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.