SBA 504: owner-occupied commercial real estate with 90% LTV (10% borrower equity), fixed CDC rate (~5.5-7% in 2026 on the 40% CDC portion), 25-year amortization. Two-loan structure: bank first mortgage (50%) + CDC second (40%) + borrower (10%). Closes in 6-12 weeks. Conventional CRE: 75% LTV, variable rate (8-12% in 2026), 5-10 year balloon with 20-25 year amortization. No occupancy restriction. Closes in 6-10 weeks. SBA 504 wins for owner-occupied with limited equity; conventional wins for investor properties or speed.
The SBA 504-vs-conventional-CRE decision is the primary financing question for any business buying its own commercial real estate. The trade is structural: 504 gets you in with less down payment and locks in a long fixed rate, but the two-loan structure adds complexity and CDC processing time. This guide covers the structural differences, when each wins, and a real cost example. For broader context see SBA loans and commercial real estate loans.
How SBA 504 Works
An SBA 504 loan is actually two loans funding one project:
- Bank first mortgage — 50% of project cost. Conventional bank loan with conventional pricing (8-11% APR in 2026), 5-10 year balloon, 20-25 year amortization.
- CDC second mortgage — 40% of project cost. Funded through SBA-guaranteed debentures sold in capital markets. Fixed rate (5.5-7% in 2026), 10/20/25-year fully-amortizing terms. Acts as a second lien.
- Borrower equity — 10% (15-20% for new businesses or special-use properties).
Both loans close at the same time and fund together. The blended rate is typically 100-200 bps below conventional on a 25-year hold because the CDC portion is below market.
Side-by-Side
| Dimension | SBA 504 | Conventional CRE |
|---|---|---|
| Max LTV | 90% (50% bank + 40% CDC) | 75% |
| Down payment | 10% (15-20% special-use) | 25%+ |
| CDC rate (40% portion) | ~5.5-7% fixed | N/A |
| Bank first mortgage rate | 8-11% | 8-12% |
| Term | CDC: 10/20/25 fully amortizing; bank: 5-10 balloon | 5-10 balloon, 20-25 amort |
| Owner-occupancy required | Yes (51%+) | No |
| Speed | 6-12 weeks | 6-10 weeks |
| Prepayment | CDC: declining penalty 10 years; bank: varies | Bank typically charges defeasance or yield maintenance |
When SBA 504 Wins
- Owner-occupied with limited equity (10-15% available)
- Long hold horizon — the fixed CDC rate locks in below-market for 10-25 years
- Owner-user buying their facility — classic 504 deal: a manufacturer buying their plant, a doctor buying their office building
- Construction or significant renovation projects on owner-occupied buildings
- Rate-sensitive borrowers who want to lock in 25 years of below-market financing
When Conventional Wins
- Investor properties — not owner-occupied, so 504 is unavailable
- 25%+ down available — the LTV advantage of 504 is moot
- Speed-sensitive — faster close on conventional
- Plan to refinance or sell within 5-7 years — the CDC rate advantage doesn't pay off; CDC prepayment penalty is meaningful
- Special-use properties the CDC won't finance (some hotel, gas station, restaurant categories)
Real Cost Example: $1.5M Owner-Occupied Office
Same $1.5M project, two structures:
- SBA 504: $750K bank @ 9.5% (25-year amort, 7-year balloon) + $600K CDC @ 6.25% (25-year fully amortizing) + $150K equity. Bank monthly: ~$6,558. CDC monthly: ~$3,963. Total monthly P&I: ~$10,521.
- Conventional: $1.125M @ 9.75% (25-year amort, 10-year balloon) + $375K equity. Monthly P&I: ~$10,066. Looks slightly cheaper monthly but borrower fronted $375K vs $150K.
- Adjusted: SBA 504 frees up $225K of borrower equity for working capital or expansion. At 10% return on that capital, the SBA 504 effectively saves $22.5K/year vs the conventional structure.
Next Step
Buying owner-occupied commercial real estate? Compare SBA 504 and conventional CRE — one application reaches both SBA-active banks and conventional CRE lenders.
Worked Example: Buying a $2M Building
Suppose an owner-occupant is buying a $2,000,000 commercial property. Under a typical SBA 504 structure, the financing splits into three parts: a bank first mortgage of about 50% ($1,000,000), a CDC/SBA second of about 40% ($800,000) at a long-term fixed rate, and roughly 10% down ($200,000) from the borrower. Compare that to a conventional CRE loan, which often wants 20–30% down ($400,000–$600,000) and may carry a shorter term with a balloon and a variable rate.
The 504 advantage here is clear: far less cash out of pocket and a long-term fixed rate on the SBA portion, which protects the owner from rate swings. The conventional loan's advantages are speed and simplicity — fewer parties, faster close, and no SBA-specific paperwork — which can matter when you need to move quickly or the deal is straightforward. The decision usually comes down to whether preserving cash and locking a long fixed rate (504) outweighs closing speed and flexibility (conventional).
When Each Option Wins
- Choose 504 when you want to minimize the down payment, lock a long-term fixed rate, and the property is at least 51% owner-occupied.
- Choose conventional when you have ample down payment, want to close fast, or prefer fewer parties and lighter documentation.
- Watch the term structure — a conventional balloon means refinancing risk later; the 504 second avoids that on its portion.
Frequently Asked Questions
What is the SBA 504 program?
An SBA program for owner-occupied commercial real estate and major fixed assets. Combines a bank first mortgage (50% of project), a CDC second mortgage (40% of project, SBA-guaranteed), and 10% borrower equity. Fixed CDC rate over 10/20/25 years; lower than conventional but slower to close.
What is owner-occupied?
A commercial property where the business that owns it occupies at least 51% of the usable square footage. SBA 504 requires owner-occupancy; conventional CRE has no such restriction. Investor-only purchases need conventional CRE financing.
What does the CDC second mortgage rate look like?
The CDC portion is funded through Treasury-bond-backed debentures. As of 2026, the CDC fixed rate runs roughly 5.5-7% on 10/20/25-year amortizations. The bank first mortgage rate varies by lender (typically 8-11% in 2026 on conventional commercial).
How much down payment for SBA 504?
Typically 10% borrower equity. New businesses or special-use properties (hotels, gas stations) may require 15-20%. Conventional CRE typically requires 25%+ down.
How long does SBA 504 take to close?
6-12 weeks. Bank first mortgage and CDC second mortgage process in parallel; the CDC piece adds 2-4 weeks to a conventional bank-only timeline. Faster CDC programs can close in 6 weeks; complex deals 12+ weeks.