SBA 504 Loan for Daycare and Childcare Centers: Complete Broker Guide

The SBA 504 loan is one of the strongest financing tools for daycare and childcare center acquisitions, offering your borrower a low down payment, a long-term fixed rate on the CDC portion, and the ability to fold renovation and improvement costs into the total project. For brokers, daycare 504 deals require careful attention to state licensing, zoning, and the borrower's operational track record, but the program's favorable terms make it a compelling option for childcare operators looking to own their real estate. This guide covers the deal structure, eligibility requirements, packaging strategy, and the most common mistakes that stall these transactions.

What Is an SBA 504 Loan?

The SBA 504 program is a federal loan program designed to help small businesses acquire real estate and major fixed assets. It uses a split funding structure: a conventional lender provides the first mortgage, a Certified Development Company (CDC) provides a second mortgage backed by an SBA-guaranteed debenture, and the borrower contributes an equity injection.

The CDC portion carries a long-term fixed rate, which is the main draw for borrowers. The conventional lender's portion typically carries a shorter term and may be fixed or variable. For a deeper overview of the full program, see Janover Pro's SBA 504 loan guide.

Why SBA 504 for Daycare Centers?

Childcare centers are capital-intensive to open and operate. Between the real estate, buildout costs to meet licensing standards, playground equipment, and safety upgrades, the upfront investment is significant. The 504 program addresses this in three ways.

First, the equity injection is typically lower than what conventional lenders require. Most conventional commercial loans ask for 20% to 30% down. The 504 program can reduce that to as low as 10% to 15% of the total project cost, preserving working capital for the business.

Second, the fixed-rate CDC portion protects the borrower against rate volatility on a substantial portion of the financing. For a childcare business with relatively predictable revenue, payment stability is a meaningful advantage.

Third, construction and renovation costs can be included in the total project cost. If the property needs to be built out to meet state childcare facility standards, those costs can be financed rather than paid out of pocket.

Eligibility and Requirements for Daycare Properties

Not every daycare deal qualifies for SBA 504 financing. Here are the key requirements brokers need to verify before packaging the deal.

Owner-Occupancy

The SBA requires that the borrower's business occupy the property. For existing buildings, the threshold is generally 51% occupancy. For new construction, it is typically 60%. Daycare centers usually satisfy this requirement without difficulty because the operator's business uses the entire facility. However, if the building includes separately leased commercial space (a retail tenant on the ground floor, for example), the occupancy calculation requires closer analysis.

SBA Size Standards

The borrower must qualify as a "small business" under SBA size standards. For childcare services (NAICS code 624410), the SBA sets size limits based on annual revenue. These limits are updated periodically, so always check the current SBA size standards table at sba.gov before packaging the deal.

State Licensing

This is the biggest differentiator for daycare 504 deals compared to other property types. Every state regulates childcare facilities, and the requirements vary significantly. Licensing typically covers staff-to-child ratios, facility square footage per child, outdoor play space, safety and fire code compliance, background checks for staff, and health inspections. Lenders and CDCs will require proof that the borrower holds or can obtain all required licenses. If the borrower is acquiring an existing licensed facility, the license transfer process needs to be factored into the timeline.

Business and Personal Financials

Lenders and CDCs will underwrite both the business and the borrower's personal financials. Expect scrutiny on personal credit scores, personal liquidity, business tax returns, and a track record in childcare operations. For operators opening their first center, some CDCs may require additional collateral or a higher equity injection.

Zoning

Daycare centers require specific zoning approvals, and these vary by municipality. Some areas restrict childcare facilities to commercial zones, while others allow them in residential areas with a conditional use permit. Zoning must be confirmed before the deal moves forward. A property that looks perfect on paper but cannot be zoned for childcare use is a non-starter.

Environmental Review

SBA 504 loans require environmental review. A Phase I Environmental Site Assessment is standard. Properties near gas stations, dry cleaners, or industrial sites may trigger a Phase II assessment, adding time and cost to the process.

How the Deal Structure Works

The SBA 504 structure splits the total project cost across three sources.

The total project cost includes the purchase price (or construction cost), closing costs, eligible renovation and buildout costs, and certain soft costs. For daycare centers, buildout costs can be substantial, covering everything from classroom partitions and child-safe fixtures to playground construction and fire suppression systems.

The first mortgage lender takes the senior position, reducing their risk. The CDC takes a subordinate position, secured by the SBA guarantee. This structure gives the conventional lender comfort and often results in more competitive terms on the first mortgage than the borrower would get without the 504 backstop.

Fees and Costs

SBA 504 loans come with fees that brokers should account for when presenting the deal. These typically include a CDC processing fee, an SBA guarantee fee, and funding fees. Most of these can be financed into the loan. The conventional lender will also have its own origination fees and closing costs. Always present the all-in cost picture to your borrower so there are no surprises.

Sample Deal Structure

Here is what a typical daycare 504 deal might look like. These numbers are illustrative, not guarantees.

Use Janover Pro's commercial mortgage calculator to estimate the monthly payment on each portion and present the combined cost to your borrower.

What Brokers Need to Know When Packaging These Deals

Daycare 504 deals are not plug-and-play. Here is what separates a deal that closes from one that stalls.

Lead with the Operating Track Record

CDCs and conventional lenders want to see that the borrower knows how to run a childcare business. If your client already operates one or more centers, present the financials with enrollment data, revenue trends, staff retention numbers, and licensing history. A strong track record makes the underwriting conversation much smoother.

Use Janover Pro's DSCR calculator to show lenders where the deal stands on debt service coverage. For daycare centers, the revenue model is relatively predictable (monthly tuition per enrolled child), which lenders appreciate.

Address Licensing Early

State childcare licensing is the single biggest variable in these deals. Start the licensing conversation early. If the borrower is acquiring an existing licensed center, confirm whether the license transfers with the sale or requires a new application. If the borrower is opening a new center, map out the full licensing timeline, because it can take weeks or months depending on the state. Lenders want assurance that the business can legally operate before funding.

Identify the Right CDC

Not all CDCs have experience with daycare properties. Work with a CDC that has closed childcare deals before. They will understand the licensing nuances, buildout requirements, and the revenue model for childcare businesses, which speeds up the underwriting process.

Match the Conventional Lender

The first mortgage lender needs to be comfortable with both the 504 structure and the childcare sector. Community banks and credit unions with SBA lending departments are often the best fit for daycare deals, especially for smaller projects in the $500,000 to $3,000,000 range. Present the deal with a complete loan package: property details, business financials, enrollment projections, licensing status, and a clear capital stack summary.

Anticipate the Timeline

SBA 504 loans take longer to close than conventional commercial loans. For daycare deals, expect 60 to 90 days minimum, and potentially longer if there are licensing delays, zoning issues, or environmental concerns. Set your borrower's expectations early, and build this timeline into the purchase agreement.

Common Pitfalls and How to Avoid Them

Underestimating Buildout Costs

Daycare facilities have specific buildout requirements that standard commercial spaces do not. Child-height fixtures, commercial kitchen or food prep areas, secure entry systems, outdoor play equipment, and safety upgrades can add significant cost. Get detailed construction estimates before packaging the deal, and include these costs in the total project budget so they can be financed through the 504 structure.

Ignoring Zoning Until Late in the Process

Zoning approval for a childcare facility is not guaranteed, and neighboring property owners sometimes oppose daycare zoning applications. Confirm zoning compatibility before your borrower commits to a purchase agreement. If a conditional use permit is required, factor the application timeline and potential hearing dates into the deal schedule.

Weak Enrollment Projections

Lenders will scrutinize enrollment projections carefully, especially for new centers. Generic projections that assume 100% capacity from day one are not credible. Build projections based on local demographics, competing childcare providers, waitlist data (if available), and a realistic ramp-up timeline. Most new daycare centers take 6 to 18 months to reach stabilized enrollment.

Not Accounting for Working Capital

Opening or acquiring a daycare center requires working capital beyond the real estate costs. Staff hiring and training, insurance, supplies, marketing, and operating costs during the ramp-up period all require cash. If the borrower puts all available capital into the equity injection, there may not be enough left to operate the business. Work with your borrower to budget for both the real estate and the operational start-up costs.

Licensing Surprises

Each state has its own childcare licensing requirements, and they can be detailed. Facility inspections, staff credential requirements, square footage per child, outdoor space minimums, and health department approvals all take time. A deal that looks ready to close can stall for weeks if a licensing requirement was missed. Research the specific state requirements before packaging the deal.

Daycare Revenue Model for Underwriting

Understanding the revenue model helps brokers present a stronger deal package to lenders.

Lenders will evaluate revenue based on actual enrollment (for existing centers) or realistic enrollment projections (for new centers). Stabilized occupancy rates for well-run daycare centers generally range from 85% to 95%. Present both the current enrollment and the facility's licensed capacity to show the revenue upside.

Frequently Asked Questions

Frequently Asked Questions