Construction Loans for
Commercial Real Estate

It is a loan that funds the construction of a new building on land that has not been developed, typically advanced in draws against a budget while the project is built. The loan is repaid from a permanent loan, a sale or a refinance once the project is complete and, for income property, stabilized.

Sponsor equity commonly runs from 25% to 40% of total project cost, depending on the lender, property type and sponsor. It is generally funded before the first loan advance. Land the sponsor already owns is generally credited at the lesser of cost and appraised value.

A construction loan funds the building of a new project in draws against a budget. A bridge loan is short-term financing for an acquisition, pre-development period or transition, with little or no construction funding. A bridge loan is sometimes used to carry land until entitlements are in place and a construction loan can close.

A construction loan is repaid at completion or stabilization by separate permanent financing. A construction-to-permanent loan closes once and converts to a permanent term loan when the conversion conditions are met, which removes the takeout risk but ties the borrower to the conversion tests and to the lender's permanent terms.

Most do. Banks and credit unions commonly require full or substantial recourse through completion and stabilization. Debt funds typically require completion, cost overrun and carry guaranties with non-recourse carve-outs, and HUD programs are non-recourse subject to standard carve-outs and completion assurances.

Lenders review experience with comparable projects, financial strength, bonding capacity, licensing, insurance, references and current backlog. A guaranteed maximum price or fixed-price contract, and in many cases a payment and performance bond, is expected.

The borrower submits a draw request with invoices and lien waivers. An inspector verifies the work in place, the title company confirms no new liens have attached, and the lender funds net of retainage. If the cost to complete exceeds the remaining loan and equity, the borrower must fund the shortfall before further advances.

An interest reserve is a portion of the loan budgeted to pay interest on advanced funds during construction and, in many structures, lease-up. It lets the project carry its own financing cost before it produces income, and lenders size it to the schedule and review it if the schedule slips.

They can, where the senior lender consents and the project supports the additional carry. C-PACE is limited to eligible improvements in an authorized jurisdiction, and preferred equity and mezzanine debt add cost and intercreditor complexity. We test the combined stack against the takeout before recommending it.

Many construction loans fund part of the land cost, and land the sponsor owns is credited toward equity. Where land is acquired ahead of entitlements, a bridge or land loan often carries the property until a construction loan can close.

Timing varies by lender and program and depends on how complete the budget, plans, contractor agreement, entitlements and third-party reports are at submission. Construction loans take longer than stabilized loans because of the cost review, appraisal, environmental and permit steps, and HUD structures take longer still. We confirm timing with the lender before a client commits.

Lender appetite for construction varies by property type, market and sponsor, and capacity changes with each institution's concentration limits. An advisor with relationships across banks, credit unions, debt funds and government programs can identify which lenders are active for a given project, structure the request and the takeout together, and manage the process through closing.