(from a recent article on ValuePenguin)

CDC / 504 loans can only be used for real estate and long-term equipment purchases, and they come with 10 or 20 year terms. A 504 loan is actually composed of two separate loans: One from a bank for 50% or more of the loan amount and one from a Certified Development Company (CDC) for up to 40%. As a borrower, you will be responsible for paying at least 10% as down payment, which is less than what’s required for a traditional real estate loan.

The interest rates set by the SBA are only for the CDC portion of the loan and are fixed. Banks may charge what they like for interest rates–however, since these loans are backed by real estate, interest rates will typically be on the lower end.

The current estimated effective interest rates for the CDC loan are in the table below. Throughout 2016, the effective interest rates have been around 4% for both 10- and 20-year loans. The effective interest rates you see listed are estimates due to the complexity of calculating the rates. Actual rates may be higher or lower.

CDC / 504 Loan Effective Interest Rates: 20-year, 4.35%; 10-year, 4.33%

Interest rates for the CDC/504 loan are typically lower than market rates, making them a competitive option for any small business owner. “It’s one of the best kept secrets in commercial finance if a business owner wants to buy property. It’s tough to get something better than the SBA 504 program,” said Chris Hurn, CEO of Fountainhead Commercial Capital.

How Are CDC / 504 Loan Rates Calculated?

Effective interest rates are calculated using a debenture/note rate and three annual fees. The debenture rate for the loan is based on market rates for U.S. Treasury yields and an additional spread (an interest rate swap rate). The note rate is the monthly equivalent of the debenture rate and is used to calculate the effective interest rate. The debenture rate for the 20-year 504 loan is based on the 10-year U.S. Treasury yield and swap rates. The 10-year 504 loan uses 5-year rates.

Since the debenture rates for the loans are based on fluctuating market rates, the debenture rate is set on a monthly basis. This means that the quoted effective interest rates for the CDC portion of the 504 loan will change monthly (however, once you get the loan, rates are fixed). “Effective rates are usually, as a good rule of thumb, about 150 to 200 basis points [1.5 to 2.0 percentage points] above the 10-year Treasury yield,” said Hurn.

When effective interest rates were set in November, the 10-year U.S. Treasury yield was 2.08% and the comparable swap rate was 0.49%. This means that the debenture rate for the 20-year loan was 2.57% (2.08% + 0.49%).

CDC / 504 Loan Debenture Rates:

• 20-year, 2.57%
• 10-year, 2.17%

There are three annual fees that are included when calculating the effective interest rate: a servicing fee paid to the Certified Development Corporation, a servicing fee paid to the central servicing agent (currently Wells Fargo) and an annual fee paid to the SBA. The annual SBA fee is set at the beginning of each fiscal year, typically sometime in October.

Annual Fee Rates:

• CDC servicing fee 0.625%
• Central servicing agent (CSA) fee 0.100%
• Borrower SBA fee (As of October 2016) 0.697%

The actual calculations for the effective interest rates are complex. Because of this, rates you see listed by CDCs are estimates of the actual effective interest rates, which are calculated by the CSA. It’s also important to note that one-time and upfront fees are not included in the effective interest rate.

While 7(a) loans can also be used for real estate, 504 loans are a better option for most borrowers. “It’s a terrific program for small business borrowers, especially in a market where we are at such low interest rates. Borrowers should be looking to lock in long-term fixed rate loans,” said Frank Keane, CEO of Eagle Compliance, the fiscal and selling agent for the 504 program.