Understanding SBA Loans in Childcare Real Estate: Why Assumability Matters

Financing is one of the most overlooked advantages in today’s childcare real estate market. Many operators don’t realize that Small Business Administration (SBA) loans are assumable, meaning a buyer can take over the seller’s existing loan under similar terms. In a rising interest rate environment, that can be the difference between a deal working and not penciling at all.

Why Assumability Creates Real Value

Over the past two years, SBA loan rates have climbed from the low 5 percent range to around 7.5 to 8.0 percent. A property financed even 18 months ago might have a rate nearly 200 basis points lower than what’s available today. When that loan is assumable, the buyer can effectively inherit a below-market rate and avoid the cost of originating new debt.

For sellers, this feature can dramatically expand the buyer pool and justify stronger pricing. For buyers, it improves cash flow and can make an otherwise marginal acquisition viable.

The Difference Between SBA 7(a) and 504 Loans

Both SBA programs support small-business ownership, but their structure and assumability terms differ.

SBA 7(a) Loan

• Purpose: Flexible; can finance real estate, business acquisition, or working capital.

• Structure: One combined loan, typically 25 years on real estate, variable rate tied to Prime plus a spread (currently around 7.75 to 8.25 percent).

• Down Payment: Usually about 10 percent.

• Assumability: Yes, but requires lender and SBA approval. The buyer must meet SBA eligibility standards and demonstrate adequate business experience and credit.

• Best Use: Acquiring an existing childcare business where goodwill and equipment are part of the transaction, not just the real estate.

SBA 504 Loan

• Purpose: Primarily for owner-occupied real estate or heavy equipment.

• Structure: Two pieces

• A first mortgage from a bank, covering roughly 50 percent of the project.

• A second mortgage from a Certified Development Company (CDC), typically 40 percent of the project, funded by SBA-backed debentures.

• Down Payment: Usually 10 percent, but can increase for startups or single-purpose properties.

• Rate: The CDC portion is fixed for 20 to 25 years, often below market (recently around 6.2 to 6.6 percent).

• Assumability: The SBA 504 second mortgage is assumable with SBA and CDC consent, and the bank’s first mortgage can often be assigned or refinanced simultaneously.

• Best Use: Purchasing or constructing real estate when the operating business will occupy at least 51 percent of the space.

When a Second Mortgage Becomes Part of an Assumption

When a buyer assumes an SBA 504 or 7(a) loan, they’re taking over the seller’s existing debt at the current balance and interest rate. If the property is selling for more than the outstanding loan amount—which is almost always the case—the buyer has to bridge that gap.

Example

A childcare property was purchased three years ago for $1.8 million with a 90 percent SBA 504 loan. The loan balance today is about $1.55 million, but the market value has risen to $2.1 million.

That $550,000 difference between the sale price and the remaining loan balance can be covered in a few ways:

1. The buyer contributes additional equity.

2. The seller carries a second mortgage or seller note for part of the difference.

3. The buyer obtains a small new second loan from a participating bank to fill the gap.

Because the SBA’s portion cannot be increased, any additional debt must come in a subordinate second position. This allows the buyer to assume the favorable low-rate SBA loan while still paying the seller full value.

Updated Structure

Purchase price: $2,100,000

• Existing SBA 504 loan balance (assumed): $1,550,000 at 5.75%

• New second mortgage or seller note: $400,000 at 8%

• Buyer equity: $150,000

The blended loan-to-value is around 93 percent, but the overall debt service remains manageable because most of the balance is financed at the below-market SBA rate.

This is one of the most effective ways to complete a transaction when today’s higher interest rates would otherwise make new financing cost-prohibitive.

Why This Matters in Childcare Transactions

Childcare centers are high-cost, low-inventory assets with limited new development. SBA assumability adds liquidity and flexibility to a market that needs it. A buyer taking over a 2021 SBA 504 loan at 5.75 percent can save hundreds of thousands of dollars in interest compared to new financing at 8 percent.

For sellers, advertising assumable SBA debt is a powerful differentiator. It signals to buyers that the deal already has attractive financing in place, often allowing the property to trade faster and at stronger pricing.

At The OFF MKT, we regularly structure transactions where assumable financing, seller participation, and SBA programs align to make childcare deals work. These are the nuances that separate standard commercial sales from specialized childcare real estate.

Key Takeaway

SBA loans are not just a financing tool—they’re a bridge that can carry a deal across the gap between high rates and buyer affordability. Understanding their assumability, rate advantages, and how second mortgages can supplement rising prices allows operators, investors, and brokers to unlock opportunities that traditional lending might not support.

In today’s market, where capital is cautious and debt costs are high, assumable SBA loans can be one of the most valuable selling features a childcare property has.