If you're selling a building before the term of your SBA 504 loan ends, the prepayment penalty can come from two places: the CDC's 504 loan, which carries a declining premium set by SBA, and the bank's first mortgage, which carries whatever its own note says. On a 20- or 25-year 504 loan, the CDC premium gets smaller every year and reaches zero in year 11. This guide shows how that premium is calculated, what a sale in year 3, 7 or 11 might cost, and how the exit compares with SBA 7(a) and conventional financing.
What does the SBA 504 loan prepayment penalty cost if you sell the building before the term ends?
A 504 project normally has three layers. SBA's SOP 50 10 8.1, effective October 1, 2026, says a Third Party Lender generally provides 50% or more of the financing, a CDC (Certified Development Company) provides up to 40% through a 504 debenture guaranteed 100% by SBA, and the borrower injects at least 10%. If your sale pays off both loans, you'll face two separate prepayment calculations, set by two different documents.
The CDC side follows federal rules. Under 13 CFR 120.940, the borrower may prepay its 504 loan if it pays the entire principal balance, unpaid interest, any unpaid fees and any prepayment premium established in the note, and the CDC must then prepay the matching debenture with interest and premium. SOP 50 10 8.1 calls that charge a repurchase premium and says SBA Form 1504 outlines how it's calculated.
The bank side follows the bank's note. The SOP requires the Third Party Loan to have a term of at least 10 years when the 504 loan is 20 or 25 years (at least 7 years when the 504 loan is 10 years), and any balloon payment must be justified in the loan report and clearly identified in SBA's loan terms and conditions. The SOP sections we reviewed don't set a prepayment schedule for the bank note, so that part depends on the lender and on what you negotiate before closing.
How the declining prepayment premium works on 20- and 25-year 504 loans
SBA's 504 loan page lists 10-, 20- and 25-year maturity terms. The premium schedule comes from SBA Form 1504, the debenture itself, which sets the formula RP = D x (I x P). D is the remaining principal balance of the debenture, I is the interest rate stated on the debenture as a decimal, and P is the factor for the applicable year. In year 1 the premium equals a full year of debenture interest on the balance, and it drops by a tenth of the rate each year after that.
| Year | Factor, 20- or 25-year debenture | Premium at an assumed 6.00% rate (20/25-year) | Factor, 10-year debenture |
|---|---|---|---|
| 1 | 1.00 | 6.0% of balance | 1.00 |
| 2 | 0.90 | 5.4% | 0.80 |
| 3 | 0.80 | 4.8% | 0.60 |
| 4 | 0.70 | 4.2% | 0.40 |
| 5 | 0.60 | 3.6% | 0.20 |
| 6 | 0.50 | 3.0% | 0 |
| 7 | 0.40 | 2.4% | 0 |
| 8 | 0.30 | 1.8% | 0 |
| 9 | 0.20 | 1.2% | 0 |
| 10 | 0.10 | 0.6% | 0 |
| 11 and later | 0 | 0% | 0 |
The 6.00% rate is an assumption for illustration. Your premium uses the rate printed on your own debenture, and our SBA 504 loan rates guide explains how debenture rates are set.
Timing has rules too. Form 1504 says the CDC may repurchase the debenture only as a whole, on a payment date before maturity, after notifying SBA in writing at least 30 days ahead. The debenture pays on a semi-annual schedule, so ask your CDC how your target closing date maps to the next payment date and how much interest runs until then.
What selling in year 3, 7 or 11 might cost
| Sale timing | 504 debenture balance | 504 premium | Bank balance | Bank penalty (assumed) | Total prepayment cost |
|---|---|---|---|---|---|
| Year 3 (month 30) | about $763,000 | 0.80 x 6.00% = 4.8%, about $36,600 | about $960,000 | 3%, about $28,800 | about $65,400 |
| Year 7 (month 78) | about $690,000 | 0.40 x 6.00% = 2.4%, about $16,600 | about $879,000 | $0 | about $16,600 |
| Year 11 (month 126) | about $598,000 | $0 | about $771,000 | $0 | $0 |
A year-3 sale in this example costs about 3.3% of the original $2,000,000 project in prepayment charges alone, before broker fees, accrued interest or any unpaid loan fees. By year 7 the bank side has dropped off under our assumption, and the 504 premium is less than half its year-3 level. In year 11 the debenture premium is gone, and you'd owe only what the bank note requires on top of the payoffs.
Small timing changes add up. Each anniversary you cross moves the factor down by 0.10, which at a 6.00% rate is 0.6% of the remaining balance, or about $4,100 on a $690,000 debenture. If a buyer can wait a few weeks so the debenture's repurchase date lands after an anniversary, run that number before you agree on a date.
How 504 exit flexibility compares with 7(a) and conventional loans
The 7(a) program handles prepayment very differently. SOP 50 10 8.1 says any fee not expressly permitted in 13 CFR 120.221 is prohibited, and it lists charging prepayment fees among the things 7(a) Lenders may not do. Instead, 13 CFR 120.223 sets an SBA subsidy recoupment fee for loans with a maturity of 15 years or more: if the borrower voluntarily prepays more than 25% of the highest outstanding principal balance in any of the first three 12-month periods after first disbursement, the fee is 5%, 3% or 1% of the prepayments made in that period. Paying off a $1,700,000 balance in the third 12-month period would cost about $17,000 under that rule, and there's no SBA fee after the third period.
If your 7(a) loan has been sold on the secondary market, the SOP's note language requires written notice and all accrued interest before you prepay more than 20%, plus 21 days' interest from the date the lender receives that notice, less interest already paid for those days, if the payoff arrives less than 21 days later. Build it into your closing calendar.
| SBA 504 (20- or 25-year debenture) | SBA 7(a), maturity of 15 years or more | Conventional commercial mortgage | |
|---|---|---|---|
| Who sets the prepayment cost | Form 1504 for the CDC loan, the bank note for the first mortgage | SBA rule, and 7(a) Lenders may not charge prepayment fees | The lender's note |
| How long it lasts | Debenture: years 1 to 10. Bank: per note | First three 12-month periods after first disbursement | Per note |
| Sale in year 3 | 0.80 x debenture rate x balance, plus bank terms | 1% of prepayments if over 25% | Depends on the lender |
| Sale in year 7 | 0.40 x debenture rate x balance, plus bank terms | No SBA fee | Depends on the lender |
| Sale in year 11 | No debenture premium, bank per note | No SBA fee | Depends on the lender |
Conventional commercial mortgages vary the most. Some lenders use a step-down schedule, some use a yield-based formula and some charge nothing, so compare each offer's prepayment clause directly. The 504 carries a longer prepayment window in exchange for a long-term debenture with one stated interest rate on its face. If you're confident you'll hold the building past year 10, the debenture premium may never touch you. If a sale within five years is a live possibility, price the 504 premium and the bank terms against SBA 7(a) and conventional offers before you commit.
How to plan your exit timing before you sell
Use this checklist when you buy, and again when you start talking to brokers.
- Find your debenture's Date of Issuance and stated rate. Both appear on the debenture (Form 1504). Ask the CDC to confirm which premium year applies to the repurchase date that follows your target closing.
- Get the schedules in writing. SOP 50 10 8.1 says the Central Servicing Agent provides the Note amortization and prepayment schedules as post-closing documents. Ask your CDC for your copy.
- Read the bank note's prepayment clause. Write down the penalty type, the years it applies and any notice period.
- Line up the dates. Map the closing against debenture anniversaries, the next debenture payment date and the 30-day written notice to SBA that comes before a repurchase.
- Check ownership rules if you're selling the business too. The SOP says CDCs may not unilaterally approve a change in a borrower's ownership for 12 months after final disbursement.
- Net it out. Subtract both payoffs, both prepayment charges and accrued interest from the sale price.
Refinancing the 504 loan instead of selling won't sidestep the premium either. The SOP's refinancing rules say any applicable 504 prepayment penalties will apply.
If you're still choosing financing for a building purchase, compare exit terms as carefully as rates. Our guides to SBA 504 loan requirements and comparing business loan offers can help. EQ Funding routes one application to lenders who compete for commercial real estate financing, including SBA and conventional options, so you can see prepayment terms side by side. Approval and terms depend on each lender's review of your credit and repayment ability.