How much of an equity contribution is required from the Borrower for an SBA 504 project?

Typically 10%. If the entity is considered a new business or the property is determined to be a Special Purpose Property, an additional 5% equity is required.  If it is determined to be both, an additional 10% equity is required.

Can the equity contribution be financed?

Yes, the equity contribution can be provided in the form of a note from the seller (must have a term of 20 yrs), or other outside financing source such as a community development loan.

Can existing equity in the Project Property be used as all or a portion of a Borrower's equity contribution?

Yes. The Borrower's injection may be existing equity in land (including buildings, structures and other site improvements that will be part of the Project Property) previously acquired by the Borrower.  This will be subject to an appraisal that must be provided to SBA at the time of application.

What are SBA's requirements regarding the Loan terms from the Participating Lenders?

  • The Participating Lender loan must have a term of at least 7 years when the 504 loan is for a term of 10 years; and at least 10 years when the 504 loan is for 20 years.
  • Interest rates must be reasonable.
  • The Participating Lender loan must not have any early call feature or contain any demand provisions unless the loan is in default.

What are the general rules to determine if a Project Financing Structure qualifies for an SBA 504 loan?

  • The Participating Lender financing must be equal to or greater than the debenture.
  • The net debenture may not exceed 40% of the project's total cost.
  • The borrower’s injection must be at least 10% of the total project cost, and may be more, as required by statute or for credit reasons.
  • No more than 50% of the project costs can come either directly or indirectly from Federal sources.

Does the SBA 504 Program finance investment properties?

No, the program is designed for owner-occupied facilities.

Does the business have to occupy the entire building?

The applicant must occupy 51% of an existing building and 60% of a newly-constructed building.  The remaining space may be leased to a third party.  No proceeds of the 504 financing can be used for tenant specific fitup of the leased space.

What type of property is classified as Special Purpose?  And, therefore, an additional 5% equity contribution would be required.

The SBA classifies the following types of properties as Special Purpose:

Gas stations; Hotels, motels, and other lodging facilities; Car wash properties; Hospitals, surgery centers, urgent care centers and other health or medical facilities; Nursing homes, including assisted living facilities; Dormitories; Automotive service centers (i.e., oil and lube, brake or transmission centers) with pits and in-ground lifts; Golf courses; Clubhouses; Bowling alleys; Amusement parks; Cold storage facilities where more than 50% of total square footage is equipped for refrigeration; Marinas; Sports arenas; Swimming pools; Tennis clubs; Theaters; Museums; Farms, including dairy facilities; Funeral homes with crematoriums; Cemeteries; Quarries, including gravel pits; Oil wells; Mines; Railroads; Sanitary landfills; and Wineries.  Self-Storage facilities are not considered to be special purpose properties.  

What is the term of an SBA 504 loan?

20 years on real estate, or equipment qualified by useful life; 10 years on machinery and equipment.

Can costs that have been incurred prior to the funding of the loan be included in the SBA 504 project?

Yes, certain preliminary costs associated with the project and incurred prior to the loan application can be included in the financing.

Are not-for-profits eligible for SBA 504 financing?


Is flood insurance required if the subject property is located in a Flood Zone?


Are personal guarantees required?

Yes, the SBA requires personal guarantees for any individual owning 20% or more of the operating company and/or real estate entity. Other personal guarantees may be required if no individual owns more than 20%.

Is there a prepayment penalty associated with the program?

There is a declining prepayment penalty for half the term of the loan (i.e. 10-year prepayment penalty on real estate; 5-year prepayment penalty on machinery and equipment).

Why is the prepayment penalty required?

A prepayment penalty is required because investors in the secondary market are guaranteed a specific return when they purchase a pool of SBA 504 debentures.

Who received the prepayment penalty?

100% of the prepayment penalty goes to the bond investors, and is not paid to the SBA or GSDC.