Commercial Magazine

Uncover a Hidden Gem

The CDC/504 loan is the best kept secret in commercial real estate

By Kurt Chambliss

Today’s small businesses need capital. The majority of smaller companies that sought financing in 2018 — 53% of them, according to a Federal Reserve Bank of New York survey — experienced a shortfall, meaning they received less financing than they wanted.

Unmet financing can take many forms. Small businesses may only receive a portion of what they request. 

Others don’t apply because they are discouraged or debt averse. In terms of financing commercial real estate deals, that would likely change if more small businesses knew about a loan program specifically designed for them — the 504 loan offered by the U.S. Small Business Administration (SBA) and a certified development company (CDC). It is one of the best options for small businesses to acquire real estate and equipment. This program also gives commercial mortgage brokers another tool to serve clients faced with a financing challenge.

Small businesses looking to purchase or construct a building are often turned down by a conventional bank or are offered unfavorable terms. The CDC/504 program was established to help the small-business owner with this predicament. The terms of a CDC/504 loan are unbeatable, and it is in your best interest as a commercial mortgage broker to get to know and introduce this program. Not only will your clients be grateful, it is bound to expand your client base. 

Loan-program details

CDC/504 loans enable a business owner to purchase, renovate, construct or refinance commercial real estate with a minimum downpayment of 10%. With this low downpayment, companies can retain precious working capital so their business can continue to grow. 

Unlike most commercial bank loans, CDC/504 loans finance the total project cost. The downpayment can represent as little as 10% of that total. Construction and renovation expenses, equipment, closing costs and soft costs can be rolled into the loan rather than paid out of pocket. This makes a big difference for many small-business owners. 

In some cases, a downpayment of 15% to 20% is required, such as when the loan is used to purchase a single-use property or if the business is less than two years old. This is still significantly less than the downpayment required with conventional financing, which is typically 30% to 35% for multipurpose properties and up to 50% for hotels and other special-purpose properties.

CDC/504 loans are two-tiered in structure and are paired with a conventional loan that will typically cover about 50% of the total project cost. The CDC/504 loan is the portion provided by the SBA. This second-lien mortgage typically represents 40% of the total project cost, has a term of 25 years, a fixed interest rate and is fully amortized for the life of the loan — meaning no balloon payments. Because the monthly payments are fixed for the entire term, this provides your clients with affordable payments and enables them to control overhead costs for the long term. Earlier this year, the typical interest rate was less than 4% for a 25-year loan. 

CDCs are nonprofit organizations that administer the 504 loan program on behalf of the SBA. There are about 240 active CDCs in the U.S. All of them offer the same product with the same fees, but these nonprofits are not all the same. It is a good idea to research the CDCs in your area. When choosing one, you should consider their overall experience — including number of years in service and number of loans approved — as well as client testimonials.

Overall, there are a lot of myths surrounding SBA loans, but the reality is that they are not much different than conventional loans, except for the tremendous benefits they offer small businesses.

Debunking myths 

The name “Small Business Administration” can be misleading as people are often surprised by what the SBA considers small. Program eligibility is based on the business’s net worth and average post-tax profit for the previous two years. Many privately owned, for-profit businesses qualify.

The business also must meet occupancy requirements. To finance the purchase of an existing building, the business must occupy at least 51% of the square footage, or 60% for new-construction projects. There is a bit of wiggle room here as the SBA allows outside yard space to be considered in the overall rentable square footage of the property.

A number of myths about the program are worth debunking. First, CDC/504 loans are not only for small projects. Although the SBA portion (up to 40% of the total project costs) is capped at $5 million, or $5.5 million for energy-efficient or manufacturing projects, there is no limit to the total project cost. Projects in excess of $40 million have been approved for CDC/504 financing.

SBA loans also do not require extensive amounts of paperwork compared to other types of financing. Although this was certainly the case many years ago, the SBA has made significant improvements to the process over the years. The application process is now streamlined and simple for small-business owners. It is no more involved than conventional financing. Apart from a few SBA-specific documents, the CDC/504 loan requires the same documents as the conventional loan that goes with it. Additionally, the support and guidance from the CDC makes the process even easier.

Another myth is that SBA loans take too long to close. The CDC/504 time frame is on par with conventional financing. Many loans are prequalified in three to five days and close in 60 days on average. CDCs typically can work with the borrower’s schedule to ensure deadlines are met.

Overall, there are a lot of myths surrounding SBA loans, but the reality is that they are not much different than conventional loans, except for the tremendous benefits they offer small businesses. Commercial mortgage brokers can increase their number of closed transactions and the value of their product portfolio by introducing the CDC/504 program to their clients. 

Your knowledge of the CDC/504 program can help more small businesses take the leap into property ownership. You also can expect to get more referrals from satisfied small-business clients. 


  • Kurt Chambliss

    Kurt Chambliss is executive vice president of TMC Financing, a certified development company (CDC) that has provided real estate financing in Arizona, California, Nevada and Oregon for more than 40 years. TMC Financing offers commercial real estate buyers up to 90% financing by utilizing the U.S. Small Business Administration's CDC/504 loan program. TMC is the No. 1 CDC in the nation, providing more than $14 billion in financing for more than 7,000 businesses.

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