SBA real estate loans

The SBA 504 loan program provides long-term, fixed-rate financing for major assets that promote business growth and job creation. If you qualify, you can get up to $5.5 million to use for various real estate needs. If you qualify for certain energy-related real estate projects, you could receive a 504 loan for up to $5.5 million per project, for up to three projects. 

The SBA offers 504 loans through Certified Development Companies (CDCs), nonprofit mission-based lenders who contribute to the economic development of their communities. Though CDCs administer 504 loans, they don’t fund the entirety of the loans themselves. CDCs provide 40% of a 504 loan, a third-party lender like a bank or credit union provides 50%, and the borrower covers the remaining 10% as a down payment. The SBA offers a 100% guarantee on the CDC portion of the loan. 

What can you use a 504 loan for?

You can use a 504 loan to purchase existing buildings or land, buy long-term machinery and equipment, and construct new facilities. You can also use the funds to improve, renovate or modernize existing facilities, land, streets, utilities, parking lots and landscaping. 

Imagine, for example, that you own a kids play center and the land it sits on. If you want to build a new facility on the land to expand your play center, you could use a 504 loan to hire an architect and construction crew, as well as pay for construction equipment. 

You can’t use a 504 loan for working capital purposes, to purchase inventory, to invest in rental real estate or to consolidate or refinance your debt. 

Rates and terms for a 504 loan

You can get up to $5.5 million in funds with a 504 loan. The repayment term for real estate uses is 20 or 25 years, and for equipment it’s 10 years. Because you already put down 10% as the borrower, you don’t need to provide additional collateral; the project assets serve as collateral. However, if you own 20% or more of your business, you still need to sign a personal guarantee. 

Interest rates from CDCs are fixed, meaning they won’t change over the course of your loan. The SBA puts 504 loan interest rates at an increment above the current market rate for 10-year US Treasury issues. The interest totals approximately 3% of your debt. As of April 2023, the current interest rate on a 504 loan is 5.8%.

Keep in mind, though, that the interest rate on the third-party portion of the loan can be either fixed or variable, and depends on the lender. 

As for fees, here’s what you can expect with a 504 loan:

• The guaranty fee for 504 loans is up to 1.5% on the CDC’s share and 0.5% on the third-party lender share. 
• CDCs also charge a monthly servicing fee of 0.625%-1.5% on your loan’s unpaid balance.
• The ongoing guaranty fee is 0.9375% of the principal outstanding. 
• The prepayment penalty starts at 3% of the loan’s value in the first year, then declines each year until it reaches 0% in year 11 (halfway through a 20-year term for real estate purchases). 

To work out the monthly repayments of your loan, use our SBA loan calculator here.

How do you qualify for a 504 loan? 

To qualify for a 504 loan, your business must: 

• operate as a for-profit company in the United States or its possessions
• have a tangible net worth of less than $15 million
• have an average net income of less than $5 million after federal income taxes for the two years preceding your application. 

You also have to fall within the SBA’s small business size guidelines, show a detailed business plan, prove that you have relevant management expertise, and be able to demonstrate good character and an ability to repay the loan. Plus, you have to abide by specific 504 loan guidelines:

• For existing real estate projects, your building must be at least 51% owner occupied. 
• For new real estate projects, your building must be 60% or more owner occupied. 
• Your real estate projects must meet either the SBA’s job creation and retention requirement or at least one community development, public policy, or energy reduction goal. For example, the job creation requirement says that the business must create or retain one job for every $65,000 the SBA gives. 

How to apply for a 504 loan

Take the following steps to apply for a 504 loan:

1. Collect your financial documents: That includes your personal and business income tax returns for the previous three years, profit and loss statements from the past three years, your business’s debt schedule and financial projections for a one-year period. If you’re buying an existing business, you’ll also need the current owner’s tax returns from the previous three years, an interim financial statement and a signed purchase agreement. 
2. Update your business plan: Make sure you include a cost breakdown of what you need the real estate financing for, how the funds will contribute to your business’s growth and how the project will satisfy the SBA’s job creation or community development requirements. 
3. Get your finances in order: Make sure you have enough capital to provide a 10% down payment as part of your financing.
4. Find a CDC  in your area: Your local CDC will walk you through the loan application process, including providing you with additional loan application documents and connecting you with third-party lenders.