SBA 504 Commercial Real Estate Loans
SBA 504 loans play a pivotal role in fostering business growth and job creation, providing
small businesses with a cost-effective means of securing financing. This program grants small
businesses access to extended, fixed-rate financing, enabling them to embark on expansion or
modernization endeavors.
Certified Development Companies (CDCs), non-profit organizations collaborating with the SBA and participating lenders, administer the financing for small businesses under the 504 loan program. These CDCs operate under SBA regulation and certification, ensuring a structured and reliable approach to facilitating business development.
SBA 504 Loan Terms
Eligible Properties: | Warehouse/Industrial, Mixed Use, Retail, Medical/Healthcare, Self Storage, Hotel/Motel, Restaurants, Daycare facilities, Assisted Living, |
Loan amount range: | Up to $5 million or $5.5 for manufactures and energy-efficient projects |
Interest Rate: | Pegged to an increment above the current market rate for 5-year and 10-year US treasury issues. See current LIBOR Rates |
Loan Term: | 10 or 20 years |
Amortization: | 10 to 30 years |
Maximum LTV: | Up to 90% LTV. Hospitality is limited to 85% |
Minimum DSCR | 1.20x |
Minimum Debt Yield: | 7-8% |
Recourse | Full recourse. |
Prepayment: | The prepayment penalty declines during the first 10 years to 0%. The loan is assumable, and the prepayment penalty does not apply. |
Collateral: | The project assets that are being financed are used as collateral. The principal owners are required to produce personal guarantees. |
SBA 504 Loans Pros:
- Fixed-Rate Loan: Provides small businesses with the benefit of predictable mortgage payments throughout the loan duration.
- Low Down Payment Requirements: Typically necessitates only 10% of the total project cost, encompassing renovations and soft costs, allowing small businesses to retain cash for working capital.
- Long Terms: Offers extended repayment periods of 10 or 20 years.
- Low-Interest Rates: Maintains favorable interest rates even when factoring in fees and closing costs.
- Costs Inclusion: Allows for the integration of soft costs such as legal fees, appraisals, and environmental studies into the loan.
SBA 504 Loans Cons:
- Limited Availability: The loan program is exclusively applicable to owner-occupied properties and is restricted to small businesses.
- Stringent Requirements: Under SBA 504 guidelines, businesses must create or retain one job for every $65,000 received through the program.
- Extended Application Process: The application and underwriting processes are lengthier compared to conventional loans due to the involvement of three parties. Agreement on terms is required from both the Certified Development Company (CDC) and the lender. SBA underwriting, centralized through a single office, may lead to extended wait times. Thorough scrutiny by underwriters may result in inquiries regarding any deviations from the norm.