SBA 504 Loan Rates

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:

1. a first mortgage for 50% to 60% of the purchase price (or total project costs) provided by an "SBA 504 Lender"
2. a second mortgage for 30% to 40% of the total projects costs provided by a local lender called a "certified development company" 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.

Some lenders will even offer first mortgages that are amortized over 30 and up to 33 years incorporating an interest-only period. (This is usually done for construction loans).

SBA 504 loan terms can be a bit nuanced and the actual terms depend on various aspects of the transaction - including the type of asset or property being financed.

• SBA 504 mortgage rates for most first mortgages for transactions with most lenders are typically within a 1/2 to 1% of most bank's conventional rates.As an example, if a bank or lender would quote you 7% for a traditional, conventional loan with 20% to 30% down, then an SBA lender would typically charge you 7.5% to 8% for the same loan but with as little as 10% down.
• SBA 504 mortgage rates for the second mortgage are the same from lender to lender and state to state.They are set once a month and they are typically a little lower than what a bank's conventional rate would be.Using the same example above, where the bank's conventional rate is 7%, the SBA second mortgage rate would be approx. 6.5% and again, is generally the same for all transactions across the entire U.S.

  Refinance rates are slightly higher on the second mortgage and 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 and the transaction is otherwise solid in the eyes of a lender.

100% Financing

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.

SBA Fixed Rate Loans

Many SBA 504 lenders offer fixed rates of at least 5 years (with a 25 year amortization) and some lenders offer 25 year fixed rate first mortgage loans that when combined with the 25 year fixed rate second mortgage allow you to lock in very favorable rates for the long term.

SBA 7a Refinance With 504

As a result of changes to SBA guidelines, you can now refinance an SBA 7a loan with a fixed rate 504.  This could be very worthwhile if you have a 7a that is pegged to or floating with the Prime Rate.  You can get more info here: SBA 504 Refinance

504 Rates For First Mortgages

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 very close to conventional rates.

Current rates for more specialty use properties like hotels, assisted living, bowling alleys, family entertainment centers, etc. can be a little higher (or a lot higher) 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 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 when SBA 504 loan rates are lower.

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.

Types of SBA 504 Lenders

Rates 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 needed for approval.

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 availability of this type of first mortgage will vary.

Private Lenders

Private lenders offer the highest SBA 504 loan 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 lenders typically have no issues with special-use 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.

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.

How to Get Better Terms By Refinancing Just the First Mortgage

You can also get better terms for a new first mortgage after a few years once things look better for you and your business.

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 first mortgage lender, and let's say that at the time a "good rate" is 5.5%, but you end up with a rate at 7.5% that is fixed for 3 years with a 25 or 30 year amortization and a 3 year prepayment penalty.

Remember, all borrowers get the same low 25 year fixed rate regardless of credit, cash flow, etc.

If we do the math using an SBA 504 loan rate of 5.107% for the second mortgage, which is fixed for 25 years for 40% of the total project costs and the above mentioned 7.5% rate for the other 50% (90% total), then you end up with a blended rate of 6.43% for the first 3 years.

Assuming first mortgages drift a little lower over a few years post-closing, and assuming things go well for your buisines, you will have the chance to improve your terms.

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.

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.

SBA New Construction Rates

The 504 program is frequently used for new construction projects for all types of businesses.

It is heavily utilized by the hotel industry for ground up hotel construction financing. And especially in the self storage industry for self storage financing.

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:

1. The 504 allows for much larger loans than the 7a as projects upwards of $20 million can be financed
2. The low rate second mortgage is always a slightly below market rate
3. The low rate second mortgage is always fixed
4. A 30 year amortization (sometimes longer) is readily available on the first mortgage with some lenders
5. The loan fees can be a little bit cheaper
6. Typically no additional collateral is needed

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.