Own vs. Lease: The SBA 504 Math for Medical Groups

Most medical groups I work with in Kansas City have the same blind spot. They'll spend three weeks negotiating a lease renewal and zero hours running the buy-versus-lease math. Then they sign a 7-year extension at $26/sf NNN and wonder why they're still renting in 2033.,Here's the part the lease broker won't tell you: with 10% down on an SBA 504 loan, a four-doctor group can buy the building they're sitting in, occupy what they need, and lease the rest to the dermatologist next door. The tenant rent covers half the debt service. The other half costs roughly what they were already paying in rent — except now they own the dirt.,This is the math. No theory. No SBA boilerplate. Just the numbers I run for medical clients before they sign anything.

The SBA 504 is a three-party loan. A conventional bank funds the senior 50% at market rate, typically 25-year amortization with a 5- or 10-year reset. A Certified Development Company (CDC) — the SBA's licensed nonprofit partner — funds 40% via a fully-amortizing 25-year debenture at a fixed rate set monthly. You bring 10% equity. That's it.,The 40% SBA debenture is the part that wins the deal. It's fixed for 25 years. No reset, no balloon, no rate risk. When the senior loan resets in year 10, you're only exposed on half the stack. The other half is locked in at whatever rate the Treasury set the month you closed.,Borrower fees run roughly 3% on the SBA portion and get rolled into the debenture, so your out-of-pocket stays at 10% of total project cost — including the building, soft costs, and equipment with a useful life over 10 years.

SBA requires the borrowing entity to occupy at least 51% of an existing building (60% for ground-up construction). Doctors hear 'occupancy requirement' and assume it limits them. It doesn't — it unlocks the second income stream.,Buy an 8,000 square foot medical office. Your group takes 4,500 sf — exam rooms, lab, admin, break room. You lease the remaining 3,500 sf to a complementary tenant: physical therapy, imaging, a solo specialist. At $24/sf NNN that's $84,000 a year of rental income coming back to your real estate LLC.,That tenant income offsets the building's debt service before the practice writes a single check. Your effective occupancy cost — the rent your practice would pay its own real estate entity — drops to roughly what you're paying now, except the principal payments are building equity in an asset you own.

Real numbers. $2.5M acquisition, 8,000 sf medical office in a south-of-the-river KC submarket. Stack: $1.25M senior bank loan at roughly 7.25%, $1.0M SBA 504 debenture at roughly 6.40% fixed for 25 years, $250K borrower equity.,Annual debt service runs about $170,000 combined — call it $108K on the senior, $62K on the SBA portion. Add property taxes, insurance, and reserves, and the building's all-in carry is around $210,000 a year.,Lease 3,500 sf to a PT group at $24/sf NNN = $84,000. Net building carry: $126,000 a year. Spread across the 4,500 sf the practice occupies, that's an effective $28/sf — within a dollar or two of what they were paying as a tenant. Except now they own the asset, capture appreciation, and stop paying someone else's mortgage.

The size standards are generous. Business net worth must be under $20 million. Average net income over the last two years must be under $6.5 million. Almost every independent medical group in the Midwest clears both bars without trying.,Use of funds is constrained but logical. The loan finances fixed assets: real estate (land and building), heavy equipment with a useful life over 10 years, and certain soft costs tied to acquisition or construction. Working capital, inventory, and goodwill don't qualify — that's what 7(a) is for.,Personal guarantees from any 20%+ owner are required. The practice entity typically signs the lease to the real estate LLC at market rent, which underwrites the deal and creates a clean tax structure. Your accountant will know the drill; if they don't, find one who does before you sign a letter of intent.

SBA 7(a) goes up to 90% LTV and can include working capital, but it's typically variable rate, capped at $5M total, and the amortization on real estate maxes out at 25 years on a blended basis. Good for smaller deals or when you need operating capital alongside the real estate.,Conventional commercial loans close in 45 days instead of 90, with cleaner paperwork and no SBA fees. The price is 25-30% down and a 5- or 10-year balloon. Right answer when speed matters or when the borrower has the cash and wants to avoid SBA's prepayment penalties.,504 is the slow-but-cheap winner for owner-occupiers who plan to hold for 10+ years. Lowest down payment, fixed-rate protection on 40% of the stack, longest amortization. The trade-off is 75-90 days to close and a prepayment penalty that declines over the first 10 years. For a medical group acquiring its forever home, that's the right trade.