Construction to Perm Loans: Complete Guide for Investors

Commercial real estate development requires significant capital, and finding the right financing structure can make or break your project's profitability. Construction to perm loans offer developers and investors a streamlined solution that combines the building phase and long-term financing into a single, efficient package.

Whether you are building a multifamily complex, industrial warehouse, or retail center, understanding how these loans work will help you make smarter financing decisions and potentially save tens of thousands of dollars.

What Exactly Are Construction to Perm Loans?

Construction to perm loans (also called construction-to-permanent loans or C2P loans) are financing products that fund both the construction phase of a commercial project and automatically convert to permanent mortgage financing once building is complete. Instead of obtaining two separate loans, borrowers secure one loan that serves both purposes.

During the construction phase, you draw funds as needed to pay contractors and suppliers. You typically make interest-only payments on the amount drawn. Once construction finishes and the property receives its certificate of occupancy, the loan converts (or "rolls") into a traditional commercial mortgage with principal and interest payments.

This structure eliminates the need to apply for, qualify for, and close on a separate permanent loan after construction. For commercial developers, this provides certainty that permanent financing will be available and removes the risk of being unable to refinance a construction loan when it matures.

The mechanics work like this: at closing, you receive a commitment for the full loan amount covering both phases. During construction, you submit draw requests as work progresses, and the lender disburses funds after inspecting completed work. Interest accrues only on the disbursed amount. Once construction completes and the property meets conversion requirements, the loan automatically transitions to permanent terms with the rate you locked at origination.

How Does Single-Close Differ From Two-Close Options?

The commercial lending market offers two main approaches to construction-to-permanent financing: single-close and two-close structures. Understanding the differences helps you choose the right option for your project.

Single-Close Construction to Perm Loans

With a single-close loan, you complete one application, one underwriting process, and one closing. The construction and permanent phases are documented together from the start. Your permanent loan terms, including interest rate, are locked in before construction begins.

This approach offers maximum protection against interest rate increases. If rates rise during your 12 to 18 month construction period, your permanent rate remains unchanged. You also pay closing costs only once, which typically saves 1.5% to 2.5% of the loan amount.

Single-close loans work best for borrowers who prioritize certainty and cost efficiency. You know exactly what your permanent financing will look like before breaking ground, which makes underwriting your development pro forma significantly easier.

Two-Close Construction to Perm Loans

A two-close structure involves separate closings for the construction and permanent phases. You close on the construction loan first, then close on the permanent loan after construction completes. While you must qualify twice and pay closing costs twice, this structure offers more flexibility.

Some borrowers prefer two-close loans because they can shop for better permanent loan terms as construction nears completion. If interest rates have dropped or your project performed better than expected, you might secure more favorable permanent financing. However, you also bear the risk of rates increasing or being unable to qualify for the permanent loan.

For most commercial projects, single-close construction to perm loans provide the best combination of cost savings and risk mitigation. The certainty of knowing your permanent financing is in place outweighs the potential upside of shopping for rates later.

Why Do Commercial Developers Choose This Financing Structure?

Construction to perm loans offer several compelling advantages for commercial real estate developers and investors. These benefits explain why this financing structure has become increasingly popular for ground-up development projects.

Locked Interest Rates Protect Your Pro Forma

When you underwrite a development deal, you build financial projections based on assumed permanent financing costs. With a single-close construction to perm loan, you know exactly what your permanent rate will be before breaking ground. This eliminates one of the biggest variables in development pro formas.

Consider a $10 million project where permanent rates increase by 1% during construction. That rate increase could add $100,000 per year to your debt service, potentially turning a profitable project into a marginal one. Rate locks through construction to perm loans eliminate this risk entirely.

Reduced Closing Costs Save Real Money

Commercial loan closings involve substantial costs: origination fees, appraisals, environmental reports, title insurance, legal fees, and more. These costs typically run 2% to 4% of the loan amount. By closing once instead of twice, you eliminate duplicate fees and keep more capital for your project.

On a $5 million loan, avoiding a second closing might save $75,000 to $150,000. That savings drops straight to your bottom line or allows you to improve the property's finishes and command higher rents.

Simplified Process Reduces Complexity

Managing a construction project is complex enough without juggling multiple lenders and loan applications. Construction to perm loans let you work with one lender throughout the project. You build a relationship during construction that continues into the permanent phase.

This single-lender approach also means consistent documentation requirements, one set of covenants to track, and one relationship manager who understands your project's history.

Guaranteed Takeout Provides Exit Certainty

Perhaps the most valuable benefit is knowing your construction loan has a guaranteed exit. With standalone construction financing, you must find permanent financing as construction completes. If the market tightens, rates spike, or lenders pull back, you could face a maturing construction loan with no refinance option.

Construction to perm loans eliminate this maturity risk. Once approved, your permanent financing is committed. Barring a material breach of loan terms, you will have permanent financing available when construction completes.

Ready to explore construction to perm financing for your next development? Contact our team to discuss your project and get pre-qualified.

What Are the Requirements for Commercial Construction-to-Perm Loans?

Qualifying for commercial construction to perm loans requires meeting both construction lending and permanent financing standards. Lenders evaluate the project, the sponsor, and the market before committing capital.

Borrower Financial Requirements

Commercial lenders assess the sponsor's financial strength carefully. They want to see that you can support the project through construction and beyond.

Lenders weight experience heavily for construction loans. If you are developing your first commercial project, expect to partner with an experienced developer or provide additional credit enhancements like larger deposits or personal guarantees.

Net worth requirements typically equal or exceed the loan amount. This ensures you have financial capacity to handle cost overruns, delays, or other unexpected challenges. Liquidity requirements of 10% or more of the loan amount demonstrate you can cover carrying costs and contingencies without additional financing.

Project and Property Requirements

The project itself must meet specific criteria. Loan-to-cost ratios are typically capped at 75% to 80% for the construction phase, meaning you need 20% to 25% equity in the deal. Loan-to-value on the completed project typically runs 70% to 75% based on the appraised "as-stabilized" value.

Debt service coverage ratios of 1.20x to 1.35x based on stabilized income ensure the property can comfortably service debt once operational. Some property types require pre-leasing, often 30% to 50% for office and retail, before the lender will fund construction.

You will also need to provide detailed construction documentation including complete plans and specifications, a fixed-price or guaranteed maximum price construction contract, builder's risk insurance, performance and payment bonds for larger projects, an Environmental Phase I assessment, and an appraisal showing "as-complete" and "as-stabilized" values.

Market and Location Requirements

Lenders evaluate the market to ensure your project will lease up and generate sufficient income. They consider supply and demand dynamics for your property type, comparable rents and vacancy rates, population and employment growth trends, and accessibility and location quality.

Projects in strong markets with demonstrated demand typically receive better terms than those in secondary or tertiary markets.

How Do Construction to Perm Loans Compare to Separate Financing?

Understanding the alternative helps you appreciate why construction to perm loans make sense for most commercial development projects. Let us compare C2P loans to obtaining standalone construction and permanent financing separately.

Cost Comparison

When you obtain separate construction and permanent loans, you incur closing costs twice. For a $7 million project, the difference is substantial. Origination fees of 1.5% become $105,000 with a single close versus $210,000 with two closings. Appraisals, legal fees, title insurance, and other costs similarly double.

The total savings from single closing typically ranges from $50,000 to $150,000 depending on loan size. That money stays in your project rather than going to third-party service providers.

Risk Comparison

Beyond direct costs, separate financing introduces several risks that construction to perm loans eliminate. Interest rate risk means permanent rates could rise significantly during your 12 to 18 month construction period. Qualification risk means you might not qualify for permanent financing when needed, perhaps due to changed financial circumstances or tighter lending standards. Market risk means lending standards could tighten, reducing available permanent options. Timing risk means construction delays could leave you scrambling for financing as your construction loan matures.

Construction to perm loans transfer these risks to the lender, who commits to permanent financing upfront.

Flexibility Comparison

The main advantage of separate financing is flexibility. With standalone loans, you can shop for the best permanent terms as construction completes, potentially benefit from rate decreases, choose a different lender for permanent financing, and adjust loan size based on actual versus projected value.

For sophisticated borrowers in stable rate environments, this flexibility might outweigh the additional costs and risks. However, most developers prefer the certainty of construction to perm loans.

What Happens During the Construction Phase?

Understanding the construction phase mechanics helps you plan your project and manage cash flow effectively. Construction to perm loans have specific structures for disbursing funds during building.

Draw Process and Schedule

Unlike permanent loans where you receive all funds at closing, construction loans disburse funds incrementally as work progresses. This draw schedule typically follows construction milestones.

To request a draw, you submit documentation showing completed work. The lender sends an inspector to verify that work matches your draw request. Once approved, funds are wired to cover contractor invoices and material suppliers.

Most lenders release draws within 5 to 10 business days of your request. Building this timeline into your contractor payment terms prevents cash flow problems. Your contractor should understand the draw process and build their payment expectations around lender timelines.

Interest Reserve Mechanics

During construction, you make interest payments on the outstanding loan balance. Since you have no rental income yet, these payments come from an interest reserve funded at closing.

The lender calculates the interest reserve based on projected draw schedule, loan amount, and interest rate. This reserve is part of your total loan amount. As construction progresses and you draw funds, interest payments are deducted from the reserve.

Monitoring your interest reserve is critical. If construction takes longer than planned or costs overrun your budget, the reserve could exhaust before completion. Building contingency into your interest reserve protects against this risk.

Construction Monitoring

Lenders actively monitor construction progress to protect their investment. Expect monthly draw inspections by the lender's inspector, regular budget and timeline updates, change order approval for significant modifications, and progress reports on pre-leasing if applicable.

This monitoring creates administrative work but also helps catch problems early. Many developers appreciate having a third-party set of eyes on contractor performance.

Have questions about the construction phase or draw process? Reach out to our lending team for a detailed walkthrough of how we structure construction to perm loans.

How Does the Conversion to Permanent Financing Work?

The transition from construction to permanent financing represents a key milestone in your project. Understanding this process helps you prepare for a smooth conversion.

Conversion Triggers and Timing

Your loan documents specify the conditions for converting from construction to permanent financing. Common conversion triggers include Certificate of Occupancy issued by local authorities, substantial completion certified by the architect, minimum occupancy achieved for some loan types, and construction budget reconciliation completed.

Once these conditions are met, you notify the lender to begin the conversion process. The loan automatically modifies from interest-only construction terms to amortizing permanent terms.

Rate Lock and Permanent Terms

With single-close construction to perm loans, your permanent rate was locked at initial closing. The conversion simply activates those pre-set terms. You will begin making principal and interest payments based on the locked permanent interest rate, the amortization schedule of typically 25 to 30 years, and the outstanding loan balance at conversion.

For two-close loans, you complete a second closing at this point. You will need an updated appraisal, potentially re-qualify based on current financials, and negotiate new permanent terms at prevailing market rates.

Post-Conversion Requirements

After converting to permanent financing, your ongoing obligations include monthly principal and interest payments, property tax and insurance escrows if required, annual financial statement submissions, property condition maintenance, and compliance with loan covenants such as DSCR tests.

The loan now functions like any commercial mortgage, with the same reporting and compliance requirements.

What Types of Commercial Properties Work Best for C2P Loans?

Construction to perm loans finance various commercial property types, though lender appetite varies based on market conditions and property fundamentals.

Multifamily Development

Apartment buildings represent the most popular property type for construction to perm financing. Strong rental demand, proven operating models, and favorable regulatory treatment make multifamily attractive to lenders.

Expect the best terms for market-rate apartments in growing metros, workforce housing in supply-constrained markets, build-to-rent single-family communities, and senior living and student housing with experienced operators.

Industrial and Warehouse

The industrial sector has seen tremendous growth, and lenders actively compete for construction to perm loans on last-mile distribution facilities, bulk warehouse and logistics centers, light industrial and flex space, and cold storage facilities with experienced operators.

Retail and Mixed-Use

Retail construction financing has become more selective, but well-located projects still attract capital. Grocery-anchored neighborhood centers, mixed-use projects with residential components, pad sites with credit tenant pre-leases, and experiential retail destinations can secure construction to perm financing from the right lenders.

Office Development

Office construction lending has slowed significantly given remote work trends, but opportunities exist for medical office buildings, life sciences and lab space, build-to-suit projects with credit tenants, and creative/adaptive office in strong submarkets.

What Should You Know About Interest Rates and Terms?

Construction to perm loan pricing reflects both the construction risk and permanent financing market. Understanding the rate structure helps you evaluate loan offers.

Construction Phase Pricing

During construction, expect interest rates of Prime plus 1% to 3% or SOFR plus 3% to 5%, interest-only payments on the outstanding balance, origination fees of 1% to 2% of total loan amount, and construction terms of 12 to 24 months with extension options.

Construction rates are higher than permanent rates because the lender takes more risk financing an incomplete property with no income.

Permanent Phase Pricing

Upon conversion, terms improve to reflect the stabilized, income-producing property. Interest rates are typically 1% to 2% lower than construction rates. Amortization runs 25 to 30 years with terms of 5 to 10 years. Prepayment provisions typically include step-down or yield maintenance.

Your permanent rate lock for single-close loans is typically 0.25% to 0.50% above where rates would be for an immediate close, compensating the lender for the forward commitment.

Factors Affecting Your Rate

Several variables influence your specific pricing. Lower loan-to-cost ratios mean better rates. Experienced developers with strong financials get better terms. Multifamily typically gets the best pricing among property types. Primary markets outperform secondary and tertiary markets. Signed leases reduce risk and improve pricing.

How Long Does the Approval Process Take?

Commercial construction to perm loans require thorough underwriting, so plan for an appropriate timeline.

Typical Timeline

Pre-qualification takes 1 to 2 weeks. Application and document collection takes 2 to 3 weeks. Underwriting and due diligence takes 4 to 6 weeks. Loan committee approval takes 1 to 2 weeks. Documentation and legal review takes 2 to 3 weeks. Closing takes about 1 week.

The total timeline runs 10 to 17 weeks from application to closing.

Accelerating Your Timeline

You can speed the process by having complete financial documentation ready, providing detailed plans specs and construction contracts upfront, selecting an experienced general contractor with a strong track record, working with a lender experienced in your property type, and responding quickly to information requests.

Starting the loan process early in your development timeline prevents financing from becoming your critical path.

What Common Mistakes Should You Avoid?

Learning from others' experiences helps you navigate construction to perm financing successfully.

Underestimating Contingency

Construction projects frequently encounter unforeseen costs. Building adequate contingency into your budget protects against cost overruns that could jeopardize your loan. Plan for 5% to 10% hard cost contingency, 10% to 15% soft cost contingency, and interest reserve buffer for timeline extensions.

Choosing Contractors Based Only on Price

Your lender evaluates your contractor almost as carefully as they evaluate you. A low-bid contractor with weak financials or limited experience can torpedo your loan approval. Choose contractors with strong balance sheets and bonding capacity, experience with similar project types and sizes, references from other commercial developers, and clean safety and legal records.

Ignoring Pre-Leasing Requirements

Some construction to perm loans require minimum pre-leasing before conversion. Understand these requirements upfront and build your marketing timeline accordingly. Starting lease-up efforts during construction prevents delays at conversion.

Failing to Plan for Rate Lock Expiration

Rate locks have expiration dates. If construction delays extend beyond your lock period, you may need to pay extension fees or accept a new market rate. Build timeline buffers and understand your lock extension options.

Ready to start your construction to perm loan application? Contact Clearhouse Lending today to discuss your project with an experienced commercial construction lender.

Frequently Asked Questions About Construction to Perm Loans

Can I use construction to perm loans for renovation projects?

Yes, many lenders offer construction to perm financing for substantial renovations and repositioning projects. The property must be significantly improved, not just cosmetically updated. Gut renovations, adaptive reuse, and major expansions typically qualify.

What happens if construction costs exceed my budget?

Cost overruns must be covered somehow. Options include using your contingency reserve, contributing additional equity, reducing scope through value engineering, or requesting a loan modification which is not guaranteed. Careful budgeting and contingency planning prevent this situation.

Can I get construction to perm financing with no development experience?

Limited experience makes approval harder but not impossible. Options include partnering with an experienced developer, hiring a third-party development manager, providing additional equity or guarantees, or starting with a smaller project to build track record.

What is the minimum loan size for commercial construction to perm loans?

Most commercial lenders focus on loans of $2 million and above. Smaller projects may find options through community banks, credit unions, or SBA loans. Larger projects of $10 million and above access more competitive terms from regional and national lenders.

How does the interest reserve work during construction?

The interest reserve is a portion of your loan that covers interest payments during construction when the property generates no income. As you draw construction funds, interest accrues on the outstanding balance. Monthly interest is deducted from the reserve. The reserve must be sized to cover projected interest through construction completion.

What documentation do I need for a construction to perm loan?

Expect to provide personal financial statements and tax returns, entity documents, project plans and specifications, construction budget and timeline, general contractor qualifications and financials, appraisal, environmental Phase I, and title and survey.

Moving Forward With Your Development Project

Construction to perm loans provide commercial developers with an efficient, cost-effective financing solution that reduces risk and simplifies the development process. By combining construction and permanent financing into one package, you save on closing costs, eliminate refinancing risk, and lock in your permanent rate before breaking ground.

The right financing structure can significantly impact your project's returns. Whether you are building multifamily apartments, industrial warehouses, or mixed-use developments, construction to perm loans deserve serious consideration for your capital stack.

Successful construction lending starts with the right lending partner. Look for a lender with construction loan experience, competitive terms, and a track record of closing and servicing similar projects. The relationship you build during construction will continue for years through the permanent loan term.

Your next commercial development project deserves financing that matches your ambitions. Construction to perm loans provide the certainty, efficiency, and cost savings that successful developers demand.