Commercial Magazine

Financing Option Expands the Window of Opportunity

The new 25-year SBA 504 loan can help you close more commercial-property deals

By Kurt Chilcott

There’s a new financing tool available to commercial mortgage brokers and their small-business clients. It’s the 25-year U.S. Small Business Administration (SBA) 504 loan, which is designed for commercial real estate purchases.

It’s the first major structural change to the SBA 504 program in many years. The new 25-year, fixed-rate term loan complements the 20-year and 10-year terms traditionally offered with SBA 504 loans.

“This 25-year option comes at a good time for small-business owners who want to purchase a building but have to deal with the uncertainty of rising interest rates,” said commercial real estate broker Martin McDermott, formerly of Avison Young and now managing director of Method Commercial in Los Angeles. “The longer term will make it easier for more entrepreneurs to qualify and benefit from a lower monthly payment, which will in turn boost their cash flow.”

Business friendly

Demand for the new SBA 504 loan is likely to be driven by small businesses that are enjoying increased revenues and the perks of a strong economy, McDermott said. They can seize the opportunity presented with the new 25-year term SBA loan program to add new locations, buy new equipment and hire more people.

It didn’t take long for the first 25-year loan to get approved. Not even a week after SBA announced the availability of the new product this past April, a major bank partnered with a nonprofit certified development company (CDC) to approve a $3.3 million loan for a California structural steel-fabrication company’s purchase of a 20,000 square-foot facility, which will serve as a fourth location for the company.

The introduction of the 25-year 504 loan turned out to be good timing for this bank’s client. The owners were moving toward a 20-year term, but then decided to take advantage of the longer amortization to lower their monthly payment.

Evolving program

The idea for a 25-year debenture was part of an ongoing, large-scale effort by the National Association of Development Companies, or NADCO. It is the trade group for CDCs and, among other efforts, it seeks to make the SBA 504 loan program more relevant for brokers, bankers and small-business owners. Commercial real estate lending has evolved to the point where 25-year and even 30-year loans are no longer the exception, but more often the rule.

The SBA 504 loan was created more than 30 years ago as an economic development tool with the goal of boosting job creation in the U.S. With 20- and 10-year terms, it was designed to help small businesses buy large machinery as well as acquire, construct and improve major fixed assets, such as owner-occupied commercial real estate.

Each month, 504 loans are pooled and funded through the sale of CDC debentures that are fully guaranteed by the SBA. Private investors looking for fixed-income streams guaranteed by the federal government find this an attractive investment. In fiscal year 2017, nearly $7 billion in commercial real estate projects were financed with SBA 504 loans.

A game-changer

Brandon Carrillo, a principal at Lee & Associates Commercial Real Estate in the greater Los Angeles area, said he believes the new 25-year SBA 504 loan will be “a game-changer for small businesses.” He said commercial-property buyers are seeking to “control their monthly costs amid rising interest rates and other expenses.”

“The 25-year 504 loan provides an opportunity to stabilize their occupancy costs,” Carrillo added, “and possibly refinance out of variable-rate conventional loans.”

The new 25-year SBA 504 loan will be ‘a game changer for small businesses.

Most small-business clients eventually come to the crossroads of determining whether buying or leasing their building is the best business strategy. An SBA 504 loan makes purchasing attractive because the cash downpayment required by the owner is typically 10 percent — far less than most commercial loans. In addition, there are long-term tax and equity benefits.

Although the majority of SBA 504-financed purchases are for office, retail or industrial buildings, the loan program can be used to finance virtually any type of business operation. Every SBA 504 transaction is structured similarly. The bank finances 50 percent of the deal and CDCs provide 40 percent, leaving a 10 percent downpayment for the small business.

CDC assistance

Companies that meet the following criteria are eligible for a 504 loan: located in the United States; are legal business entities, corporations, partnerships, sole proprietorships or limited liability companies; and have a net worth of less than $15 million and average net profits of less than $5 million. Franchise businesses are eligible, too, and if listed in the SBA Franchise Directory, they may qualify for expedited loan approval.

The core features of an SBA 504 loan package include the following:

  • Total financing up to $10 million, and higher in many cases.
  • 90 percent financing.
  • Fixed interest rates (less than 5.5 percent for the past four years).
  • 10-, 20- and now 25-year loan amortizations.
  • No balloon payments.

Bankers’ “go-to” recommendations for their small-business clients tend to focus on conventional financing or, in some cases, an SBA 7(a) guaranteed loan. Bankers earn more fee income with these financing vehicles, compared to an SBA 504 loan, which is designed for commercial real estate purchases.

Commercial mortgage brokers typically turn to bankers to pre-qualify prospects interested in buying a commercial building. The CDCs — which have expertise exclusive to the 504 loan program — can bring another perspective to the table, however, particularly when it comes to educating small-business owners about 504 loans versus SBA 7(a) loans, so brokers don’t have to take on that challenge.

In addition, CDCs can assist mortgage brokers by pre-qualifying clients, structuring deals to gain fast SBA approval and sharing their knowledge about bank credit boxes to find the best 504 financing partner. They also can monitor the financing process to ensure the deal closes in a timely manner.


  • Kurt Chilcott

    Kurt Chilcott is president and CEO of CDC Small Business Finance, a nonprofit certified development company established in 1978. Chilcott is a nationally recognized leader in economic and community development and small-business finance. Under Chilcott’s leadership, CDC Small Business Finance has led the nation in SBA 504 loan production for nearly 20 years. It has leveraged $13.8 billion in small-business loans since its inception.

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