SBA 504 DSCR: How the Bank Loan and the CDC Debenture Are Tested Together Under SOP 50 10 8.1

The 504 floor moved from 1:1 to 1.15x on 1 October 2026. It is measured on history first, and it counts both loans at once.

FSC Consulting, Inc. is run by Sarrah Allen, MAI.

For SBA 504 files governed by SOP 50 10 8.1, the debt service coverage ratio must be at least 1.15x, calculated on historical cash flow, and the test covers the first-lien bank loan and the CDC debenture together. This is how a feasibility study consultant builds that test: what the SOP and 13 CFR Part 120 require, what a debenture payment really costs once its fees are counted correctly, and a worked owner-occupied purchase that passes on one permitted basis and fails on the other.

Until 30 September 2026, the 504 coverage floor was a formality. SOP 50 10 8 required a ratio of at least 1:1, and no Third Party Lender we work with would book a loan that merely broke even. Most CDC files cleared SBA's number long before they reached the bank's.

That changed on 1 October. Section C of SOP 50 10 8.1 now states that "The DSC ratio must be equal to or greater than 1.15:1," and that the global ratio must be at least 1.0:1. The floor sits in the middle of the range where owner-occupied operating companies typically land on their first test as owners, which is roughly 1.10x to 1.30x. It no longer filters out only the weakest files.

We build coverage exhibits for 504 projects every month, usually for owner-occupied buildings held in an eligible passive company. This article sets out how the combined test works, how to calculate the debenture side of the denominator without the common shortcut, and where real files now pass or fail. Our DSCR methodology guide covers the numerator conventions and the SBA, USDA and bank floors side by side. Our 504 consultant's role guide covers the program's structure and timing. This piece goes deeper on one question: whether the operating company can carry both loans.

Which SOP Governs the File

SBA issued SOP 50 10 8.1 on 14 August 2026 through Information Notice 5000-880695 and reissued it with technical policy updates on 25 September 2026 through Information Notice 5000-882227. Both carry an effective date of 1 October 2026. The SOP replaces SOP 50 10 8, effective 1 June 2025.

The transition trigger deserves care. The August notice applies SOP 50 10 8.1 to applications issued an SBA loan number on or after 1 October 2026. Practitioner summaries describe the September notice as applying to applications received by SBA on or after that date, and note that for PLP lenders SBA treats an application as received when it is assigned a loan number. In practice the two readings rarely diverge, but a file submitted in late September and numbered in October sits exactly on the line.

The first line of any 504 coverage exhibit should therefore state which SOP governs the file and why: the date of submission, the date of the loan number, and the CDC's confirmation. The difference between the two floors is 15% of the operating company's entire debt service. That is not a detail to leave implicit. Our SOP 50 10 8 vs 8.1 DSCR calculator shows both results side by side.

What the Rules Actually Say

13 CFR Part 120 contains no coverage ratio for 504 loans. The general credit standard at 13 CFR 120.150 requires that loans be so sound as to reasonably assure repayment. The 504 subpart adds pre-closing certifications under 120.892: the borrower certifies that there has been no unremedied substantial adverse change in its ability to repay, with interim financial statements current within 120 days of closing, and the CDC issues a matching opinion. A CDC with delegated PCLP authority is responsible under 120.848(c) for properly determining borrower creditworthiness. None of this is numeric.

The number lives in the SOP. Section C, Chapter 1 of SOP 50 10 8.1 sets two ratios:

As reproduced by CDC summaries of the same provision, coverage is calculated on a historical basis using either the last fiscal year-end or an average of the last two fiscal year-end statements. If historical cash flow does not show sufficient coverage after the effects of the SBA loan, the CDC must analyze projections. If the projections show repayment in Year 2 but not in Year 1, sufficient liquidity must be shown to cover the Year 1 shortfall.

Three features of the rule matter in practice. The basis is historical, so projections are a fallback rather than the base case. The CDC chooses between the last year and a two-year average, and in a business with uneven years that choice can decide the file. And the 504 chapter does not define cash flow in its own words. CDCs apply EBITDA-based operating cash flow, consistent with the 7(a) definition, and the adjustments described below.

One Test, Two Lenders

A 504 project has two lenders and one coverage test. Section A of SOP 50 10 8.1, in the eligible passive company conditions, requires the lender to consider whether the operating company's cash flow will cover the loan payment, "for 504 loans, including the loan payment to the Third Party Lender," in addition to the expenses of holding the property. The next provision counts payments to SBA, to the Third Party Lender and, where a lender finances the borrower's contribution, to that lender as well, all within the loan payment being tested.

The result is a single blended test. The numerator is the operating company's cash flow. The denominator is everything the project and the business owe: the first-lien payment, the debenture payment with its annual fees, any borrowed contribution, and the operating company's other business debt. SBA does not test the bank loan alone or the debenture alone. A bank may impose its own covenant on its own basis, but that is a lender term, not an SBA requirement.

Two consequences follow for the exhibit.

The first is structural. Most owner-occupied 504 projects place the real estate in an eligible passive company that leases it to the operating company, and SOP 50 10 8.1 requires the EPC to lease 100% of the rentable property to that operating company. The lease is real for legal purposes and circular for credit purposes, so the test looks straight through it to the operating company.

The second is analytical. When a business moves from renting to owning, its rent disappears and is replaced by debt service and the costs of holding the property. The standard treatment adds current rent back to historical EBITDA and then deducts any holding costs the business does not already bear. Under a triple-net lease, taxes, insurance and maintenance are usually already in operating expenses and stay there. Under a gross lease, the landlord was paying them, and they must come out. A study that skips the add-back understates coverage. A study that adds back gross rent without deducting the landlord's costs overstates it, and that is the error we correct most often in owner-occupied files.

The Capital Stack Writes the Denominator

The 504 structure is set largely by regulation, and every element of it changes debt service.

Under 13 CFR 120.801(c) and 120.910, permanent financing consists of a borrower contribution of at least 10%, a debenture-funded 504 loan of up to 40% on a second lien, and a Third Party Loan for the balance on a first lien. The contribution rises to 15% if the business has operated for two years or less or the project is a limited or special-purpose property, and to 20% if both apply. Under 120.920(a), the Third Party Loan must still be at least 50% of project cost in those cases, so the extra equity comes out of the debenture.

That matters for coverage. The bank payment does not change between tiers. The cheaper, longer debenture shrinks.

The debenture is capped. Under 120.930 and 120.931, the 504 loan is limited to 40% of project cost plus eligible administrative costs, raisable to 50% for good cause, with an outstanding balance of $5,000,000 per borrower and affiliates, or $5,500,000 per project for small manufacturers and qualifying energy projects. The minimum is $25,000.

The Third Party Loan has its own rules. Under 120.921(a), it must run at least 7 years beside a 10-year debenture and at least 10 years beside a 20-year debenture, and SBA Form 2287 applies the 10-year minimum to 25-year debentures. It may carry no early call or demand feature outside default. SBA removed the regulatory sentence on balloon disclosure in April 2023, but Form 2287 still requires any balloon to be disclosed to and approved by SBA. Practitioner reports conflict on whether the September technical update removed a prohibition on bank amortization running longer than the debenture term. Confirm the position with the CDC on any file where the bank proposes it.

Interim financing sits outside the coverage test and inside the cash plan. Under 120.890, an interim lender, usually the Third Party Lender, may finance everything except the borrower's contribution until the debenture is sold, and the debenture then repays the interim loan including its interest and fees. On a purchase the bridge is short. On a ground-up project it can run for many months, and its interest belongs in the project budget.

What a Debenture Payment Actually Costs

The debenture is the cheapest money in the stack, but its quoted rate is not its cost. Three layers sit above the Treasury benchmark, and each has to be counted correctly.

Financed fees. Most 504 closing fees are added to the net debenture to produce the gross debenture: a CDC processing fee of 1.5%, a funding fee of 0.25%, an underwriter fee of 0.40% on 20- and 25-year debentures (0.375% on 10-year), and the FY2027 SBA upfront guaranty fee of 0.50%. Together they add about 2.65%, plus up to $2,500 of closing costs. The Third Party Lender's 0.50% participation fee is not financed.

The note rate. SBA prices a pool of debentures each month at a spread over the Treasury benchmark. At the 8 October 2026 pricing, the 25-year debenture priced at 5.85% and the 20-year at 5.78% against a 10-year Treasury benchmark of 5.28%. The Central Servicing Agent then sets the borrower's note rate, fixed for the life of the loan, which CDCs reported at about 5.91% for 25 years and 5.86% for 20 years. Principal and interest amortize level over 120, 240 or 300 months on that rate.

Annual fees. On top of principal and interest, the borrower pays the FY2027 SBA annual fee of 0.203% (0.204% for refinancing without expansion), a CDC servicing fee of at least 0.625% under 13 CFR 120.971 and up to 1.0% outside rural areas, and a CSA fee of 0.10%. The fees are charged on the balance outstanding at the start of each five-year period and held flat for five years, so in years one to five they apply to the full gross debenture. For FY2027, manufacturers, listed food-supply-chain businesses and rural borrowers have the SBA upfront and annual fees waived.

The published effective rate, 6.974% for the 25-year debenture at the October pricing, folds all three layers into one figure across the life of the loan. It is a disclosure figure. Because the fees are front-loaded and step down every five years, amortizing at the effective rate understates debt service in the first five years, which is exactly the period a historical test measures. The correct exhibit uses two lines: note-rate principal and interest, plus the fee strip on the period's opening balance.

The effective rate tells a borrower what the loan costs. It does not tell a credit officer what the loan demands.

Worked Example: An Owner-Occupied Building Purchase

An HVAC contractor that has operated for eleven years buys the 24,000-square-foot industrial building it currently leases. The building is general-purpose, so the standard 10% contribution applies. Total project cost is $4,000,000. The operating company is the only tenant, and an eligible passive company will hold title.

The gross debenture is the net debenture plus about 2.65% of financed fees and $2,500 of closing costs, rounded to $1,645,000 for illustration. The CSA's figure will differ slightly because the underwriter fee is computed on the gross amount.

The bank loan assumes 7.50% on a 25-year amortization with a 10-year term. That is a base case, set against a WSJ Prime of 7.00% and current first-lien indications of roughly 6.6% to 9%. The debenture uses the 25-year note rate of 5.91% over 300 months. The fee strip uses the minimum CDC servicing fee.

The operating company reported EBITDA of $244,000 for FY2024 and $214,000 for FY2025, after a market salary for the owner and after $150,000 a year of rent. The lease is triple net, so the business already carries taxes, insurance and maintenance, and those costs continue after the purchase. The rent does not. Adding it back gives adjusted EBITDA of $394,000 for FY2024 and $364,000 for FY2025, an average of $379,000. The business has no other term debt.

The file passes on the average and fails on the last year. Both bases are permitted, so the file is approvable as presented. The exhibit should still say which basis the CDC used and why, because a declining second year is the first thing a credit committee will ask about.

The same denominator reads cleanly against every threshold in play.

The last row is the one that most often decides a 504 file in practice. It is lender policy rather than SBA policy, and the exhibit should label it that way.

Two later dates complete the picture. At the start of year six, the debenture balance is about $1,477,000 and the fee strip falls to about $13,700 a year. At the end of year ten, the bank loan reaches its maturity with about $1,594,000 outstanding while the debenture runs another fifteen years. The SOP test does not measure that refinancing event. A feasibility study should.

Where 504 Files Now Break

The example sits close enough to the floor that small assumptions move it across. We test four on every 504 file.

The bank rate. At 8.50% instead of 7.50%, the Third Party Loan payment rises to $193,255 and combined debt service to $334,622. The two-year average falls to 1.13x, and the file fails on both bases. A 100-basis-point move on half the capital stack is enough.

The contribution tier. If the CDC classified the building as special-purpose, the borrower would contribute 15%, or $600,000, and the net debenture would fall to $1,400,000. Combined debt service drops to $301,108, and coverage rises to 1.21x on the last year and 1.26x on the average. An extra $200,000 of equity buys about 0.07x of coverage. Until the CDC rules on special-purpose status, the exhibit should run both tiers.

The CDC servicing fee. We used the 0.625% minimum. At 1.0%, the fee strip rises by about $6,170 a year, and average coverage falls to 1.17x. The file still passes, with less room. Each 0.10% of servicing fee costs about $1,645 a year on this debenture.

The effective-rate shortcut. Amortizing the gross debenture at the 6.974% effective rate, instead of the note rate plus fees, gives debenture debt service of $139,191 instead of $141,367. On the FY2025 basis, coverage becomes 1.1499x. Rounded to two decimals, that is 1.15x. It is not 1.15x. A method error of about $2,200 a year makes a failing file appear to pass, which is exactly the kind of finding a reviewer at the Sacramento Loan Processing Center is positioned to make.

Rounding is not underwriting. When a file sits within a few thousand dollars of the floor, the exhibit should carry the ratio to three decimals and say so.

When History Falls Short

Where historical cash flow does not cover, the CDC must analyze projections, and if projected repayment appears in Year 2 but not Year 1, liquidity must cover the Year 1 shortfall. Practitioner summaries report that the projection analysis must cover at least two years and that the 504 provision sets no separate projected ratio.

Suppose the contractor had only its weaker year and projected Year 1 adjusted EBITDA of $300,000 against $318,725 of debt service. The literal shortfall to repayment is $18,725, which is the minimum liquidity the file must show. The shortfall to 1.15x is $66,534. We present both, label the first as the SOP test and the second as a prudent benchmark, and show where the liquidity sits: cash remaining after the contribution, an interest reserve, or an available working capital line.

Two cautions apply. The SOP puts projections second, so a study that leads with projected coverage for an existing business with weak history is arguing against the structure of the rule. And a projection has to be supported line by line. A projection that improves because rent disappears is arithmetic. A projection that improves because revenue grows is a claim, and it needs market evidence. Our financial projections methodology and our guide to where SBA still lends on projections set out what that evidence looks like.

CDC summaries also report that the historical test must use the highest level of financial reporting available, in the order of audited, reviewed and compiled statements, then tax returns. For projects of $5,000,000 or more, SBA requires the Third Party Lender's credit memorandum or underwriting analysis as well.

Four Statements Worth Checking

"SBA has no DSCR minimum for 504." True of 13 CFR Part 120, which sets none. Not true of SOP 50 10 8, which set 1:1, or of SOP 50 10 8.1, which sets 1.15x with a 1.0x global floor.

"504 requires projected coverage of 1.15x within two years of funding." That sentence exists, but in the Standard 7(a) chapter, Section B, not in the 504 chapter. The 504 provision requires a Year 1 liquidity bridge rather than a projected ratio. A 1.15x Year 2 benchmark is sound discipline for a 504 projection. It is not a 504 rule.

"The bank tests its loan and SBA tests the debenture." The SOP does not divide the test. The operating company's cash flow must cover both payments together.

"504 lenders require 1.20x to 1.35x." Many do, and the range fairly describes bank credit policy for owner-occupied real estate. It is market practice set by each Third Party Lender. A file that clears 1.15x has met SBA's requirement. Whether it has met the bank's is a separate question with a separate answer.

The SOP sets the floor. The bank sets the bar. The exhibit has to show both and say which is which.

Seven Errors We Correct in 504 Coverage Exhibits

1. No governing SOP stated. The floor depends on the loan number date, and the exhibit should say so.
2. Testing the bank loan alone. The SBA test is on combined debt service, including the debenture fees and all other business debt.
3. Amortizing at the effective rate. It understates years one to five, the period the historical test measures.
4. Leaving out the annual fees. On this example they are $15,266 a year, close to 5% of debt service.
5. Gross rent added back without the landlord's costs. Under a gross lease, taxes, insurance and maintenance must come back out.
6. Running one contribution tier. Where special-purpose status is open, run both.
7. Ignoring the bank maturity. The first lien usually matures or resets fifteen years before the debenture. That date is a coverage event.

The 504 Coverage Exhibit We Deliver

1. The governing SOP, with the submission date, the loan number date and the CDC's confirmation.
2. Historical coverage on both permitted bases, the last fiscal year-end and the two-year average, with the CDC's basis identified.
3. A normalization schedule: market owner compensation, rent add-back, holding costs, non-recurring items, each with its source.
4. A denominator built from the stack: the gross debenture with financed fees, note-rate principal and interest, the annual fee strip by five-year period, the bank payment and all other business debt.
5. Coverage against every threshold in play: the SBA floor, the 1.0x global floor and the Third Party Lender's policy, each labeled by source.
6. Sensitivities on the bank rate, both contribution tiers where relevant, the CDC servicing fee and the bank maturity.
7. Where history falls short, a projection of at least two years with documented assumptions and a Year 1 liquidity bridge sized to the shortfall.

The exhibit does not replace the CDC's credit memorandum or the bank's underwriting. It makes both easier to defend, by building the numerator from evidence, computing the denominator correctly, and showing exactly how much room the file has and which assumptions that room depends on.

Current as of 3 November 2026

This article reflects SOP 50 10 8.1 effective 1 October 2026, including the technical updates issued 25 September 2026; 13 CFR Part 120 as published in the eCFR, current to 23 October 2026; FY2027 fee notices effective 1 October 2026; and SBA debenture pricing of 8 October 2026. Debenture pricing changes monthly, with the next pricing on 5 November 2026. Fees reset each 1 October. We update this article when pricing, fees or the SOP change.

Frequently Asked Questions

What is the minimum DSCR for an SBA 504 loan?

Under SOP 50 10 8.1, effective 1 October 2026, the DSC ratio must be at least 1.15:1 and the global ratio at least 1.0:1, calculated on historical cash flow using the last fiscal year-end or an average of the last two. Files governed by SOP 50 10 8 remain subject to its 1:1 floor.

Is coverage tested on the bank loan and the 504 loan separately?

No. The SOP requires the operating company's cash flow to cover the loan payment including the Third Party Lender's payment, and counts payments to SBA, the Third Party Lender and any lender financing the contribution together.

Which SOP applies to my file?

SOP 50 10 8.1 applies to applications numbered or received on or after 1 October 2026; SBA's two notices describe the trigger slightly differently. Confirm the position with the CDC and record it in the file.

Can projections be used instead of historical results?

Only as a fallback. If history does not cover, the CDC must analyze projections, and if repayment appears in Year 2 but not Year 1, liquidity must cover the Year 1 shortfall.

Does a larger equity contribution improve coverage?

Yes, because it comes out of the debenture. At 15% or 20%, the bank stays at 50% and the 504 loan falls to 35% or 30%. In our example, moving from 10% to 15% raised coverage by about 0.07x.

Should DSCR be calculated at the 504 effective rate?

No. The effective rate is a disclosure figure across the life of the loan. Debt service in the years a historical test measures is note-rate principal and interest plus annual fees on the five-year opening balance.

Why does my bank ask for 1.25x if SBA requires 1.15x?

Because the Third Party Lender applies its own credit policy. Ratios of 1.20x to 1.35x are common for owner-occupied real estate. They are lender terms, not SBA requirements.

Are any 504 fees waived in FY2027?

Yes. For manufacturers, listed food-supply-chain businesses and rural borrowers, the SBA upfront fee and the 0.203% annual fee are waived, which lowers the effective rate by roughly a quarter point.

Related research, tools and case studies

• SBA DSCR calculator: SOP 50 10 8 vs 8.1
• DSCR and debt yield calculator
• Debt Service Coverage Ratio for SBA and USDA Loans
• SBA 504 Feasibility Studies: The Consultant's Role
• SOP 50 10 8.1: Where SBA Still Lends on Projections
• SOP 50 10 8.1 and the Feasibility Study Consultant
• SBA Special-Purpose Property Feasibility Study
• SOP 50 10 8.1 update
• Limited-service hotel SBA 504 vs conventional (case study)
• SBA 504 engagements
• SBA feasibility study consultant
• Lender requirements matrix
• Regulatory references
• Industrial feasibility study

Sources

1. U.S. Small Business Administration, SOP 50 10 8.1, Lender and Development Company Loan Programs, with Technical Policy Updates, Section A and Section C, Chapter 1, effective 1 October 2026
2. U.S. Small Business Administration, SOP 50 10 8, Lender and Development Company Loan Programs, effective 1 June 2025
3. U.S. Small Business Administration, Information Notice 5000-880695, Issuance of SOP 50 10 8.1, 14 August 2026
4. U.S. Small Business Administration, Information Notice 5000-882227, Issuance of Technical Updates to SOP 50 10 8.1, 25 September 2026
5. U.S. Small Business Administration, Information Notice 5000-881796, 504 Loan Program Fees for FY2027, effective 1 October 2026
6. Code of Federal Regulations, 13 CFR Part 120, Subpart H, sections 120.801 to 120.991, eCFR current to 23 October 2026
7. Code of Federal Regulations, 13 CFR 120.150, What are SBA's lending criteria
8. Federal Register, 504 Debt Refinancing, final rule, 89 FR 79734, 1 October 2024
9. Federal Register, SBLC Moratorium Rescission and Removal of the Requirement for a Loan Authorization, 88 FR 21899, 12 April 2023
10. U.S. Small Business Administration, SBA Form 2287, Third Party Lender Agreement
11. Eagle Compliance, Central Servicing Agent User Manual, 1 August 2023
12. Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, bank prime loan rate, September to October 2026
13. Business Plan Firm, SBA Debt Service Coverage Ratio Requirements Under SOP 50 10 8.1, 12 October 2026
14. SomerCor, SBA 504 Program Updates Effective in FY2027, 5 October 2026
15. Pursuit Lending, Guide to SBA SOP 50 10 8.1
16. Coleman Report, SBA Releases SOP 50 10 8.1 Technical Update, 28 September 2026
17. Pioneer Capital Advisory, SOP 50 10 8 vs SOP 50 10 8.1 Annotated Comparison
18. NAGGL, SBA Publishes SOP 50 10 8.1 with Technical Policy Updates
19. Growth Corp, SBA 504 debenture pricing, October 2026
20. Statewide CDC, SBA 504 note rates, October 2026
21. CDC Loans, SBA 504 effective rates, October 2026
22. NWBDA, summary of the FY2027 504 fee notice
23. StatementsReady, summary of SOP 50 10 8.1 applicability
24. SMB Law Group, commentary on SOP 50 10 8.1 application receipt
25. Avana Capital, May 2026, and Bay Street Lending, November 2026, first-lien commercial real estate rate indications