SBA 504 Loan Project Example
The Basics
- The program provides long-term fixed-rate financing by using an SBA 504 2nd mortgage with a bank 1st mortgage
- SBA rate is usually below market
- The typical borrower is renting, but wants to own company real estate
- Oregon Business Development funds the 2nd mortgage as take-out financing
- 60% owner-occupied for new construction, 51% for existing building
- Any bank can do SBA 504 loans, and there is no SBA paperwork for the bank
Typical Structure
SOURCES |
USES |
Bank 1st mortgage | $1,000,000 |
Purchase R/E |
$1,960,000 |
| SBA 504 2nd mortgage | $800,000 |
Appraisal environmental |
$8,000 |
| Borrower cash | $200,000 |
Fees & closing (estimate) |
$32,000 |
| TOTAL finance package | $2,000,000 |
Total uses |
$2,000,000 |
| Loan Term: | Bank – Typically 20 to 30-year amortization, 10-year maturity minimum SBA 504 portion – 20 year amortization, 20-year term |
| Interim Loan: | Bank funds permanent 1st mortgage Bank funds bridge loan for 2nd mortgage until SBA 504 bond is funded |
| Collateral: | Bank has 1st trust deed, typically at 50% LTV SBA 504 has 2nd trust deed, total LTV 90% (higher in some cases) |
Can SBA Work For Your Project?
What do look for
- Pre-project debt-to-worth must be reasonable
- Prior year debt coverage typically at least 1.2
- Lower down payment to conserve the company’s working capital
- Positive sales & cash flow trends
- Experienced management
- For start-ups and/or special use
What to avoid
- Non-owner-occupied commercial real estate projects are not eligible
- Residential developments or apartment projects are not eligible
- Businesses that are over-leveraged
- SBA 504 can’t be used for the “goodwill” portion of a business acquisition,
only real estate/equipment - Equipment is eligible, but not working capital items (inventory, supplies, etc.)
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