SBA 504 Loans for Buying a Building

The SBA 504 program provides long-term, fixed-rate financing for major fixed assets that promote business growth and job creation. It is delivered through Certified Development Companies (CDCs), which SBA describes as its community-based nonprofit partners. The CDC works with a senior lender, usually a bank. SBA does not lend directly here, and Tenant Advisory Group is a broker, not a lender or a CDC.

Every figure in this guide comes from SBA's web page and its operating procedure, SOP 50 10 8.1, effective October 1, 2026, as read in November 2026. Program terms change, so treat them as a starting point and confirm them with a CDC.

The SOP describes a standard 504 project as three pieces:

• Third party lender: 50 percent or more of the financing, usually in first lien position on the property.
• CDC, through a 504 debenture that SBA guarantees: up to 40 percent, usually with a second lien.
• Borrower: at least 10 percent.

For a hypothetical, illustrative project costing $2,000,000, that means $1,000,000 from the bank, $800,000 from the CDC and $200,000 from the borrower. The percentages shift for certain borrowers and buildings. Under the SOP, a new business or a limited or special purpose property moves to 50, 35 and 15 percent, and a project that is both moves to 50, 30 and 20 percent. Our guide to down payments covers those tiers.

A 504 loan is for a building your business uses, not rental property. SBA's page says it cannot be used for speculation or investment in rental real estate. The test is in 13 CFR 120.131 and the SOP:

• Existing building: your company must occupy at least 51 percent of the rentable property and may lease out up to 49 percent.
• New construction: your company must occupy at least 60 percent, may permanently lease up to 20 percent, and may temporarily lease another 20 percent if it plans to use some of that within three years and all of it within 10 years.

The SOP adds details that affect planning. Occupancy is measured on rentable property, which excludes stairways, elevators and mechanical areas. A borrower has no more than one year to meet the requirement, and the CDC must get approval in advance if the borrower will not be occupying at funding. Loan proceeds also may not be used to improve space that will be leased to a third party.

If you are buying a building larger than you need, or one with tenants still in place, measure the occupancy before you make an offer.

SBA's page says a borrower must be an operating business, operate for profit, be located in the U.S., be small under SBA size requirements and not be an ineligible type of business. Other standards include qualified management, a feasible business plan, good character and the ability to repay.

• ✓Are we small under SBA's standards? The SOP lets an applicant use its industry size standard or an alternative test of no more than $20 million in tangible net worth and no more than $6.5 million in average net income after federal income taxes for the prior two fiscal years, including affiliates.
• ✓Can the CDC or lender certify that the credit is not available elsewhere on reasonable terms? SBA requires it, and the analysis can include the liquidity of owners of 20 percent or more.
• ✓Does the project meet an economic development goal? The SOP's job test is one job created or retained per $95,000 guaranteed, or per $150,000 for small manufacturers and energy projects. Other public policy goals may qualify instead.
• ✓Can our cash flow carry the debt? The SOP says cash flow is the primary source of repayment, and a loan lacking reasonable assurance of repayment must be declined, regardless of collateral.
• ✓Will we hold the property in a separate company? SBA allows an Eligible Passive Company that leases 100 percent to the operating company, subject to strict conditions.

A CDC can review your facts and tell you where you stand. If your company has grown beyond the size test, a conventional loan may be the better starting point.

SBA's page says 504 proceeds can be used for buying, building or renovating buildings or land, for long-term machinery and equipment with at least 10 years of remaining useful life, and for certain qualified debt.

It cannot be used for working capital or inventory, for debt that does not meet the rule's definition, or for speculation or investment in rental real estate. That means the money you need to operate after closing has to come from elsewhere, which should shape your budget from the start.

The page and the SOP should be read together on the dollar limit. SBA's page shows both $5 million and $5.5 million. The SOP explains the difference: the gross debenture is limited to $5,000,000 in aggregate for a small business and its affiliates, while eligible energy public policy projects and small manufacturers have a $5,500,000 maximum per project. These caps apply to the debenture, not to total project cost, because the bank's share sits outside them.

• Maturity: SBA's page lists 10, 20 and 25 years, and the SOP sets a maximum of 25 years for real estate.
• Rate: SBA's page says rates are pegged to an increment above current 10-year Treasury rates, and the SOP says the debenture rate reflects market conditions when it is sold. That means the final rate may not be known at approval.
• Fees: administrative costs are added to the debenture. In the SOP's own hypothetical, a $350,000 net debenture becomes $362,000 gross.
• Bank loan: its term must be at least 10 years alongside a 20- or 25-year 504 loan, and any balloon must be justified in the loan report and identified in SBA's loan terms.
• Prepayment: the note can set a prepayment premium. Under 13 CFR 120.940, a 504 borrower that prepays must pay the entire principal balance, unpaid interest, fees and any premium.
• Guaranties: the SOP requires a full guaranty from individuals owning 20 percent or more.

Ask your CDC how long debenture funding takes. The SOP describes interim financing that covers the period between SBA's approval and the debenture sale, and that interim lender may be the bank or another qualified source.

1. Talk with a CDC or SBA lender before you make an offer, using your financial statements and the intended building.
2. Have your broker confirm that the size and tenancy of the building can meet the occupancy test.
3. Sign a contract with financing time that matches SBA's process, with help from your attorney.
4. Get a bank term sheet or commitment, because the SOP says the third party lender must be in place at application.
5. The CDC submits the application, and SBA reviews or approves it through its delegated process.
6. Complete the appraisal, environmental and title work, and close with interim financing.
7. The debenture sells and repays the interim portion, and the long-term loan begins.

TAG does not make or arrange SBA loans. Our part is the real estate: finding and negotiating buildings that fit your operations and that can pass the occupancy test, then keeping the contract dates in step with your lender and CDC.