The Small Business Administration (SBA) is a government agency that provides support to entrepreneurs and small businesses. SBA loans are made through banks, credit unions and other lenders who partner with the SBA to finance the purchase or construction of business owner-occupied real estate. The SBA defines “owner-occupied” as a minimum of 51% owner occupancy by square footage. SBA loans do provide for non-owner use as long as the owner utilizes at least 51% of the usable space. The SBA provides a government-backed guarantee on a portion of the loan.

One use of SBA loans is commercial mortgages on buildings occupied or soon to be occupied by small business. These programs are beneficial to small businesses because standard bank loans require larger down payments and/or have repayment terms requiring borrowers refinance every five years.

The 504 Loan or Certified Development Company (CDC) program provides finance for the purchase of real estate at below market interest rates. This program distributes the capitalization among three parties. The business owner contributes a minimum of 10%, a bank lends up to 50%, and a CDC contributes the remaining 40%. The CDC’s loan is fully amortized and fixed for 20 years. The maximum amount for the 2nd trust is $5,500,000. The CDC is able to receive below market rates because they are established as a non-profit corporation that supports economic growth within its community.

In order to qualify for the 504 program, the borrower must meet the SBA’s definition of small business and must plan to use over half (51%) of the property for its own operations within one year of ownership. The borrower may form a real-estate holding company that leases 100% to the operating business, which then subleases surplus space, up to 49% of the square footage.

Interest rates on 504 loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees approximate 2.15% of the debenture and may be financed with the loan. Also, SBA loans are available up to 90% loan to value (LTV).

The 7(a) Loan Program includes financial help for businesses with special requirements. This is a 25 year fully amortized loan that is typically variable. There is a 25 year fixed program, but it is considerably more expensive than the 20 year fixed rate on 504 loans. Also, the 7(a) program is only 1 loan. SBA will finance all SBA fees into the loan.

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