Commercial Construction Loan Guide

Commercial construction loans fund the building of new structures or major renovation projects, with capital disbursed incrementally as work progresses. Unlike permanent loans that fund fully at closing, construction loans release funds in draws tied to project milestones verified by third-party inspectors.

Key components of a construction loan include the draw schedule, interest reserve, contingency budget, and completion guarantees. The draw schedule outlines when and how funds are released. The interest reserve covers interest payments during construction so the borrower doesn't need to make monthly payments while the project generates no income. The contingency budget covers unexpected cost overruns.

Qualifying for a construction loan requires development experience, a strong personal financial statement, detailed plans and specifications, a qualified general contractor, and typically 20% to 35% equity including land value. Lenders evaluate the borrower's track record with similar projects as a primary underwriting factor.

The exit strategy for a construction loan is critical. Most construction loans are designed to be taken out by permanent financing once the project is complete and stabilized. Having a clear path to permanent debt, whether through conventional refinancing, agency lending, or CMBS, strengthens the construction loan application.

Frequently Asked Questions