Money & Finance › Commercial real estate lending › Government-backed property loans: agency, HUD and SBA
SBA 504 loans: a bank first lien plus a CDC second lien
Since 1980· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
A long fixed-rate SBA program for owner-occupied buildings and heavy equipment, split between a bank first lien and a CDC second lien.
See it on the Money & Finance map →How it works
The usual split is 50-40-10. A bank lends 50% on a first deed of trust. A Certified Development Company (CDC), a nonprofit, lends 40% on a second, funded by an SBA-guaranteed bond sold to investors. The business puts in 10%, or 15–20% for start-ups or special-purpose buildings. The CDC piece is fixed for 10, 20 or 25 years, priced off 5- and 10-year Treasuries, up to $5 million ($5.5 million for manufacturing and energy projects). The business must occupy at least 51%.
Why it matters
It gives owner-occupiers 90% financing with a long fixed rate on much of the debt, but it means two lenders, more paperwork and job-creation goals.
Facts, rules and data
Section 504 of the Small Business Investment Act, SBA's SOP 50 10 rules, and the monthly debenture sales whose results set the fixed rate borrowers pay.
Debates and risks
Whether the 504 job-creation requirement actually creates jobs, or just labels jobs that would exist anyway, is hard to measure.
Connections (2)
▸SBA 504 loans: a bank first lien plus a CDC second lien are the fixed-asset alternative to SBA 7(a) loans: the all-purpose small-business loan (to $5 million)Fact, law or data
The connection
7(a) is the all-purpose program: one lender, up to $5 million, usable for buildings, working capital, inventory or buying a business, usually at a floating rate. 504 funds only fixed assets, buildings and heavy equipment, but fixes the rate on the CDC's 40% for up to 25 years with 10% down. Larger building purchases often favor 504.
When and why
Both are SBA programs for owner-occupied businesses, run through banks and other lenders (7(a)) and nonprofit Certified Development Companies (504).
How we know
SBA's SOP 50 10 sets the rules for both; SBA's yearly lending reports show each program's volume and uses.
Debates and risks
Which costs less depends on rates and fees at closing, and lenders' comparisons are not neutral, since they earn different amounts on each.
▸SBA 504 loans: a bank first lien plus a CDC second lien pair a CDC second lien with Bank balance-sheet loans from community and regional banksFact, law or data
The connection
In a 504 deal a bank makes a conventional first-lien loan for about 50% of the project, with no SBA guarantee; at that low leverage it is a safe loan. The CDC's 40% second lien sits behind it. Banks also often provide short-term interim financing for the CDC share until the SBA-backed bond is sold.
When and why
Community and regional banks across the US act as the 504 first lender; the CDC is a local or regional nonprofit.
How we know
SBA's 504 rules and third-party lender agreements, plus bank call reports and CDC annual reports.
Debates and risks
How much the 504 structure lowers the bank's losses, compared with a conventional loan at 70–75% of value, is rarely measured publicly.