What interest rate does an SBA 504 loan have?
An SBA 504 loan has two rates: the CDC second mortgage is fixed for 20 or 25 years at a rate set each month off the 10-year Treasury plus a spread that includes the program's servicing fees, and the bank first mortgage is negotiated with the bank, fixed or variable. Because the CDC piece is fixed and below-market, the blended rate is usually lower than a comparable conventional commercial mortgage.
The two pieces
| Piece | Share of project | Rate | Term |
|---|---|---|---|
| Bank first mortgage | About 50 percent | Negotiated: often prime plus 1 to 2 percent variable, or a 5 to 10 year fixed | 20 to 25 year amortization |
| CDC second mortgage (SBA debenture) | Up to 40 percent | Fixed for the full term; set monthly when the debenture is sold | 20 or 25 years, 10 for equipment |
| Your equity | 10 to 15 percent |
Ranges vary by lender and market.
How the CDC rate is set
The CDC portion is funded by debentures sold to investors each month. The effective rate you pay is the debenture rate plus servicing fees for the CDC, the SBA, and the central servicing agent, all rolled into one fixed number. It is published monthly and locks when your debenture funds, typically 30 to 60 days after the bank loan closes. Historically it tracks the 10-year Treasury plus roughly 1.5 to 2.5 points once fees are included.
The bank rate
The bank sets its own terms on the first mortgage. Many offer a five-year fixed with a reset, or a variable tied to prime. Because the bank's exposure is only 50 percent of value, its rate is often better than on a conventional 75 percent loan.
The blended rate
On a $2 million project with a $1 million bank loan at 7.5 percent and an $800,000 CDC loan at 6.5 percent, the blended rate on the $1.8 million of debt is about 7.06 percent, with $800,000 of it fixed for 25 years. A conventional loan on the same building at 75 percent leverage would likely price higher and reset sooner.
Prepayment
The CDC portion carries a declining prepayment penalty over the first ten years, starting near the full debenture rate and falling each year. The bank portion follows the bank's terms. Plan to hold a 504 loan five years or more.
Fees
CDC processing, SBA guarantee, and funding fees run about two to three percent of the CDC portion and are financed into it. The bank charges its own origination, usually a half to one point.
Construction and interim rates
On a 504 construction project, the bank funds an interim construction loan at its rate, and the CDC debenture funds at completion, locking the fixed rate then. The rate you get is the one in effect at funding, not at application.
How CommFi handles it
Our lending desk prices the bank piece across lenders, since that is the negotiable half. It searches a database of 7,000+ lenders and puts the file in front of the banks that actively do 504 in your industry, so they compete on the first mortgage rate. Zero upfront fees.
Related reading
Related questions
- Is the SBA 504 rate fixed?
- The CDC portion is fixed for 20 or 25 years. The bank first mortgage is negotiated and can be fixed or variable.
- How is the 504 rate determined?
- The CDC rate is set monthly when the debentures sell, off the 10-year Treasury plus servicing fees. The bank sets its own rate on the first mortgage.
- When does my 504 rate lock?
- At debenture funding, typically 30 to 60 days after the bank loan closes, or at completion on a construction project.
- Is a 504 loan cheaper than a conventional commercial loan?
- Usually on the blended rate, because the CDC piece is long-term fixed and the bank's exposure is only 50 percent.
- Does a 504 loan have a prepayment penalty?
- Yes on the CDC portion, declining over the first ten years. The bank portion follows the bank's terms.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.