With a maximum 25-year term, low down payment requirements and historically low interest rates, origination of SBA 504 loans is up over 40 percent in Massachusetts.

With the local economy remaining strong and interest rates at historic lows, some small business owners have taken advantage of these conditions by turning away from leasing and instead taking out loans to purchase real estate for their businesses. 

“With interest rates being so low, the total cost of the monthly loan payments can be less than leasing,” said John Silva, executive vice president and chief lending officer at Bristol County Savings Bank. 

A key resource for purchasing these office and industrial spaces has been the U.S. Small Business Administration‘s 504 loan program. Minimal down payment requirements, low interest rates and terms now extended to 25 years have helped business owners also become building owners. 

Low Rates and Long Terms 

From October through December 2019, the first quarter of the SBA’s fiscal year, Massachusetts saw a 43.6 percent increase in the number of 504 loans compared to the same period in the previous fiscal year, according to the state’s SBA district office. 

Robert Nelson, Massachusetts’ SBA district director, said the push for owner-occupied spaces and business expansions, along with large equipment purchases, helped drive the increased 504 activity.  

The SBA works with 135 Massachusetts banks, credit unions and community development financial institutions on the 504 program. Lenders provide 50 percent of the project’s financing while the SBA funds 40 percent and assumes the risk of the loan. 

The business owner provides the remaining 10 percent, far less than the 20 to 25 percent down payment often required with conventional commercial loans. 

From October through December 2019, Massachusetts saw a 43.6 percent increase in the number of 504 loans compared to the same period in the previous year.

And the loan term is longer. The SBA in June 2018 extended the maximum 504 loan period to 25 years.  

This 25-year loan period means business owners right now can lock in at historically low rates, another factor driving recent 504 activity, Nelson said. The rate for a 25-year loan is 3.904 percent as of January 2020.  

“It really is remarkable,” Nelson said. “It’s amazing when you think of a business owner getting real estate, having to come up with only 10 percent equity and getting out of leasing.” 

The 504 program does not finance investment or passive real estate purchases, such as apartment projects or retail strip malls, Nelson said, adding that restaurants, hotels and manufacturing facilities are some of the business types that have used the 504 loan program. 

Silva said Bristol County Savings Bank used SBA 504 loans with several existing customers who wanted to own industrial space instead of leasing it. He said the opportunity to take out a 504 loan with 10 percent down was attractive to commercial customers, who also wanted to take advantage of the low interest rates to buy space or expand their businesses. 

One of Bristol County Savings Bank’s lenders, Alissa Hall, was recognized by the South Eastern Economic Development Corp. (SEED), as banker of the year for her work with the 504 program in 2019.  

An Economic Development Tool 

SEED is one of the state’s seven certified development companies (CDCs), nonprofit corporations that act as agents of the SBA, working on the loan application and servicing the loan after it‘s approved. Nelson attributes the state’s success with the 504 program in part to the CDCs.  

“It really helps when you’re working with [a CDC] that knows what SBA will approve and how to structure the loan,” Nelson said. “That knowledge is critical in helping small businesses and lenders navigate the 504 program so they can use

Diane McLauglin

it as a lending tool.” 

For the October to December time frame, Massachusetts ranked fourth in the country for number of SBA 504 loans, according to the state district office, behind the South Florida, Los Angeles and Illinois district offices. 

The CDCs also focus on job creation. For every $65,000 in financing, small business owners with 504 loans are expected to create one new job. 

Not all businesses qualify for the 504 program, and not all lenders choose to participate. The loan has to go through SBA’s approval process, Nelson said, and some lenders prefer conventional loans that finance 75 to 80 percent of a project. 

A slowing economy and real estate market could affect the 504 program, Nelson said. But he added that lenders provide just 50 percent of the financing, and the 504 program can protect them during economic downturns.  

“No one has a crystal ball, but the 504 program protects lenders through different cycles,” Nelson said. “It’s just a great product helping a lot of small businesses realize the American dream of owning their own business.”