SBA 504 Loans for Commercial Real Estate: How They Work
The SBA 504 program lets you buy or improve commercial real estate with as little as 10% down and a below-market fixed rate. Here's the three-party structure and what it costs.
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The SBA 504 program is designed specifically for fixed asset purchases — commercial real estate and major equipment. It's a three-party structure that lets businesses buy property or heavy equipment with as little as 10% down, at a below-market fixed rate, with terms up to 25 years.
The structure is more complex than a standard 7(a) loan, but the terms are often better for eligible projects.
How the Three-Party Structure Works
A 504 loan involves three funding sources:
1. Conventional lender (50%): A bank provides the senior mortgage — typically 50% of the project cost. This portion is at market rates (not capped by SBA) and is the bank's portion.
2. Certified Development Company / SBA (40%): An SBA-approved CDC provides a second mortgage for up to 40% of the project cost. This is the SBA's 504 debenture — fixed rate, below market, 10 or 25-year term.
3. Borrower equity (10%): You put in at least 10%. Newer businesses or special-purpose properties may require 15–20%.
On a $1,000,000 commercial real estate purchase: bank $500K (50%) + CDC/SBA $400K (40%) + borrower $100K (10%).
504 Loan Eligibility Requirements
To qualify for the 504 program:
- Net income after tax: Under $5 million (averaged over the past 2 years)
- Tangible net worth: Under $15 million
- For-profit business operating in the U.S.
- Job creation or retention: Must create or retain 1 job per $75K of 504 funds (or meet a community development objective)
The 504 program does not work for working capital. It's strictly for fixed assets.
504 Rates vs Conventional
The 504 debenture rate is set monthly by the SBA based on 10-year or 20-year Treasury rates plus a spread. In the current rate environment, 504 rates run approximately 5.5–7% — significantly below 7(a) rates of 11–13%.
The blended rate across all three portions (bank, SBA, and equity) works out to roughly 8–9% for many projects — below a comparable conventional commercial real estate loan.
Bottom Line
If you're buying commercial property or major equipment and your net income is under $5M, the 504 program is worth exploring before committing to conventional financing. Compare SBA vs conventional loan terms to see the payment difference on your project.
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