# Owner-occupied commercial real estate loans: 504, 7(a) and bank options

**Short answer:** Your business's cash flow repays an owner-occupied building loan, so lenders size it on your earnings. SBA 504 uses a 50% third party lender, 40% CDC debenture, 10% borrower split. Banks set their own down payments. Sources: OCC Comptroller's Handbook; SOP 50 10 8.1, Sec. C, Ch. 1.

Canonical page: https://www.sbaexpress.loans/guides/owner-occupied-commercial-real-estate-loans/
Last checked: 2026-11-09

## On this page

- [Your business's cash flow repays the loan](#your-business-s-cash-flow-repays-the-loan)
- [Three loan types fit, and each trades something](#three-loan-types-fit-and-each-trades-something)
- [The down payment is the biggest difference](#the-down-payment-is-the-biggest-difference)
- [Fixed and variable rates carry different risks](#fixed-and-variable-rates-carry-different-risks)
- [Compare a year of rent with a year of ownership](#compare-a-year-of-rent-with-a-year-of-ownership)
- [When buying the building is a bad idea](#when-buying-the-building-is-a-bad-idea)
- [What lenders check before they lend](#what-lenders-check-before-they-lend)

## Your business's cash flow repays the loan

Your business's earnings repay an owner-occupied building loan, and the building is the collateral. The OCC says the primary source of repayment is usually the cash flow of the occupying business (Comptroller's Handbook, Commercial Real Estate Lending, p. 131).

That decides how lenders size the loan. They test your coverage of the payment first and the property's value second. The OCC adds that owner-occupants with uneven earnings may warrant a higher coverage ratio (p. 43).

Occupancy rules decide what counts as owner-occupied:

- SBA requires you to occupy at least 51% of an existing building and lets you lease the rest (SOP 50 10 8.1, Sec. A, Ch. 3, Para. C).
- For new construction, SBA requires 60% at the start. You may permanently lease up to 20% and temporarily lease another 20%.
- A bank treats a property as non-owner-occupied when outside rent supplies 50% or more of repayment (OCC, p. 131).

Many owners hold the building in a separate company and lease it to their business. Lenders check that the rent is at market, because an inflated rent can overstate the building's value (OCC, p. 131). SBA has its own rules for this setup. See the answer on [EPC and OC structures](https://www.sbaexpress.loans/answers/what-is-an-eligible-passive-company/).

## Three loan types fit, and each trades something

Three loan types fit an owner-occupied building. The right one depends on your down payment, your term and how much risk you can carry.

- **SBA 504.** SBA calls it long-term, fixed-rate financing. A Certified Development Company (CDC) delivers it with a senior lender. Maturities are 10, 20 or 25 years. It finances major fixed assets such as land, buildings and long-term machinery and equipment, not working capital or inventory.
- **SBA 7(a).** One loan can cover the building and some working capital, up to $5,000,000. The real estate term can run 25 years, plus any reasonable construction or renovation period. SBA does not allow balloon payments.
- **Bank loan.** The bank sets the term, rate and down payment. Federal regulators tell banks to set internal limits no higher than 85% loan to value on improved property. A bank's own limit can be lower.

A balloon changes the risk. A balloon loan does not fully amortize, so the remaining balance comes due at maturity. The OCC warns that a borrower may struggle to refinance a balloon if property values fall (p. 11). Ask any lender for the maturity date and the balance due then.

## The down payment is the biggest difference

The down payment is the largest difference between a bank loan and an SBA 504 loan. Take a $1,000,000 building and ignore fees and closing costs.

- **Bank loan:** suppose the bank lends 75% of the price. You put in $250,000.
- **SBA 504, standard:** the structure is 50% third party lender, 40% CDC debenture, 10% borrower. You put in $100,000. The bank lends $500,000 and the CDC lends $400,000.
- **SBA 504, special cases:** your share rises to 15%, or $150,000, for a new business or a limited or special-purpose property. It rises to 20%, or $200,000, for both (SOP 50 10 8.1, Sec. C, Ch. 1, Para. B).

On these assumptions the standard 504 leaves $150,000 in your business that a 75% bank loan would take. That cash can fund payroll, inventory or growth. A down payment cannot.

## Fixed and variable rates carry different risks

The rate type decides how much your payment can move. The CDC portion of a 504 loan is fixed-rate. Its rate is based on market conditions for long-term government debt when the debenture is sold (SOP 50 10 8.1, Sec. C, Ch. 1, Para. D). The bank portion is priced by the bank. It can carry a variable rate, and its terms vary by lender.

A 7(a) loan can carry a variable rate. SBA caps it at Prime plus 3.0 to 6.5 percentage points, depending on loan size (13 CFR § 120.214). A variable rate can change no more often than monthly. SBA also caps fixed rates. The cap is the Prime rate on the first business day of the month plus an allowable spread that SBA publishes. See today's caps on the [rates page](https://www.sbaexpress.loans/rates/).

Test your payment against a move. Suppose you borrow $900,000 over 25 years and the rate rises from 7% to 8%. The monthly payment rises from $6,361 to $6,946. That is $585 a month, or about $7,000 a year. These rates are assumptions for the arithmetic, not quotes.

## Compare a year of rent with a year of ownership

Compare a full year of rent with a full year of ownership before you buy. Suppose rent is $7,000 a month, or $84,000 a year. You buy a $1,000,000 building with a $100,000 down payment and a $900,000 loan. These are assumptions, not quotes.

- Loan payments: about $76,000 a year, using the 7%, 25-year loan above.
- Property tax: $14,000.
- Insurance: $6,000.
- Repairs and upkeep: $10,000.

Owning costs $106,000 a year in cash. That is $22,000 more than rent. About $14,000 of the loan payments is principal, which you keep as equity. Your true extra cost is about $8,000 a year, plus what your $100,000 down payment would have earned inside the business.

Buy when you expect to use the space for most of the loan term and the extra cost is small. Rent when the down payment would earn more working inside the business.

## When buying the building is a bad idea

- **The down payment would drain working capital.** SBA 504 cannot finance working capital or inventory.
- **You plan to lease out more than half the space.** SBA requires you to occupy 51% of an existing building, and a bank may treat the loan as an investment loan.
- **You may outgrow the space.** If you leave in five years, you sell into whatever the market is then.
- **A balloon comes due before you can refinance.** Refinancing depends on the property's value and your earnings at that time.
- **Your plans may change.** If the cost gap is small, flexibility can be worth more than equity.

## What lenders check before they lend

Lenders check four things before they lend on an owner-occupied building:

- **Coverage of the payment.** SBA's minimum on a Standard 7(a) loan is 1.15:1. A lender's own policy can be higher (SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.a).
- **The building.** Expect an appraisal and an environmental investigation. The property's use and history set how deep it goes. See the answers on [SBA appraisals](https://www.sbaexpress.loans/answers/sba-commercial-real-estate-appraisal-requirements/) and [environmental review](https://www.sbaexpress.loans/answers/sba-environmental-review-requirements/).
- **Your plan for the space.** The lender asks how much you will occupy and who will lease the rest.
- **Payoff terms.** A 504 loan carries a prepayment fee called a repurchase premium, which SBA's debenture form sets (SOP 50 10 8.1, Sec. C, Ch. 2, Para. C.7). Bank loans set their own prepayment terms.

## Sources

- [OCC Comptroller's Handbook, Commercial Real Estate Lending, Version 2.0 (March 2022), pp. 11, 43 and 131](https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf)
- [Interagency Guidelines on Policies, Real Estate Lending, supervisory loan-to-value limits (Federal Reserve Regulatory Service 3-1577.5)](https://www.federalreserve.gov/frrs/guidance/interagency-guidelines-on-policies.htm)
- [SBA, 504 loans](https://www.sba.gov/funding-programs/loans/504-loans)
- [SOP 50 10 8.1, Sec. A, Ch. 3, Para. C (p. 54); Sec. A, Ch. 5, Para. E (p. 105); Sec. B, Ch. 1, Para. C.2.a (p. 119); Sec. C, Ch. 1, Paras. B (p. 221) and D (p. 241); Sec. C, Ch. 2, Para. C.7 (p. 270); App. 18 (p. 395); App. 19, Para. A.1.g (p. 405)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [13 CFR § 120.214, Variable interest rates, including (a) frequency and (e) no balloon payments](https://www.ecfr.gov/current/title-13/section-120.214)
- [sba.gov/loans/504-loans; SOP 50 10 8.1, Sec. A, Ch. 3, Para. A (p. 51)](https://www.sba.gov/loans/504-loans/)