Construction Loan Approval Guide

What is a Commercial Construction Loan?

Commercial construction loans finance the building of new commercial properties or major renovations. They're short-term loans that convert to permanent financing upon project completion.

Whether you're pursuing vertical construction (building up) or horizontal construction (site development), understanding the qualification process is essential.

How Construction Loans Work

Draw Schedule

Funds are disbursed in stages as construction progresses:

Land acquisition (if included)
Foundation
Framing/structure
MEP (mechanical, electrical, plumbing)
Interior finish
Final completion

Interest Reserve

Lenders typically include an interest reserve—funds set aside to make interest payments during construction when the property isn't generating income.

Conversion to Permanent

Most construction loans have two phases:

Construction period: Interest-only draws
Mini-perm or permanent: Converts after certificate of occupancy

Qualification Requirements

1. Experience

Construction lenders heavily weight experience:

Previous development projects (similar size/type)
Track record of on-time, on-budget delivery
Successful lease-up or sale of prior projects

First-time developers: May need experienced partner, general contractor, or development consultant.

2. Equity Requirements

Construction loans require substantial equity:

Typical LTC (Loan-to-Cost): 60-75%
Your equity: 25-40% of total project cost
Equity injection timing: Usually required before loan funds

3. Financial Strength

Personal/entity requirements:

Net worth: Often ≥ loan amount
Liquidity: 10-20% of loan amount
Good credit history
No bankruptcies or foreclosures

4. Project Fundamentals

Lenders evaluate:

Market demand for the product type
Location and site characteristics
Feasibility study/market analysis
Realistic budget and timeline
Exit strategy (permanent loan, sale)

5. Pre-leasing/Pre-sales

Depending on property type:

Multifamily: May not require pre-leasing
Office/Retail: Often require 30-50% pre-leased
For-sale condos: May require 30-50% pre-sold

Documentation Requirements

Developer Documents

Development resume/track record
Personal financial statements
Tax returns (3 years)
Entity documents
Organizational chart

Project Documents

Architectural plans (construction drawings)
Engineering reports
Environmental reports (Phase I minimum)
Geotechnical study
Survey
Market/feasibility study
Appraisal (as-is and as-complete)

Budget Documents

Detailed construction budget
General contractor bid/contract
Subcontractor bids
Soft cost breakdown
Contingency allocation (typically 5-10%)

Contractor Documents

General contractor resume
GC financial statements
Insurance certificates
List of subcontractors
AIA contract

Construction Budget Components

Hard Costs

Site work and demolition
Foundation
Structure
Building envelope
MEP systems
Interior finishes
Landscaping
Contingency (5-10%)

Soft Costs

Architectural and engineering
Permits and fees
Legal
Accounting
Marketing/leasing
Loan fees and interest reserve
Taxes and insurance during construction
Contingency

Types of Construction Lenders

1. Banks

Relationship-focused
Smaller projects ($1M-$20M)
Recourse typically required
LTC: 65-75%

2. Debt Funds

Larger projects ($10M+)
Higher leverage available
More flexible terms
Higher rates

3. Hard Money

Smaller projects
Fastest closing
Highest rates
Asset-focused

4. SBA (504/7a)

Owner-occupied projects
Lower down payment
Longer process
Size limitations

Construction Loan Terms

Factor	Typical Range
LTC	60-75%
LTV (as-complete)	55-70%
Interest Rate	Prime + 1-3% or 8-12%
Term	12-36 months
Extension Options	6-12 month extensions
Recourse	Usually full recourse
Fees	1-2% origination

Strategies for Approval

1. Build Your Team First

Experienced general contractor
Reputable architect
Commercial real estate attorney
CPA with development experience

2. Have More Equity Than Minimum

Bringing 30-35% equity (vs. required 25%) demonstrates commitment and provides cushion.

3. Solid Pre-Development Work

Complete architectural plans, permits, and market study before approaching lenders.

4. Realistic Budget with Contingency

Include 10%+ hard cost contingency and 5%+ soft cost contingency.

5. Clear Exit Strategy

Have permanent financing lined up or realistic sale projections supported by market data.

6. Start with Relationships

Banks that know you are more likely to finance your first development.

Common Reasons for Denial

Insufficient experience
Inadequate equity/liquidity
Unrealistic budget or timeline
Weak market/location
No pre-leasing in required markets
Poor contractor qualifications
Previous project failures

Ready to Discuss Your Project?

Construction financing is complex. Our team can help you structure your deal, identify the right lender, and improve your chances of approval.

Related Resources:

How to Get Approved for a Commercial Construction Loan