market. Sure, it is a little high, but it gives you a chance to right the ship and refinance at the end of 3 years when the prepayment penalty on the first mortgage expires.
Exit Strategy: Refinance the First Mortgage
With any luck, in a few years time you would have stronger cash flow/NOI and you would refinance your higher rate first mortgage and simply re-subordinate your low rate 504 second mortgage as that loan is typically fixed for the 25 years. Obviously, this is hypothetical, and a lot can happen in 3 years to derail well-laid plans, but this type of sceanario plays out quite frequently with 504 loans.
New Construction Rates
The 504 program is frequently used for new construction projects for all types of businesses.
When it comes to construction, it is more complicated than the 7a (primarily because the 7a is just one loan/one underwriter), but it has it's advantages:
- The 504 allows for much larger loans than the 7a as projects upwards of $20 million can be financed
- The low rate second mortgage is always a below market rate
- The low rate second mortgage is always fixed
- A 30 year amortization (sometimes longer) is readily available on the first mortgage with some lenders
- The loan fees are a little bit cheaper
- Typically no additional collateral
504 Unique Construction Structure
When it comes to construction lending, the 504 loan structure is a little unusual in that most lenders will give you a temporary construction loan at closing where you will pay a higher rate (typically a margin over the Prime Rate) during construction.
You would pay interest only on a monthly basis based on how much you have borrowed and ultimately that loan is replaced by the permanent first mortgage and the permanent 504 second mortgage once you recieve your Certificate of Occupancy from the local municipality. Although, technically the permanent 504 second mortgage does not fund until approximately 45 to 60 days after CO, because those loans are funded once a month through a debenture (bond) sale and it takes time for that transaction to settle.
It sounds complicated, but good 504 lenders know how to make the process go smoothly and usually it is worth it for the lower rates and longer term fixed rates.
30 and 33 Year Amortization for 504 Construction Loans
The 504 program is more rigid than the 7a and many SBA lenders prefer to offer SBA 7a loans as they are typically way more profitable and offer a higher "SBA Guarantee," but there is some variety with what lenders can offer with the 504.
Case in point, some lenders will offer a 30 to 33 year amortization of the SBA 504 first mortgage for building purchases or building construction projects to give a borrower a longer interest only period on the front end of the loan and/or to make the construction period as well as the first few years more affordable.
SBA 504 Refinance Rates
The 504 program is used almost exclusively for commercial real estate and buildings, although it is possible to finance "long life" equipment and, in the case of a refinance, other business debt and some working capital, but there are 2 different types of refinances under the program - one for a business expansion that is not used very often and another that can be very useful, especially because it allows a 90% loan to value refinance with some cash out. Furthermore, it allows this even for a single use/special use property like a hotel or assitsted living facility.
This 90% cash out refinance allows small businesses who would normally not be eligible to take advantage of the excellent SBA 504 loan rates.
504 first mortgages are typically amortized over 25 years but a 30 year amortization is possible with some lenders. Rates depend on loan size, term, property type and strength of transaction.
The 5 year fixed rate with a 25 year amortization is a popular product. After the initial 5 years the rate could adjust as frequently as monthly or as infrequently as every 5 years depending on the lender.
SBA 504 Equipment Loans are typically 10 years and can be anywhere from .25 to 1.5% lower in rate than commercial real estate transactions.
504 Loan Payment Example
Here is an example of loan amounts and payments for a $1.5 million transaction with 10% down and a 1st mortgage rate of 4.0% and a 25 year amortization:
- Project Cost: $1,500,000
- Down Payment/Equity Injection: $150,000
- First Mortgage: $750,000
- Second Mortgage: $600,000
The payments would be as follows:
- First Mortgage: $3945.63
- Second Mortgage: $2658.05
- Total of Payments: $6603.68
More SBA 504 Loan info: 504 Loans
Please contact us at 1-800-414-5285 to find out how the SBA 504 or 7a could help your business.
* This is the effective rate. It includes fees to SBA, CDC and central servicing agent. Some CDC's charge higher loan rates in certain parts of the U.S. (Rates change monthly).