Is the SBA 504 / Bank Portion / Usually a Balloon Loan?
I'm working on the purchase of a $500K industrial flex condo.   I have a functioning model on the financing and taxation benefits, and the model really seems to like a 25 year / 6% / SBA 504.

I've contacted one reputable CDC in my area (they do a few hundred 504s a year), and they introduced me to a local community bank, and on the bank portion of the 504 the bank and CDC are proposing a 10 year term / 25 year amortization loan with some soon-to-be-disclosed prepayment.

The CDC is telling me a balloon term is all they ever see these deals getting done with (my preference is a straight amortizing loan with a known prepayment penalty through the whole term).

The bank involved only wants to do balloon loan.  Am I crazy to shop around banks to find a fully amortizing loan for the bank portion of the 504?   Is the balloon really just "how things are done" for 504's?
[{"id": "ip7nwi1", "text": "Good luck finding that bank. Your CDC (who is involved in all these in your geographic area) is telling you these are the terms that get closed.\n\nWhy would any lender take an extra 15 years of duration risk they don't have to? The rules on 7a loans preclude balloons; they do not on 504s.\n\nFurther question... why do you want to do a 504 for half a million? That's barely out of SBA express territory.", "replies": [{"id": "ip7p4ok", "text": "&gt;inding that bank. Your CDC (who is involved in all these in your geographic area) is telling you these are the terms that get closed.  \n&gt;  \n&gt;Why would any lender take an extra 15 years of duration risk they don't have to? The rules on 7a loans preclude balloons; they do not on 504s.  \n&gt;  \n&gt;Further question... why do you wa\n\nWell... that's why I'm asking -- I trust the CDC actually; the lady is fast and on top of thing since they just crank these deal out.   The banks are really obnoxious to get an answer out of on any terms of their portion...  \n\nThe 504 I think has the lowest interest rate so that's what I'm going for until I find out otherwise.", "replies": [{"id": "ip7sg6o", "text": "&gt;The 504 I think has the lowest interest rate so that's what I'm going for until I find out otherwise.\n\nAnd the 7a will get you a fully amortizing term.\n\nBesides, if rates on owner occupied real estate get back into the 3%-4% range in the next 10 years you're not going to refinance?", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ip80pv1", "text": "So at least in Chicago where I'm at, I just had a call with Bank of America, and they'll do a 25/25 fully amortizing with no pre-payment penalty on the bank portion of the 504.  So the answer is...  maybe it is worth your time to shop this a bit.", "replies": [{"id": "ip83jkl", "text": "What\u2019s the rate on the fixed 25 yr bank portion? Every bank has those terms. I\u2019m a lender and we do that for 504 and 7a. The catch is that the rate is fucking horrible. \n\nSBA loans with real estate aren\u2019t meant to be carried out to term. There\u2019s a reason the prepayment penalty goes away on 7a after 3 years. Typically you can refinance into a conventional loan with enough equity by then, so that\u2019s why most people don\u2019t care about a 25 year fully fixed SBA loan because the rate is so bad.", "replies": [{"id": "ip84dei", "text": "I went to the same college as this banker lady, in the same year, she made a good impression on me in our meeting... she seems like she knows what she is talking about, and they'll do a 25/25 no prepayment penalty, 2.99% 1 year promo on the bank rate side.  I'm not around this SBA product (ever), so I don't know either...\n\nWe talked about an SBA 7(a) -- and the fact they maybe they could close faster on it to avoid more Fed rate hikes.   Do you think it's worth chasing the 7(a) to try to beat the Fed's timing or just go with the 504 and eat the rates with wherever they are going to be?", "replies": [{"id": "ip85mlx", "text": "The promo sounds nice but what about after that? \n\nThis hike is already baked into treasury bonds, which drives long term borrowing rates. So you\u2019re already going to get hit with the brunt of it at this point until the next months inflation report. Unless it\u2019s going to take wildly longer to close the 504, I would just go with it. \n\nAlso 504s will still have a penalty on the debenture, it\u2019s not something the bank has control over, it\u2019s from the CDC. Unless the bank is going to cover any prepayment fee for you. The other rub with 504 is that you can only payoff twice a year on anniversary and semi anniversary of the debenture, which can be tricky from a timing perspective sometimes on a refi. I\u2019m assuming the debenture rate is still not great in the grand scheme of things at this point so you would look to refi it when rates come down.", "replies": [{"id": "ip894fs", "text": "&gt;the bank is going to cover any prepayment fee for you. The other rub with 504 is that you can only payoff twice a year on anniversary and se\n\n(So the CDC lady, who I really like, says no way on what this BoFa lady is saying... they only are talking about 7(a) on the 25/25.   I'm not sure why this is so difficult on the bank side for this thing.).\n\nIt's like nailing down jello to get any bank to commit to the rate without underwriting (which I undestand), it sounds like 6-6.5% today on the 25/25.\n\nAgreed the prepayment on the 504 portion is gonna be there.\n\n\\---\n\nThe CDC, Somercor, is excellent.   I'm letting them loose on BoFa to make sure we are talking a amortizing portion on the bank loan.\n\n&amp;#x200B;\n\n(BoFa comes back, and says 25/25, no prepayment penalty. 2.99% 1 year teaser rate.   I think this is legit).", "replies": [{"id": "ip931f4", "text": "&gt;I'm not sure why this is so difficult on the bank side for this thing.)\n\nWho are you talking with at BoA? Big banks don't typically have full time commercial lenders working on $500,000 SBA loans in market. Odds are whomever you are talking to is relaying it through a centralized underwriting group.\n\nYou can search the SBA for the bank lenders with the most loans (and $s) for your state [here](https://data.sba.gov/dataset/lender-activity-reports/resource/f2b34c01-b29f-45ec-90c5-69e9c92e8117) in the third party report.  That might give you a better idea of who knows their shit when it comes to SBA lending.", "replies": [], "depth": 6}, {"id": "ip9iupn", "text": "6-6.5% on 25 year fully fixed cannot be real. If so, then that\u2019s a crazy deal. I would have assumed it would be 9%+. It would be tough for you to find a 5 year fixed for 6-6.5% today, let alone 25 years. \n\nHell, it wouldn\u2019t even be a stretch to say that a conventional 5 year term is 6-6.5% today, let alone an SBA loan.", "replies": [{"id": "ip9o5o3", "text": "&gt;then that\u2019s a crazy deal. I would have assumed it would be 9%+. It would be tough for you to find a 5 year fixed for 6-6.5% today, let alone 25 years.\n\nReally?   I mean we have a business line of credit for $250k that's like Prime + 1% or something.   Citi just sent me an email that it's like 7.25% to pull on the line right now.  (Obviously it floats, but...).\n\nI feel like vomiting borrowing at 6% for 25 years, but our IRR on this condo vs leasing is like 18% annual modeling in a 1% price appreciation on the condo (IL sucks...).   This thing pencils out even with 7% interest rates but we really need that 90% LTV to juice the return and make sure there is no minimal buildout.\n\nIf we could manage 3% annual price appreciation -- that's a dream in IL.\n\n80% LTV + $100k buildout, and we should be leasing for certain.   This is some really ideally built out space for us (worth $200k in build for us to replace) that just makes the numbers work so great.", "replies": [{"id": "ipaog7f", "text": "Yeah prime + 1% is common pricing for operating lines. That\u2019s probably what most of my clients are at on operating lines, some at prime. \n\nSBA is different though. Typically the credit quality is lower (hence the guaranty of the government for 75% if the loan), lower cash flow coverage requirements, there\u2019s higher LTVs, on biz acquisitions there\u2019s essentially no collateral, less required time in business, etc. Lots of reasons for the loan to be priced higher to compensate for the appropriate risk. SBA loans are always higher rate than conventional.", "replies": [{"id": "ipc8qao", "text": "&gt;t though. Typically the c\n\nReally?   So you think if I go through conventional (we have the cash), we'd actually end up with a lower rate than a 504?", "replies": [{"id": "ipdyr0c", "text": "Yeah 100% guaranteed. You probably won\u2019t get a rate promo but I know you can if you search around. My rates are not as competitive right now but even my 5 year fixed and 25 year amort is 6% with zero loan fee. I have seen some 10 year fixed at 5% with the right lender (fees might be more). \n\nYou just need to put more down. Also a higher cash flow coverage requirement might preclude you from qualifying (I have no idea what your financials look like, this is just a possibility)", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]