Building From the Ground Up
Commercial construction loans fund the development of new buildings across every CRE property type — multifamily, mixed-use, industrial, retail, office, and build-to-suit. Unlike bridge loans that finance existing properties, construction loans fund a project that doesn't exist yet, which means lenders underwrite the plan, the team, and the market as much as the numbers.
These are draw-based facilities. The lender commits the full loan amount at closing but releases funds in stages as construction milestones are completed and verified by a third-party inspector. This protects both sides — the lender knows money is going into the ground, and the borrower only pays interest on what's been drawn.
How the Draw Process Works
- Loan closing — lender commits the full construction budget; borrower contributes equity (typically 25-40% of total project cost)
- Draw requests — submitted monthly or upon milestone completion with invoices, lien waivers, and progress documentation
- Third-party inspection — lender's inspector verifies work is complete before releasing funds
- Retainage — lender typically holds back 5-10% of each draw until project completion
- Final draw — released upon certificate of occupancy, final inspection, and lien waiver collection
Construction Loan vs. Construction-to-Perm
| Feature | Standalone Construction | Construction-to-Perm |
|---|---|---|
| Structure | Construction only; refinance separately | Single close; converts to permanent loan |
| Closings | Two (construction + permanent) | One |
| Closing Costs | Higher (two sets of fees) | Lower (one set of fees) |
| Rate Risk | Permanent rate unknown at construction close | Permanent rate locked or formulaic |
| Flexibility | Shop for best permanent terms later | Less flexibility but guaranteed takeout |
| Best For | Experienced developers; rate optimizers | Risk-averse sponsors; first-time developers |
Pro tip: Construction-to-perm eliminates your biggest risk: not having permanent financing when construction completes. If you're building in a volatile rate environment or this is your first ground-up project, the certainty of a guaranteed takeout is worth the tradeoff in flexibility. Experienced developers often prefer standalone construction loans to shop for the best permanent terms after stabilization.
Interest Reserve — How It Works
Unlike stabilized properties that generate income to cover debt service, a construction project produces zero revenue until completion and lease-up. To solve this, lenders build an interest reserve into the loan. This is a capitalized pool of funds that covers monthly interest payments during the construction period.
The interest reserve is sized based on the draw schedule, projected interest rate, and construction timeline. As draws are funded and the outstanding balance grows, interest payments increase — the reserve accounts for this ramp. If construction runs ahead of schedule, unused reserve can reduce total loan cost. If it runs behind, you may need to fund additional interest out of pocket.
Property Types We Finance
- Multifamily development — garden-style, mid-rise, high-rise, student housing, senior living, affordable/LIHTC
- Mixed-use — ground-floor retail with residential or office above; increasingly favored by municipalities
- Industrial / spec — warehouse, distribution, flex space, last-mile logistics; strong institutional demand
- Build-to-suit — single-tenant construction with a signed lease in hand; often the strongest credit profile for lenders
- Retail / hospitality — ground-up retail, hotel, restaurant; higher hurdle but financeable with pre-leasing or franchise commitments
What Lenders Want to See
- Plans and specifications — full architectural and engineering drawings, stamped and permitted
- Building permits — all required entitlements, zoning approvals, and construction permits in hand
- GC contract — executed general contractor agreement with a guaranteed maximum price (GMP) or stipulated sum
- Pro forma financials — projected stabilized NOI, rental rates supported by market comps, absorption timeline
- Sponsor track record — prior ground-up development experience is critical; lenders want to see completed projects of similar scope
- Pre-leasing or pre-sales — signed LOIs, leases, or purchase contracts; the more committed demand, the better the terms
- Environmental and geotechnical reports — Phase I ESA, Phase II if needed, soils/geotech report
- Equity verification — proof of equity contribution (cash, land basis, or committed LP capital with subscription agreements)
Submit Your Construction Deal
Tell us about your development — property type, location, total project cost, and your experience. We'll match you to construction lenders who specialize in your deal type and deliver competing term sheets.