Owner-Occupied Commercial Properties - Can I Qualify for SBA 504 Rates Below 3.00%?

When the Cares Act was signed into law it included some permanent changes to the SBA 504 lending program.  Historically the program could only be used for new debt and to refinance non-government guaranteed debt under some tight restrictions.  However, the Cares Act greatly expanded what loans qualify to be refinanced by the SBA 504 loan program, providing a new mechanism for many borrowers who are currently at higher or variable rate interest rates to secure the long-term fixed interest rates offered by the SBA 504 program. 


For those who are not aware what the SBA 504 program is and how it works, the SBA 504 loan program is a commercial loan program administered by the Small Business Administration (“SBA”).  The loan program is specifically geared to help finance equipment and real estate to be used by a business.  In order for a property to qualify for an SBA 504 loan it must be 51% or more owner-occupied by a business that owns the property or 51% or more owner-occupied by businesses owned by the borrower.  The program is administered as a partnership between Bank’s and Certified Development Corporations (“CDC’s”).  CDC’s are non-profit entities created by the SBA to manage the SBA portion of 504 Loans.  Up front the full loan amount is funded by a Bank, and then eventually the SBA through a CDC comes in and takes out the SBA portion of the loan.  Historically SBA 504 loans were primarily used for new equipment and property acquisitions or expansions.  The benefits of using the SBA 504 program for these types of loans are as follows:


  • Potential for as little as 10% down on new owner-occupied real estate and equipment acquisitions or expansions as opposed to 20% to 25% via traditional bank financing.
  • For special-use properties as little as 15% to 20% down on new owner-occupied real estate or expansions as opposed to 25% to 35% down via traditional bank financing.
  • Low fixed interest rates on the SBA portion of the debt of 10 years for equipment and 20 to 25 years for real estate
  • The Bank must guarantee the Borrower a minimum of a 10-year loan term on their portion of the loan (versus traditional 5-year balloon loans from conventional banks)
  • You can include soft costs and leasehold improvements in project costs
  • Minimum required debt service coverage ratio of 1.15x as compared to 1.20x to 1.35x from traditional bank financing
  • The Bank exposure is typically only 50% of cost / end value once the project is completed, removing risk for the Banks and encouraging Banks to make slightly higher risk loans they might not make at normal advance rates

Under the SBA 504 refinance provisions, the following additional benefits exist:


  • Ability to refinance existing debt that is only six months old (previously the debt had to be outstanding for at least two years)
  • Ability to refinance existing loans up to a loan to value of 90% with no cash-out, allowing Borrowers with a higher loan to value to still refinance.
  • Ability to refinance existing loans up to 85% with cash-out so long as that cash-out is going for approved uses (which can include refinancing other business debt). Traditional Banks typically will not do cash out above 65% to a maximum of 75%. 
  • Ability to now refinance variable rate SBA 7A loans, higher rate existing SBA 504 loans, or other government guaranteed debt into new SBA 504 loans
  • Maximum SBA exposure to any one Borrower is capped at $5 million. The government guaranteed portion of a SBA 504 loan is only the SBA piece of that loan as opposed to the whole loan amount as it is for SBA 7A loans.  So as an example, refinancing a $5 million SBA 7A loan into an SBA 504 loan would only eat up a maximum of $2.5 million of a Borrower’s potential SBA exposure, whereas the SBA 7A loan used 100% of the Borrowers potential SBA exposure of $5 million.  Borrowers can leverage the SBA 504 loan program to refinance SBA 7A debt and free up additional SBA borrowing exposure.  


As can be seen, the benefits of using an SBA 504 loan are many.  Under the provisions of the SBA 504 loan program, the Bank makes the initial loan, and then the SBA through a CDC comes in and takes out the government guaranteed portion of the loan via a long-term loan (called a debenture) that is sold into the secondary market and then administered by the CDC.  The Bank portion of the loan is typically 50% of the project cost for new acquisitions or up to 50% of the debt for refinances.  The SBA portion of the loan can range from 35% of cost for special-use acquisitions to 40% of cost for standard acquisitions, and up to 50% of the refinance amount.  In September the interest rates offered on SBA 504 loans were 2.67% fixed for 10-years, 2.86% fixed for 20-years, and 2.97% fixed for 25-years.  As can be seen, these interest rates are way below traditional Bank interest rates, especially when you look at the fixed rate term offered under the SBA 504 loan program as compared to typical Bank fixed rate terms of 5 to 10 years.     


Interest rates continue to hover close to all-time lows.  If you have equipment or a 51% or more owner-occupied commercial property, now is a great time to consider refinancing into a long-term fixed rate SBA 504 loan.  If you have an existing government guaranteed loan like an SBA 7A loan or a higher interest rate SBA 504 loan that is secured by a commercial owner-occupied property, now is a great time to consider refinancing that loan into a lower fixed interest rate via the SBA 504 loan program. 


We have created a guide to SBA 504 loans on our website called CLX – SBA 504 Loans Explained.  Here at Commercial Lending X we have the expertise to help you understand what products you will qualify for and over 350 lending partners to help you find the best interest rate and terms in the market.  We also typically work with the Banks and CDC in tandem to be sure you qualify and to accelerate the process in getting your SBA 504 loan done.  Although the SBA 504 program may not make sense for every Borrower, we can help you assess the positives, negatives and costs, and help you determine which is the best product for you and your business.  We hope you will give us a chance to assess your situation and help you lock in permanent long-term financing.