SBA 504 vs. Conventional Commercial Mortgage: Compare for CRE

Overview

For owner-occupied commercial real estate, the SBA 504 loan is one of the most powerful financing tools in the market — it enables 10% down on properties where conventional lenders require 20–35% and provides a fixed rate on the government-backed 40% portion for 20–25 years. The 504 structure is a two-loan arrangement: a bank provides 50% of the purchase price as a conventional first mortgage, the SBA (through a Certified Development Company, or CDC) provides 40% as a 20 or 25-year debenture at a fixed rate, and the borrower contributes 10% equity. This structure allows a business to buy a $2M building with just $200,000 down — impossible with conventional financing. Conventional commercial mortgages require 20–35% down but offer more flexibility: they work for investment properties (not just owner-occupied), are available for any commercial property type without SBA eligibility requirements, and do not require a job creation covenant. For sophisticated investors, property types that SBA restricts (special purpose properties, investment real estate), or borrowers with 25–35% down who want simpler structure, a conventional commercial mortgage may be preferable. For most small business owners buying their own building with limited capital, the SBA 504 is the clear winner.

Restaurant owner wants to buy their building instead of leasing; has $200K liquid

SBA 504 $200K is 10% of a $2M building. SBA 504 enables this with a fixed rate on 40% of the financing. Conventional lenders would require $400K–$700K down for the same building.

Real estate investor buying a multi-tenant office building as an investment

Conventional Commercial Mortgage SBA 504 requires owner-occupancy of at least 51% of the property. An investment property where the borrower does not occupy the space cannot use SBA 504.

Frequently asked questions

What is the job creation requirement for SBA 504?

SBA 504 borrowers must create or retain one job per $95,000 of SBA financing (or $140,000 for some advanced manufacturing or public policy goals). For a $800K CDC debenture, you must create or retain approximately 8–9 jobs. This requirement can be met over a 2-year period after loan closing.

Can I use SBA 504 for a new construction project?

Yes — SBA 504 can be used for ground-up construction of owner-occupied commercial property, not just purchases of existing buildings. The construction phase is typically financed separately with a construction loan, which is then taken out by the permanent SBA 504 structure.

What is the maximum SBA 504 loan amount?

The CDC portion of an SBA 504 loan is capped at $5 million ($5.5M for manufacturing and certain public policy goals). There is no statutory limit on the bank first mortgage, though the bank portion cannot exceed 50% of the project cost under standard 504 structure.