Building a commercial property from the ground up is one of the most rewarding investments you can make. But securing the right financing? That is where most developers hit a wall. Traditional lenders move slowly, require mountains of documentation, and often reject projects that do not fit their rigid criteria.
A commercial construction loan works differently than standard commercial mortgages. These specialized loans fund the actual building process, releasing money in stages as your project reaches specific milestones. Understanding how they work can mean the difference between a successful build and a stalled project.
This guide covers everything you need to know about commercial construction financing in 2025, from current rates and requirements to approval strategies that actually work.
What Is a Commercial Construction Loan and How Does It Work?
A commercial construction loan is short-term financing designed specifically for building new commercial properties or completing major renovations. Unlike traditional mortgages that provide a lump sum at closing, construction loans release funds incrementally through a draw schedule tied to construction milestones.
Here is the basic structure: You apply for financing based on the completed property's projected value (known as the "as-completed" or "as-stabilized" value). Once approved, the lender establishes a draw schedule aligned with your construction timeline. As you complete each phase, an inspector verifies the work, and the lender releases the next portion of funds.
Most commercial construction loans have terms of 12 to 36 months, covering the build period plus a buffer for unexpected delays. Interest accrues only on the amount drawn, not the full loan amount. This structure keeps your carrying costs manageable during construction when the property generates no income.
At project completion, you will either refinance into permanent financing (a separate long-term mortgage) or, if you secured a construction-to-permanent loan, automatically convert to the permanent phase without a second closing.
What Are Current Commercial Construction Loan Rates?
Commercial construction loan rates typically run 1% to 2% higher than permanent financing rates due to the increased risk lenders assume during the build phase. As of early 2025, most borrowers see rates between 7.5% and 11%, depending on the project type, location, and borrower qualifications.
Several factors influence your specific rate:
Loan-to-Cost Ratio (LTC): Lower leverage means lower rates. Borrowers putting 30% or more down typically secure better pricing than those seeking maximum leverage.
Project Type: Ground-up construction on raw land carries more risk than renovation of an existing structure. Speculative projects (without pre-leasing) cost more than those with signed tenants.
Borrower Experience: Developers with a track record of successful projects get preferential rates. First-time developers often pay a premium or need stronger guarantees.
Market Conditions: Construction in strong markets with clear demand commands better terms than projects in unproven locations.
To estimate your monthly payments and total project costs, use our commercial mortgage calculator to model different scenarios.
What Are the Requirements to Qualify for a Commercial Construction Loan?
Lenders evaluate commercial construction loans differently than traditional mortgages. Since the collateral does not exist yet, they focus heavily on the project's viability and your ability to execute.
Down Payment: Expect to contribute 20% to 35% of total project costs. This includes land costs, hard costs (actual construction), and soft costs (permits, architectural fees, etc.).
Credit Score: Most lenders require a minimum 680 credit score for the primary guarantor, though 700+ opens more options and better rates.
Net Worth: Lenders typically want guarantors with net worth equal to or exceeding the loan amount. Liquidity requirements usually run 10% to 20% of the loan balance.
Experience: While not always mandatory, construction experience significantly improves approval odds. First-time developers should partner with experienced contractors and consider bringing in experienced equity partners.
Project Documentation: You will need detailed construction plans, a comprehensive budget, contractor bids, permits (or permit-ready status), and a realistic timeline.
How Is a Commercial Construction Loan Different from Other Financing Options?
Understanding your options helps you choose the right financing structure for your specific project.
Commercial Construction Loan vs. Traditional Mortgage: Traditional mortgages finance existing, income-producing properties. Construction loans fund the building process itself. You cannot use a standard mortgage to build because lenders require completed collateral.
Commercial Construction Loan vs. Bridge Loan: Bridge loans provide short-term financing for existing properties, typically during transitions like lease-up or renovation. Construction loans specifically fund new builds with staged disbursements tied to construction progress.
Commercial Construction Loan vs. SBA 504 Loan: SBA 504 loans can fund construction for owner-occupied properties at attractive rates, but the process is slower and more bureaucratic. Traditional construction loans offer more flexibility and faster closings for investor-owned projects.
Commercial Construction Loan vs. Hard Money: Hard money construction loans offer faster approval with less documentation but at significantly higher rates (often 12% to 15%+). They work best for experienced developers who need speed over cost optimization.
Learn more about the full spectrum of options on our construction loans program page.
What Types of Projects Can a Commercial Construction Loan Finance?
Commercial construction loans cover a wide range of project types, though lender appetite varies by property category.
Multifamily Development: Apartment buildings and condo projects represent the largest segment of commercial construction lending. Strong rental demand in most markets makes these projects attractive to lenders.
Retail Construction: While traditional retail faces headwinds, well-located retail projects with pre-leasing continue to secure financing. Neighborhood centers anchored by essential retailers perform best.
Industrial and Warehouse: E-commerce growth has fueled massive demand for industrial construction. These projects often secure favorable terms due to strong market fundamentals.
Office Development: Selective lending continues for Class A office in strong markets, though lenders scrutinize these projects more carefully post-pandemic.
Mixed-Use Projects: Properties combining residential, retail, and office uses can access construction financing, though complexity increases underwriting requirements.
Hospitality: Hotel construction financing remains available but typically requires flags (brand affiliations), experienced operators, and higher equity contributions.
What Is the Commercial Construction Loan Process from Application to Funding?
The commercial construction loan process typically takes 45 to 90 days from application to closing, though complex projects may require longer.
Step 1: Pre-Qualification (Week 1) Submit your project summary, preliminary budget, and borrower financials. The lender provides initial feedback on feasibility and likely terms.
Step 2: Full Application (Weeks 2-3) Provide complete documentation including detailed plans, final budgets, contractor agreements, permits, and comprehensive borrower financials.
Step 3: Underwriting (Weeks 3-6) The lender analyzes project viability, reviews appraisals, verifies contractor qualifications, and assesses market conditions.
Step 4: Approval and Term Sheet (Week 6-7) Receive formal approval with detailed loan terms. Negotiate any points of concern before accepting.
Step 5: Legal and Closing (Weeks 7-10) Attorneys draft loan documents, title work clears, and all parties prepare for closing.
Step 6: Construction Draws (Ongoing) As construction progresses, submit draw requests with documentation of completed work. Inspectors verify, and funds release within days.
Ready to start? Contact our construction lending team to discuss your project timeline.
How Does the Draw Schedule Work for Commercial Construction Loans?
The draw schedule determines when and how you receive loan proceeds throughout construction. Understanding this process prevents cash flow problems that can derail projects.
Most lenders structure draws around completion percentages or specific milestones. A typical schedule might include:
- Foundation Complete: 15% of loan proceeds
- Framing Complete: 25% of loan proceeds
- Rough Mechanicals (plumbing, electrical, HVAC): 20% of loan proceeds
- Drywall and Interior Rough-In: 15% of loan proceeds
- Finishes and Fixtures: 15% of loan proceeds
- Final Completion and CO: 10% of loan proceeds (often held as retainage)
Before each draw, you submit a draw request with supporting documentation: contractor invoices, lien waivers from subcontractors, and updated progress reports. The lender dispatches an inspector to verify work completion. Once approved, funds typically release within 3 to 7 business days.
Retainage: Most lenders hold back 5% to 10% of each draw as retainage, releasing it only after final completion and certificate of occupancy. This protects against incomplete punch-list items.
Interest Reserve: Many borrowers include an interest reserve in their loan, essentially borrowing money to make interest payments during construction. This preserves cash flow when the property generates no income.
What Happens After Construction Completes?
Your commercial construction loan does not last forever. At project completion, you need an exit strategy.
Option 1: Construction-to-Permanent Loan If you secured a construction-to-perm loan, the permanent phase activates automatically. Your short-term construction loan converts to a long-term mortgage (typically 20-30 years) without a second closing, saving time and fees.
Option 2: Separate Permanent Financing Many developers use standalone construction loans and arrange permanent financing separately. This approach offers flexibility to shop rates at completion but requires a second closing with associated costs.
Option 3: Sale If you built to sell, completion triggers your sale process. Strong market conditions and pre-construction sales contracts can make this the most profitable exit.
Option 4: Bridge to Stabilization Projects requiring lease-up before qualifying for permanent financing may need interim bridge financing. This short-term loan covers the period between construction completion and stabilization.
What Are Common Mistakes to Avoid with Commercial Construction Loans?
Experienced developers learn these lessons the hard way. Skip the costly education by avoiding these common pitfalls.
Underestimating Costs: Construction budgets almost always face overruns. Build in contingency reserves of at least 10% to 15%. Lenders require this anyway, but insufficient reserves remain the top cause of troubled projects.
Ignoring Soft Costs: First-time developers focus on hard construction costs and underestimate soft costs: permits, architectural fees, engineering, legal, insurance, and loan fees. These typically run 15% to 25% of hard costs.
Choosing Contractors on Price Alone: The lowest bid often becomes the most expensive choice. Verify contractor experience, check references, confirm insurance and bonding, and ensure they have completed similar projects successfully.
Inadequate Pre-Development Work: Rushing to break ground before completing due diligence leads to expensive surprises. Thoroughly investigate soil conditions, environmental issues, utility availability, and entitlement risks before closing on construction financing.
Neglecting the Exit Strategy: Know exactly how you will repay the construction loan before you start. Lock in permanent financing commitments or have clear sale prospects lined up.
Why Work with Clearhouse Lending for Your Commercial Construction Loan?
Commercial construction lending requires specialized expertise. Unlike residential mortgages with standardized processes, construction loans demand lenders who understand development timelines, draw management, and the unique challenges of building commercial properties.
Clearhouse Lending brings decades of construction lending experience to every project. Our team has funded hundreds of millions in commercial construction, from small infill multifamily to major mixed-use developments.
What sets us apart:
- Speed: Our streamlined process delivers construction loan approvals in as few as 21 days for qualified borrowers
- Flexibility: We structure loans around your project's specific needs, not rigid institutional templates
- Experience: Our team includes former developers who understand construction from the borrower's perspective
- Draw Management: Our efficient draw process releases funds within 3-5 business days of inspection approval
- Relationship Focus: We are portfolio lenders who value long-term developer relationships over one-time transactions
Whether you are building your first apartment complex or your fiftieth industrial warehouse, our construction lending team can help structure financing that works for your project.
Get a personalized construction loan quote by sharing your project details with our team.
Frequently Asked Questions About Commercial Construction Loans
What credit score do I need for a commercial construction loan? Most lenders require a minimum 680 credit score for the primary guarantor, though 700+ improves options and rates significantly.
How much down payment is required? Expect to contribute 20% to 35% of total project costs, including land, hard costs, and soft costs.
Can I get a commercial construction loan with no experience? Yes, though it is more challenging. First-time developers should partner with experienced contractors, consider equity partners with track records, and be prepared for more conservative loan terms.
How long does approval take? Typical timelines run 45 to 90 days from application to closing, depending on project complexity and documentation readiness.
What is the difference between LTC and LTV? Loan-to-Cost (LTC) measures the loan against total project costs. Loan-to-Value (LTV) measures against completed property value. Construction lenders use both metrics in underwriting.
Can I use a commercial construction loan for renovation? Yes, substantial renovation projects often qualify for construction loan treatment, especially gut renovations that significantly change the property.
Take the Next Step on Your Commercial Construction Project
Securing the right commercial construction loan can determine whether your development project succeeds or stalls. The right lender brings not just capital but expertise, flexibility, and efficient processes that keep your project on track.
At Clearhouse Lending, we specialize in commercial construction financing for developers who need more than a cookie-cutter loan. Our team understands the complexities of ground-up development and structures financing that works for your specific project.
Contact us today to discuss your construction project. Share your plans, and we will provide a preliminary assessment within 24 hours.
Ready to build? Let us make it happen.