SBA 504 vs. 504 Loans for Owner-Occupied Commercial Real Estate

CMBS loans and SBA 504 loans are two incredibly popular forms of commercial real estate financing, but they have several important differences. CMBS loans, also known as conduit loans, are issued by lenders, pooled with other similar loans, and then sold on the secondary market. In comparison, SBA 504 loans, which are guaranteed by the Small Business Administration (SBA), are 50% financed by a lender, and 40% financed by a Certified Development Company (CDC), a local non-profit group intended to increase economic development in a specific area. The remaining 10% consists of a borrower down payment.

CMBS Loans, SBA 504 Loans, and Partially Owner-Occupied Properties

The biggest difference between CMBS and SBA 504 loans is the fact that CMBS loans typically do not allow for owner-occupied commercial real estate, while SBA 504 loans require that the property in question be owner occupied. So why would a borrower ever have to choose between the two? Well, there are exceptions to the rules, and that’s where things get more complex.

In certain cases, highly-qualified CMBS borrowers can occupy as much as 60% a building, as long as they rent the remaining 40% out to a similarly qualified tenant with a long-term lease. And, just like CMBS borrowers, well-qualified SBA 504 borrowers may also be able to occupy as little as 60% of a building, leasing around 40% of the property to one or more eligible tenants. So, for borrowers who want to occupy some, but not all, of a commercial structure, both CMBS and SBA 504 loans could be a smart option.

CMBS vs. SBA 504 Eligibility Requirements

Typically, conduit loans have relatively lax credit and net worth requirements, and don’t often look into a borrower’s audited tax statements. However, in the case of partially owner-occupied CMBS deals, conduit lenders will take a much closer look at a company’s financials. In contrast, since SBA 504 loans are partially guaranteed by the federal government, they pretty much always require a lengthly application process, with many forms and an in-depth examination of a borrower’s financial health.

CMBS vs. SBA 504 Uses, Terms, and Interest Rates

In general, CMBS loans have partially amortizing loan terms of 5, 7, or 10 years, with amortizations of between 25 and 30 years. SBA 504 loans, however, have fully amortizing loan terms of 25 years. Generally, SBA 504 and CMBS interest rates are quite similar, with both rates sitting around 5% for most loans. It should also be mentioned that since SBA 504 loans are intended for small businesses, they can also finance the purchase of heavy equipment, which will be used to collateralize the loan. In comparison, CMBS loans can only be used to purchase commercial real estate.