Understanding Commercial & New Construction Loans
Construction lending funds a project that does not exist yet, which is why it is underwritten more rigorously than any other real estate product. The lender is betting on your budget, your contractor and your schedule as much as on the finished asset — and disburses in stages precisely because of that.
Construction Loans terms at a glance
Construction Loans — typical parameters
Illustrative market ranges. Your actual terms depend on lender underwriting, credit, collateral and program availability.
| Loan amount | $500,000 – $100,000,000 |
|---|---|
| Speed to funding | 30 – 60 days |
| Interest rate | 8% – 13% |
| Loan-to-cost | Up to 85% |
| Loan-to-ARV | Up to 70% |
| Term | 12 – 36 months |
| Payments | Interest-only on drawn balance |
| Disbursement | Inspected draw schedule |
| Sponsor equity | 15% – 35% of total cost |
| Take-out | Sale or permanent financing |
How Construction Loans can help you
The defining feature of construction finance is that you pay interest only on what has actually been disbursed. That structure alone saves substantial money across an eighteen-month build.
You build to your own specification rather than buying a compromise
Ground-up construction lets you optimise unit mix, ceiling heights, loading, parking and energy systems for the actual demand in your market. On the right site, delivering exactly what tenants want commands a rent premium that no acquisition of existing stock can match.
You capture the development spread
Building for $180 a foot into a market where finished comparable product trades at $240 creates equity the day the certificate of occupancy is issued. That spread is the compensation for taking construction risk, and financing at 80% of cost is what makes it accessible without enormous capital.
You carry interest only on drawn funds
On a $6,000,000 construction loan drawn over eighteen months, average outstanding balance might be $2,800,000 rather than the full amount. The interest saved against a fully funded loan commonly runs into the hundreds of thousands on a project of that size.
Construction-to-permanent removes refinance risk
A single-close construction-to-permanent loan converts automatically to long-term debt at completion. You pay one set of closing costs and — critically — you are not exposed to whatever the rate environment happens to be on your completion date.
The draw process protects you as well as the lender
Third-party inspection before each disbursement means nobody gets paid for work that is not done. Developers who have been through a contractor dispute understand that this is a genuine benefit, not merely a hurdle.
How the process works
Present the project
Site control, entitlements status, plans and specifications, a detailed line-item budget, the general contractor's qualifications, a pro forma and your development track record.
Feasibility and sizing
The lender orders an as-completed appraisal and a plan-and-cost review, then sizes proceeds against the lesser of loan-to-cost and loan-to-as-completed-value.
Close and fund equity first
In most structures your equity goes in ahead of the loan. Site work begins once the loan closes and permits are in hand.
Draw, inspect, complete
Monthly draws against the schedule of values, each verified by inspection, with retainage held until completion. Then the take-out: sale or permanent financing.
What you will need to qualify
- Site control and entitlements
- Complete plans and specifications
- Detailed line-item budget with contingency
- Licensed, bondable general contractor
- 15%–35% sponsor equity
- Development track record (or experienced partner)
- Pro forma and exit analysis
- 680+ credit score
The honest drawbacks
What we would want to know if we were you
Construction is where optimistic assumptions go to die. Build a 10% hard-cost contingency into the budget and expect to use it. Add three months to whatever schedule your contractor gives you. Confirm that your interest reserve covers the extended timeline, not just the planned one, because running out of interest reserve on a half-built project is the worst position in real estate. First-time developers should expect to bring more equity and to be asked to partner with someone who has finished projects before — that is not a lack of confidence in you, it is how the risk gets priced.
Construction Loans — frequently asked questions
Loan-to-cost measures the loan against total project cost including land, hard costs and soft costs. Loan-to-value measures it against the as-completed appraised value. Lenders apply both and lend the lesser, so a project with a large development spread is still capped by the cost test.
You submit a draw request against a schedule of values showing percentage completion by line item. An inspector verifies the work, then funds release — typically five to ten business days. Most lenders hold 5% to 10% retainage until final completion and lien releases are delivered.
Occasionally, if you are a licensed builder with a genuine track record. Most lenders require an independent, licensed and bondable GC, because owner-builder projects have materially higher failure rates. If you are a builder by trade, say so early — it changes the conversation.
A single loan that funds construction, then converts to long-term amortising debt at completion without a second closing. You pay one set of costs and eliminate the risk of being unable to obtain permanent financing later. It generally requires a stronger sponsor and a clearer completion path.
Yes — spec homes, build-to-rent communities, small subdivisions and infill residential. Build-to-rent in particular has strong lender appetite right now, and we can structure the construction facility alongside the DSCR portfolio take-out at the same time.
Related commercial real estate programs
Construction Loans sits alongside a number of related structures. If your situation is close to but not quite this product, one of these is probably the better fit — and the same single application reaches all of them.
- Portfolio Loans — One loan across multiple properties, underwritten as a single pool with a single payment.
- Mixed-Use Property Loans — Financing for buildings that combine ground-floor commercial with residential above.
- Commercial Land Loans — Acquisition capital for raw, entitled or infill land ahead of development.
- Permanent Financing — The long-term, fully amortising debt that takes out your construction or bridge loan.
- Mezzanine Real Estate Loans — Subordinate debt that raises total leverage without giving up ownership.
- Acquisition & Development Loans — Combined land purchase and horizontal-improvement financing for subdivisions and pads.
- Refinance (Commercial & Investment) — Replace maturing, expensive or misstructured debt with better terms.
- Blanket Mortgages — A single mortgage secured by several properties, with release clauses as you sell.