Buying commercial property with 10% down

I think this would be a good opportunity to discuss an SBA program that allows small businesses to buy commercial property with as little as 10% down. Normally, bank lenders will require 20% to 25% equity to qualify for a commercial real estate loan. However, the SBA 504 loan program allows a lower down payment while decreasing the risk to the bank lender at the same time.

To qualify for a 504 loan, the small business applicant under the 504 loan program must:

 (1)               Meet SBA’s standard eligibility criteria, and be small as defined by SBA on its size standards.

 (2)               Occupy at least 51% of the space on a purchase, and at least 60% of the space if the project is new construction.

 (3)               Provide an equity injection of (at least) 10% of the Total Project Cost.

 (4)                Create or retain a job for every $65,000 of debenture monies loaned ($100,000 for Small Manufacturers).  If a project does not meet the job creation standard, it may still qualify by meeting a public policy or community development goal.

 What makes the program such a success with borrowers and lenders?

For borrowers it comes down to a lower down payment.  The ability to purchase real estate with only 10% down is a big benefit for a small company.

For the bank lenders it comes down to exposure. The riskiness of a loan in a portfolio is determined by two factors:

a)      The credit risk of the borrowing entity. In the case of small businesses, their financial strength and condition usually puts them in a higher risk category.

b)      The possible loss in event of default, which is solely based on the structure of the facility. The fact that the loan-to-value for the bank lender is 50% mitigates the riskiness due to borrower being a small business.

This is better explained with an example. Let’s assume that a small business “XYZ Landscaping” has the opportunity to buy the office/warehouse where it operates. The purchase price for the property is $1,000,000. In order to do finance the purchase XYZ approaches “Main Street Bank” for a loan. Main Street loan guidelines provide for a maximum of 80%  financing for owner occupied real estate, but that would require XYZ to come up with $200,000. On the other hand, Main Street Bank could structure the financing in the form of a 504 loan. The structure of the 504 would be as follows:

Source of





Main St. Bank Loan

1st Lien

50 %


CDC Debenture

2nd Lien

40 %


XYZ Borrower Equity


10 %


If the 504 program did not exist, the business would have had to come up with an additional $100,000., and Main St. Bank would have a loan with 80% loan-to-value on its books. This way both borrower and lender benefit.

 What is a CDC?

A Certified Development Company (CDC) is a non-profit entity that functions as a third party on 504 transactions. CDC primary goals are to promote community development with 504 lendings. CDCs are certified and regulated by the SBA, and work closely with lenders. There are over 250 CDCs each covering a specific geographic area, which is usually defined as a single state.

What is a CDC Debenture?

To understand what a CDC debenture is one needs to understand how the SBA works. The SBA does not lend money directly to small businesses. Instead, the SBA as an agency of the US Government utilizes its most valuable asset {the credit rating of the US Government} to guarantee loans, and in this case securities that consist of pooled 2nd liens. The 20-year debentures are pooled and sold on Wall Street the first Tuesday of the first full week of each month.

For additional information about SBA financing, and funding your business you can read more by buying the following books at Amazon: The SBA Loan Book: The Complete Guide to Getting Financial Help Through the Small Business Administration
or Get Your Business Funded: Creative Methods for Getting the Money You Need

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