SBA 504 Medical Office Building Loans for Internists
An SBA 504 medical office building loan is one way internists can buy, build or renovate the property their practice occupies. The program is designed for owner-occupied commercial real estate and certain long-term fixed assets, and it may offer long repayment terms and a fixed-rate component that can help practices plan occupancy costs.
This guide explains how the program is generally structured, what it can and cannot fund and what lenders review. SBA program rules change from time to time, and eligibility and terms depend on the business, the borrower, use of proceeds, program rules and lender review. Every loan is subject to approval, and nothing here is legal, tax or accounting advice or a commitment to lend.
Why Internists Consider Owning Their Building
Leasing works well for many practices, but some internists prefer to own. Potential reasons include:
- More control over the space, renovations and long-term location
- Protection from rent increases or a landlord’s decision not to renew
- The potential to build equity in real estate over time
- Flexibility to lease extra space to other providers, where program rules allow
Owning also brings responsibility for maintenance, taxes and vacancy risk. Our guide on whether to buy or lease a medical office for an internal medicine practice walks through that decision.
How an SBA 504 Medical Office Building Loan Is Structured
A 504 loan typically involves three sources of funds:
- A first mortgage from a bank or other lender: secured by a senior lien on the property
- A loan from a certified development company: backed by the SBA and secured by a subordinate lien, often with a long-term fixed rate
- The borrower’s equity contribution: the amount required depends on program rules and factors such as whether the property is special purpose or the business is new
Because the structure combines two lenders, closing involves coordination between them, and the process can include additional documentation compared to a single conventional loan.
What a 504 Loan Can Fund
The program is focused on long-term fixed assets. Eligible uses may include:
- Purchasing an existing medical office building or condo unit
- Constructing a new building on land the practice will occupy
- Renovating, expanding or converting a building
- Certain long-life equipment, subject to program rules
- Some soft costs and fees related to the project
A 504 loan generally cannot be used for working capital, practice goodwill or inventory. Internists who want to buy a practice and its building together may use a different program or a combination of loans. Our article on whether to buy a medical practice and building together explores that situation.
SBA 504 vs. SBA 7(a) for Real Estate
SBA 7(a) loans can also finance owner-occupied real estate, and they are more flexible about combining real estate with practice acquisition, working capital and equipment in one loan. The SBA 504 program is narrower in purpose but is built specifically for fixed assets.
Which program fits depends on the project. Physicians often weigh:
- Whether the project is purely real estate or includes business acquisition
- Interest rate structure and how long the rate is fixed
- Fees and any prepayment penalties
- The equity contribution each program would require for the specific deal
Owner-Occupancy and Ownership Structure
The 504 program requires the operating business to occupy a required portion of the building, with different rules for existing buildings and new construction. Many physicians hold the real estate in a separate entity that leases the property to the practice. Program rules address how those entities must be structured and who must guarantee the loan, so healthcare counsel and an accountant should review the arrangement.
Internists buying space in a multi-tenant medical building may consider a condo unit. Our guide to medical office condo loans for primary care physicians covers that option.
What Lenders Review
Lenders and certified development companies typically evaluate:
- The practice’s historical cash flow and ability to cover the new occupancy costs
- The physicians’ personal credit, liquidity and guarantees
- An appraisal of the property and, for construction, the budget and contractor
- Environmental reports and other property due diligence
- Occupancy plans and any tenant leases
Comparing your current rent with projected ownership costs, including taxes, insurance and maintenance, can help you and the lender understand the impact. You can model loan payments with our SBA loan calculator. Estimates are for planning purposes only and do not represent an offer or approval.
Preparing Your Request
Gathering information early can help the process move more smoothly. Internists planning a 504 project typically prepare:
- Several years of business and personal tax returns and current financial statements
- A purchase contract or construction budget, plans and contractor information
- A personal financial statement for each owner
- A description of how the practice will use the space and any plans to lease part of it
- A schedule of existing debts, leases and other obligations
Engaging an experienced lender early can help identify program issues before you commit to a property.
Mistakes to Avoid
- Underestimating maintenance, property taxes and other ownership costs
- Buying more space than the practice can occupy or lease
- Overlooking prepayment terms if you may sell or refinance
- Draining practice cash for the equity contribution and leaving too little in reserve
Final Thoughts
An SBA 504 medical office building loan can give internists a path to owning their space with long-term financing designed for real estate. Understanding the structure, eligible uses and occupancy rules can help you decide whether it fits your practice and your long-term plans.
US Medical Funding helps internists finance medical office real estate, acquisitions and expansions. Learn more about our full range of internal medicine practice financing options.
