Commercial Finance Group
Commercial Real Estate Construction Loans
Financing Your Ground-Up Development and Major Renovations
A Construction Loan provides the necessary capital to cover the costs of developing a property, from breaking ground to final completion. These loans are designed to fund the vertical build-out of a new structure or the extensive rehabilitation of an existing one.
Key Features of Construction Financing
Construction loans are defined by their unique disbursement and repayment structure:
Phased Disbursements (Draws)
Funds are not provided as a lump sum. Instead, capital is released in periodic draws directly to the general contractor, third-party inspectors, and subcontractors.
Interest-Only Payments
During the construction period (typically 12 to 24 months), payments are often Interest-Only on the funds actually drawn to date.
High Risk/Short Term
The lender faces higher risk since the asset does not yet produce income. Therefore, these loans carry higher interest rates than permanent loans.
Focus on Cost and Value
Underwriting focuses on the total project cost and the anticipated After-Completion Value (ACV) of the finished property.
Important: Unlike conventional loans that lend against a stabilized asset, a construction loan funds a future asset based on a detailed budget and a strong exit strategy. Because the funds are disbursed only as construction milestones are met, these are highly scrutinized, short-term, specialized loans.
The Construction-to-Permanent Process
The “Two-Close” Model
A construction loan is only the first step in the financing lifecycle. It must be replaced by a permanent loan once the project is complete:
1. Construction Loan
Covers the building period (12-24 months). The loan is paid off by the Takeout Loan.
2. Stabilization
The completed building begins leasing up and generating consistent cash flow.
3.Takeout Financing
The borrower secures a Conventional (Permanent) loan or an Agency (Fannie Mae/Freddie Mac) loan that pays off the high-interest construction debt.
Note: We also offer a Single-Close Construction-to-Permanent product for qualifying borrowers, which rolls the two phases into one loan and one closing, simplifying the process and reducing closing costs.
Critical Underwriting Factors
A successful construction application requires meticulous planning and a strong development team:
| Factor | Description |
|---|---|
| Sponsor Experience | The lender must have confidence in the borrower’s (Sponsor’s) and contractor’s ability to execute the project on budget and on time. |
| Hard vs. Soft Costs | The budget must clearly detail Hard Costs (materials, labor) and Soft Costs (permitting, insurance, interest reserve, architecture fees). |
| Contingency Reserve | A mandatory portion of the loan (usually 5%–10% of hard costs) is reserved for unforeseen issues, preventing project stalls. |
| Loan-to-Cost (LTC) | The maximum financing provided is typically capped at 70%–80% of the total project cost. |
Build Your Next Project with Confidence
We understand the complexity of the development cycle. Our construction financing experts work directly with your contractor and title company to ensure timely draws, keeping your project moving forward without costly delays.
Ready to turn your development plan into reality? Connect with our Construction Lending Team.