Buying the building your business operates in, instead of renting, is a big step. The SBA 504 loan program is designed for exactly that kind of long-term fixed-asset purchase, but it comes with specific requirements. Here is what owner-occupied real estate buyers should know.
What the 504 program is for
SBA 504 loans finance major fixed assets, such as owner-occupied commercial real estate, construction, and long-lived equipment. They are not meant for working capital or everyday expenses. If you need operating cash, other products like a line of credit or a working capital loan are usually a better fit.
How the financing is typically structured
A 504 project generally involves two lenders. A bank or other lender provides a first-lien loan for a portion of the project, and a Certified Development Company (CDC) provides a second loan backed by the SBA. In a typical structure, the bank covers about half, the CDC covers up to about 40 percent, and the borrower contributes roughly 10 percent as a down payment. Certain situations, such as start-ups or special-purpose properties, may require a larger contribution.
The owner-occupancy requirement
This is the rule that surprises many buyers. Your business must occupy a meaningful share of the property. Generally, that means at least 51 percent of an existing building, or at least 60 percent of a building that is newly constructed. You can lease out the remaining space, but you cannot treat the property as a pure investment.
Other eligibility points
- The business must be for-profit and operate in the United States.
- It must meet SBA size standards and show a tangible net worth and net income within program limits.
- The lender will review cash flow, credit history, and your ability to repay.
- Property must be appraised, and environmental review may be required.
Rules and limits are updated from time to time, so confirm current details with a CDC or an SBA-experienced lender. Our overview of SBA loans covers how 504 compares with other SBA programs.
Planning for the timeline
Because two lenders and an appraisal are involved, a 504 loan usually takes longer than a fast online product. Start early, gather several years of financial statements and tax returns, and line up your down payment. If you also want to understand the size of loan your finances might support, try the how much can my business borrow guide.
Frequently asked questions
Can I use a 504 loan to buy an investment property?
No. The property must be owner-occupied, with your business using a required share of the space.
Can I use a 504 loan for working capital?
No. The program is for fixed assets such as real estate and major equipment, not day-to-day operating costs.
Is the down payment always 10 percent?
It is commonly around 10 percent, but it can be higher for start-ups or special-purpose properties.
Thinking about buying your business location? Fundmerica is a marketplace that connects businesses with funding sources, not a direct lender. Apply now to explore what may be available.