You have the land, the plans, and the vision for your commercial development. But when you approach your local bank for a construction loan for commercial property, you discover a frustrating reality: traditional lenders want two years of tax returns, 30% down, and three similar completed projects before they will even consider your application.
Meanwhile, your contractor is holding your bid for only 60 more days, material costs keep climbing, and that prime location will not wait forever.
The good news? Commercial construction financing has evolved. Today's lending landscape includes options for first-time developers, faster closings, and structures designed specifically for ground-up commercial projects. This guide walks you through everything you need to know to secure the right construction loan for your commercial property.
Construction Loan Commercial Property Key Metrics
75-80%
Typical LTC Ratio
7.5-12%
Interest Rates
12-36 mo
Loan Terms
30-60 days
Closing Timeline
What Is a Construction Loan for Commercial Property?
A construction loan for commercial property is short-term financing designed to cover the costs of building or substantially renovating income-producing real estate. Unlike residential mortgages that fund completed homes, commercial construction loans disburse funds in stages as your project progresses.
These loans typically cover:
- Hard costs: Foundation, framing, mechanical systems, finishes, and all physical construction
- Soft costs: Architecture, engineering, permits, legal fees, and project management
- Land acquisition: Some lenders include land purchase in the construction loan
- Interest reserve: Funds set aside to cover loan payments during construction
- Contingency: Usually 5-10% buffer for unexpected costs
The loan term matches your construction timeline, typically 12 to 36 months, with the expectation that you will either refinance to permanent financing or sell the completed property.
Construction Loan Types Comparison
| Loan Type | Best For | LTC Range | Rate Range | Term Length |
|---|---|---|---|---|
| Bank Construction Loan | Established developers | 65-75% | Prime + 1-2% | 12-24 months |
| SBA 504 Construction | Owner-occupied properties | Up to 90% | 6.5-8% | Up to 25 years |
| Bridge-to-Construction | Value-add projects | 70-80% | 9-12% | 18-36 months |
| Hard Money Construction | Speed-critical deals | 60-70% | 10-14% | 6-18 months |
| Mezzanine + Senior | Large developments | 80-90% | 8-15% blended | 24-36 months |
How Does the Commercial Construction Loan Process Work?
Securing a construction loan for commercial property involves more steps than traditional financing because lenders must evaluate both your ability to complete the project and the property's value once finished.
Commercial Construction Loan Process
Pre-Qualification
Submit project overview and preliminary financials for initial review
Full Application
Provide complete plans, permits, contractor bids, and financial statements
Underwriting
Lender reviews feasibility study, appraisal, and borrower background
Loan Approval
Receive term sheet, negotiate conditions, and finalize loan structure
Closing
Execute loan documents, fund initial draw, and begin construction
Draw Schedule
Request funds as construction milestones are completed and inspected
The process typically takes 30 to 60 days from application to closing, though complex projects or first-time developers may require additional time. Working with an experienced commercial lender who understands construction financing can significantly streamline this timeline.
Ready to discuss your construction project? Contact our construction lending specialists for a preliminary assessment within 24 hours.
What Are the Requirements for a Commercial Construction Loan?
Lenders evaluate construction loans based on three primary factors: the borrower, the project, and the exit strategy.
Borrower Requirements
What Lenders Look For in Borrowers
680+
Minimum Credit Score
10-20% of loan
Liquidity Required
Equal to loan
Net Worth Target
1-3 projects
Experience
Your personal financial strength matters significantly in construction lending. Lenders want assurance that you can weather cost overruns and delays without defaulting.
Credit score: Most lenders require a minimum 680 FICO score, with better terms available above 720. Some private lenders work with scores as low as 620 for experienced developers.
Liquidity: Expect to show cash reserves equal to 10-20% of the total loan amount. This proves you can handle unexpected expenses without jeopardizing the project.
Net worth: Many lenders require your net worth to equal or exceed the loan amount. This provides recourse if the project fails.
Experience: This is often the most critical factor. First-time developers face stricter requirements, while borrowers with successful track records enjoy better terms and higher leverage.
Project Requirements
Minimum Requirements by Property Type
| Property Type | Min Down Payment | Experience Required | Pre-Leasing | Typical LTC |
|---|---|---|---|---|
| Multifamily 5+ units | 20-25% | 1-2 similar projects | Not required | 75-80% |
| Retail Strip Center | 25-30% | 2-3 projects | 40-60% pre-leased | 70-75% |
| Office Building | 25-35% | 2-3 projects | 50-70% pre-leased | 65-75% |
| Industrial Warehouse | 20-25% | 1-2 projects | 30-50% pre-leased | 75-80% |
| Mixed-Use | 25-30% | 2+ projects | Varies by use | 70-75% |
| Self-Storage | 25-30% | 1-2 projects | Not typically required | 70-80% |
Your project itself must demonstrate feasibility and market demand. Lenders will scrutinize:
Plans and permits: Complete architectural and engineering drawings, along with all required building permits or a clear path to obtaining them.
Contractor qualifications: Licensed, insured general contractor with experience on similar projects. Lenders may require contractor financials and references.
Budget and timeline: Detailed construction budget with line-item costs and realistic completion schedule.
Pre-leasing or pre-sales: Depending on property type, lenders may require 30-70% of space to be leased before funding. Multifamily projects typically have lower or no pre-leasing requirements.
Appraisal: As-completed appraisal showing projected value supports the loan-to-value calculation.
Should You Choose a Bank or Private Lender?
This decision significantly impacts your loan terms, timeline, and flexibility. Both options serve legitimate purposes depending on your situation.
Bank vs Private Lender Construction Loans
Traditional Bank
- Lowest interest rates
- Longer repayment terms
- Relationship pricing benefits
- May offer permanent financing
- Strict qualification requirements
- Lengthy approval process 60-90 days
- Requires strong credit and experience
- Limited flexibility on property types
Private Bridge Lender
- Faster closing 2-4 weeks
- Flexible qualification criteria
- Creative deal structures
- Funds challenging property types
- Higher interest rates
- Shorter loan terms
- May require larger down payment
- Prepayment penalties possible
Choose a traditional bank when:
- You have 2+ years of tax returns showing strong income
- Your credit score exceeds 720
- You have completed similar projects successfully
- Timeline flexibility allows for 60-90 day closings
- You prioritize the lowest possible interest rate
Choose a private or bridge lender when:
- You need to close in 30 days or less
- Your situation does not fit traditional underwriting boxes
- You are a newer developer building your track record
- The property type is specialized or higher-risk
- You need higher leverage than banks offer
Many developers use private lenders strategically to acquire and entitle properties, then refinance with banks once the project is de-risked.
Learn more about our construction loan programs designed for both experienced developers and those building their portfolios.
How Much Does a Commercial Construction Loan Cost?
Understanding total financing costs helps you budget accurately and compare offers meaningfully.
Construction Loan Cost Breakdown
| Cost Category | Typical Range | When Paid | Notes |
|---|---|---|---|
| Origination Fee | 1-2% of loan | At closing | May be reduced for larger loans |
| Appraisal | $3,000-$10,000 | At application | Complex projects cost more |
| Environmental Phase I | $2,000-$4,000 | During underwriting | Phase II if issues found |
| Legal and Title | $5,000-$15,000 | At closing | Varies by state and deal size |
| Inspection Fees | $500-$1,500 per draw | Per draw request | Third-party verification required |
| Interest Reserve | 6-12 months interest | Built into loan | Covers payments during construction |
Interest Rates
Construction loan rates typically run 1-3% higher than permanent financing due to the increased risk. Current ranges:
- Bank construction loans: Prime + 1-2% (approximately 7.5-9.5%)
- Credit union construction loans: Similar to banks, sometimes 0.25% lower
- Private/bridge construction loans: 9-13%
- Hard money construction loans: 11-14%
Most construction loans use variable rates tied to Prime or SOFR. Some lenders offer rate caps or fixed-rate options for a premium.
Interest Reserve
Rather than making monthly payments during construction, most borrowers build an interest reserve into their loan. This fund covers 6-12 months of interest payments, preserving your cash for project needs.
Example: On a $5 million construction loan at 9% interest with a 12-month term, your interest reserve would be approximately $450,000 built into the loan proceeds.
Pro Tip: Interest Reserve Strategy
Most lenders allow you to include 6-12 months of interest payments in your loan amount. This interest reserve means you will not need to make payments out-of-pocket during construction, preserving your cash for other project needs.
What Documents Do You Need for a Construction Loan Application?
Prepare these documents before starting your application to accelerate the process:
Entity documents:
- Operating agreement or corporate bylaws
- Certificate of good standing
- EIN verification
Personal financial documents:
- Two years of personal tax returns
- Personal financial statement (most lenders provide their form)
- Bank and investment account statements (60-90 days)
Project documents:
- Purchase agreement for land (if not already owned)
- Complete architectural plans and specifications
- Engineering reports (civil, structural, MEP)
- General contractor bid and construction contract
- Project budget with detailed line items
- Construction schedule with milestones
- Permits or permit status letter from municipality
Market support:
- Letters of intent or signed leases (if applicable)
- Comparable sales and rental data
- Demand analysis for your property type and location
How Do Construction Loan Draws Work?
Unlike term loans that fund entirely at closing, construction loans disburse in stages called draws as work progresses.
Draw Request Process
Complete Milestone
Finish the construction phase outlined in your draw schedule
Submit Request
Provide invoices, lien waivers, and progress photos to lender
Inspection
Third-party inspector verifies work completion in 1-3 days
Approval
Lender reviews inspection report and approves disbursement
Funding
Funds wired to title company or directly to contractors in 2-5 days
Typical Draw Schedule
Your loan documents will include a draw schedule tied to construction milestones. A common breakdown:
- Initial draw (10-15%): Foundation and site work
- Second draw (20-25%): Framing and structural completion
- Third draw (25-30%): Mechanical, electrical, plumbing rough-in
- Fourth draw (20-25%): Interior finishes, fixtures, exterior completion
- Final draw (10-15%): Certificate of occupancy and punch list completion
Draw Request Best Practices
- Submit draw requests promptly when milestones complete
- Keep meticulous records of invoices and payments
- Obtain lien waivers from all subcontractors
- Photograph progress extensively
- Communicate proactively with your lender about any delays
Delays in draw funding can disrupt your construction schedule and contractor relationships. Work with a lender known for efficient draw processing.
Common Pitfall: Underestimating Soft Costs
Many developers budget 15-20% for soft costs, but the real number is often 25-35% of total project cost. Include architecture, engineering, permits, legal fees, loan costs, and a 10% contingency. Undercapitalized projects are the number one reason for construction loan defaults.
What Are the Risks of Commercial Construction Loans?
Construction lending carries inherent risks that require careful planning and management.
Cost overruns: Material prices, labor costs, and unforeseen conditions frequently push projects over budget. Build a minimum 10% contingency into your budget, and consider 15-20% for renovation projects.
Timeline delays: Weather, permit issues, subcontractor problems, and material shortages can extend your construction period. Each month of delay costs additional interest and may require loan extension fees.
Interest rate risk: Variable-rate construction loans expose you to rate increases during your build period. Consider this exposure when stress-testing your project returns.
Completion risk: If you cannot finish the project, the lender holds an incomplete building as collateral. This is why lenders scrutinize contractor qualifications and borrower liquidity so carefully.
Market risk: Real estate markets can shift during your construction period. Properties projected to lease at $30 per square foot may face $25 market rents by completion.
Ground-Up Construction vs Major Renovation: Which Is Right for Your Project?
Ground-Up vs Renovation Construction Loans
Ground-Up Construction
- Build exactly to specifications
- Modern building codes and efficiency
- No hidden structural issues
- Easier to finance new construction
- Longer timeline 12-24 months
- Higher total project cost
- More permitting requirements
- Greater execution risk
Major Renovation Conversion
- Shorter timeline 6-12 months
- Existing structure reduces costs
- May have historical tax credits
- Faster path to stabilization
- Unexpected conditions common
- May require environmental remediation
- Code compliance challenges
- Harder to find specialized lenders
Your project type affects both your financing options and risk profile.
Ground-Up Construction
Building from scratch offers complete control over design and specifications. Modern construction meets current codes and energy efficiency standards, often commanding premium rents.
However, ground-up projects require longer timelines (typically 12-24 months), more comprehensive permitting, and carry greater execution risk. Lenders generally view ground-up projects favorably because there are no hidden conditions in existing structures.
Major Renovation or Adaptive Reuse
Converting existing buildings (warehouses to multifamily, offices to hotels, etc.) can be faster and less expensive than new construction. Historic properties may qualify for tax credits that improve project economics.
The challenge? Existing buildings hide surprises. Environmental contamination, structural deficiencies, and code compliance issues frequently inflate budgets. Many lenders are cautious about renovation loans, so finding the right financing partner matters even more.
What Exit Strategies Work for Construction Loans?
Exit Strategy Matters
Your construction loan is temporary financing. Lenders want to see a clear exit strategy: refinance to permanent debt, sell the completed project, or convert to a mini-perm loan. Have your exit planned before you apply.
Your construction loan is bridge financing. Planning your exit before you start is essential.
Permanent refinance: The most common exit strategy. Once construction completes and the property stabilizes (reaches target occupancy), you refinance to a permanent loan with a 5-25 year term. Some lenders offer construction-to-permanent programs that automatically convert.
Property sale: If your strategy is build-to-sell, your exit is finding a buyer for the completed property. This works well for condo developments or properties built to specific tenant requirements (build-to-suit).
Mini-perm bridge: If you need time to stabilize the property before qualifying for permanent financing, a 2-3 year bridge loan provides runway while you lease up the building.
Have a backup plan: Markets change, lease-up takes longer than expected, and permanent lenders may have tightened standards by the time you complete. Discuss contingency plans with your construction lender before closing.
Questions about structuring your construction loan exit? Talk with our team about takeout financing options and construction-to-permanent programs.
How Can First-Time Developers Get Construction Financing?
Breaking into commercial development is challenging, but not impossible. Strategies that work:
Partner with experience: Bring an experienced developer as a partner or consultant. Their track record can satisfy lender requirements while you build your own.
Start smaller: A 10-unit apartment building is easier to finance as a first project than a 200-unit complex. Prove yourself on smaller deals before scaling up.
Increase your equity: First-time developers often need 30-40% down compared to 20-25% for experienced borrowers. More equity reduces lender risk.
Use alternative lenders: Private lenders and debt funds are often more flexible with first-time developers, especially those with relevant professional backgrounds (construction, real estate, finance).
Owner-occupied advantage: If you will occupy part of the building (medical office for your practice, for example), SBA loans offer more accessible requirements for owner-users.
Build your team: Surround yourself with an experienced contractor, architect, and property manager. Lenders evaluate your team, not just you personally.
Why Work with Clearhouse Lending for Your Construction Loan?
Commercial construction financing requires a lender who understands development, not just lending. Our construction lending team brings:
Speed: We provide term sheets within 48 hours and can close loans in as few as 21 days when time matters.
Flexibility: Every construction project is unique. We structure loans to match your specific project needs, timeline, and exit strategy.
Draw efficiency: Our streamlined draw process gets funds to your project within 3-5 business days of inspection approval.
Experience: We have funded hundreds of construction projects across multifamily, industrial, retail, office, and specialty property types.
Relationships: Our permanent lending relationships mean smoother transitions from construction to takeout financing.
Use our commercial mortgage calculator to estimate your construction loan payments and compare financing scenarios.
Ready to Start Your Commercial Construction Project?
A construction loan for commercial property is your bridge from vision to reality. The right financing partner makes the difference between a smooth build and a stressful ordeal.
Whether you are an experienced developer with a new ground-up project or a first-time builder ready to break into commercial real estate, our construction lending specialists can help you find the right loan structure.
Contact Clearhouse Lending today for a confidential project review. We will analyze your deal, explain your options, and provide a preliminary term sheet within 48 hours.
Your commercial construction project deserves a lender who understands what you are building. Let us show you how we are different.