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Business Owners

Buying Commercial Real Estate? Consider SBA CDC/504 Loans


Is your business thinking about buying real estate for expansion? You should consider SBA CDC/504 loans. These loans are typically used to finance commercial real estate projects ranging from $2 million to $5.5 million. In 2014, 58% of projects financed with SBA CDC/504 loans were in this range.

There are multiple advantages of SBA CDC/504 loans:

  • The company can put down as little as 10% of the project‚Äôs value.
  • These loans carry below market interest rates.
  • Up to 40% of the loan can be financed at a fixed rate for 20 years.
  • The loan can be used for the purchase of property and remodeling and for the purchase of equipment which will be used.

Who can qualify for SBA CDC/504 loans:

  • The business buying the real estate must use¬†51% of the space.
  • The project must create¬†new jobs or prevent the loss of jobs. The loan is limited to a maximum of $65,000 per job created / retained.
  • The business has¬†a maximum of $5 million of profits per year.

How do SBA CDC/504 loans work?

There are three parties involved with a real SBA CDC/504 Loan: a bank, a CDC, and the SBA.  It starts with finding a bank that is willing to offer these types of loans. Banks generally have relationships with CDC’s, which are non-profit organizations that do the financial, legal, and technical due diligence for these loans on behalf of the SBA. If the project passes the scrutiny of the CDC, the company will receive a letter that basically says that the SBA will finance up to 40% of the project, provided a bank offers 50% of the financing.

  • Step 1: Borrower finds a bank.
  • Step 2: Bank and borrower work with CDC to get approval.
  • Step 3: Borrower purchases the property, typically with borrower making a 10% down payment and the bank providing 90% of the financing.
  • Step 4: All work (remodeling, repairs, installation of equipment, etc.) is completed.
  • Step 5: Building receives certificate of occupancy and SBA takes over 40% of the financing.

The two loans that make up an SBA CDC/504 Loan:

  1. The bank loan: This loan is senior to the SBA loan. The combination of being a senior loan and the loan being collateralized by real estate makes the loan extremely safe for the bank. The business would have to default and the real-estate lose half its value for the bank not to be able to recoup its investment. As a result of the low risk nature of these loans, banks generally offer very attractive terms on these loans. A term of 7 to 15 years with a mid-single digit interest rate would not be unusual. However, the interest rates on these loans are often reset around the five year mark based on market rates.
  1. The SBA loan: This loan is a fixed rate loan which can be for a term of 10 or 20 years. The interest rate on this loan can be misleading as there are lots of fees which drive up costs. After including fees, the current cost of these loans is between 3.5%  and 4.5%.

How common are these loans?

Over the last five years, the SBA has issued between 1,700 and 2,500 of SBA CDC/504 loans during each year, with the total value of the loans ranging between $1.2 billion and $1.6 billion per year. In other words, while these loans are not rare, not every bank has experience working with these loans. You may want to reach out to local CDCs to ask with which banks they frequently work with. (They cannot recommend a particular one and show favoritism, but they should provide you a list of names.) Here is a list of CDCs.

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