A construction to permanent loan is a single financing product that funds the construction of a commercial property and then converts into a long-term mortgage once the building is complete. Instead of closing two separate loans, borrowers close once, pay one set of fees, and lock in their permanent interest rate before breaking ground. This guide walks through every step of the construction to permanent loan process for commercial real estate projects in 2026, including qualification requirements, draw schedules, rate lock strategies, and the most common mistakes that derail projects.
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What Is a Construction to Permanent Loan and How Does It Work?
A construction to permanent loan (also called a C2P loan or single-close construction loan) combines two financing phases into one product. During Phase 1, the lender disburses funds in stages as the builder completes milestones. You pay interest only on the amount drawn, not the full loan balance. Once the building receives its Certificate of Occupancy, the loan automatically converts into Phase 2: a fully amortizing permanent mortgage with a fixed or adjustable rate.
The key advantage is simplicity. With a single closing, you eliminate the risk of not qualifying for permanent financing after your building is complete. You also avoid paying two sets of origination fees, two appraisals, two title policies, and two rounds of legal costs. For commercial projects in the $500,000 to $10 million range, those savings typically add up to $8,000 to $15,000.
Commercial C2P loans are available from banks, credit unions, SBA lenders, and select debt funds. The structure works particularly well for owner-occupied properties, small multifamily developments, and mid-size commercial projects where the borrower intends to hold long-term. For larger or more complex developments, many borrowers still prefer a two-step approach with separate construction financing and a permanent takeout loan.
How Does a One-Time Close Differ From a Two-Time Close?
The choice between a one-time close and a two-time close is one of the most important decisions in any construction project. Each approach has distinct advantages depending on your project size, experience level, and risk tolerance.
With a one-time close, you sign all documents at the initial closing. Your permanent interest rate, amortization schedule, and loan term are established before the first shovel hits dirt. When construction ends, the loan modifies automatically with no second application, no second underwriting review, and no additional closing costs.
With a two-time close, you get a standalone construction loan first. Once the building is complete and stabilized, you apply for a separate permanent loan. This gives you the flexibility to shop multiple permanent lenders at the time of conversion. However, you bear the risk that rates may have increased or that your financial situation may have changed during the 12 to 24 month construction period.
For most commercial borrowers building projects under $10 million, the one-time close provides the best combination of cost savings and risk reduction. Developers working on larger projects often benefit from a two-time close because they can access specialized permanent financing from CMBS lenders, life insurance companies, or agency programs that typically do not offer combined C2P products.
What Are the Steps in the Construction to Permanent Loan Process?
The construction to permanent loan process follows eight core steps from pre-qualification through final conversion.
Step 1: Pre-Qualification and Lender Selection
Before you submit a full application, most lenders will do a preliminary review. Provide a project summary (location, property type, estimated cost, timeline), your personal financial statement, and a resume of prior development experience. Shop at least three lenders before selecting one.
Step 2: Full Application and Document Submission
Submit a complete loan application with two to three years of personal and business tax returns, a detailed construction budget with line-item breakdowns, architectural plans and specifications, a builder contract, proof of permits (or a permit timeline), and evidence of site control. For investment properties, include a market study or rent comparables.
Step 3: Underwriting, Appraisal, and Builder Review
The lender orders an "as-complete" appraisal estimating the value of the property after construction. This determines your loan-to-value ratio for both the construction and permanent phases. The underwriter also reviews your builder's credentials, including their license, insurance, bonding capacity, and track record.
Use our commercial mortgage calculator to estimate your monthly payment after conversion to permanent terms.
Step 4: Loan Approval, Commitment, and Closing
The lender issues a commitment letter outlining final loan terms. Review the interest rate, rate lock period, draw schedule, contingency requirements, and disbursement conditions carefully. At closing, you sign the construction loan agreement, permanent loan modification agreement, deed of trust, and related documents.
Step 5: Construction Phase and Initial Draw
After closing, the builder begins work. Most lenders require the borrower's equity to go in first before any loan funds are disbursed. The first draw typically covers site preparation, grading, and foundation work.
Step 6: Ongoing Draw Inspections
Before each draw is released, a third-party inspector verifies the work matches the draw request. This process takes three to five business days. The inspector confirms percentage of completion and checks for code violations or quality concerns.
Step 7: Final Inspection and Certificate of Occupancy
The municipality conducts its final inspection and issues a Certificate of Occupancy (CO), confirming the building meets all local codes. Commercial properties may also need sign-off from the fire marshal or health department.
Step 8: Conversion to Permanent Financing
With the CO in hand, the loan converts to its permanent phase through a loan modification. The lender recalculates your payment based on the permanent rate, amortization schedule, and final loan balance. Your first permanent payment is typically due 30 to 60 days after modification. There is no new application, no new closing, and no additional fees.
What Are the Qualification Requirements for a C2P Loan?
Most commercial C2P lenders evaluate four core areas: creditworthiness, financial capacity, project feasibility, and builder qualifications.
Credit score minimums range from 680 to 700 for commercial C2P loans, though some SBA programs accept 660 with compensating factors. Lenders also review your debt-to-income ratio, existing obligations, and any history of bankruptcy or foreclosure.
Financial capacity means having liquidity to cover your down payment (10 to 25%), closing costs, and post-closing reserves. Most lenders require 6 to 12 months of principal, interest, taxes, insurance, and association dues (PITIA) in liquid reserves after closing.
Project feasibility is assessed through the as-complete appraisal, construction budget, and market analysis. The completed property must generate enough income to support the permanent mortgage at a debt service coverage ratio of 1.20x to 1.35x.
Builder qualifications are critical to the lender. Your general contractor must carry adequate insurance and bonding, hold required licenses, and demonstrate a track record of completing similar projects. Some lenders maintain approved builder lists and will not fund projects with unapproved contractors.
If you are exploring ground-up development for the first time, our guide on horizontal vs. vertical construction loan structures provides additional context on how lenders evaluate different project types.
How Does the Draw Schedule and Inspection Process Work?
The draw schedule determines when and how much money the lender releases as construction progresses. Understanding this process prevents cash flow disruptions and keeps your build on track.
A typical commercial construction loan uses five to seven draw milestones. Each draw corresponds to a construction phase: foundation, framing, mechanical systems, interior finishes, and final completion. The borrower or builder submits a draw request detailing work completed, costs incurred, and the amount requested.
Before releasing funds, the lender orders a third-party inspection. The inspector visits the site, verifies the work matches the request, and submits a report within three to five business days. Once approved, the lender wires the draw amount to the title company or borrower.
Most lenders retain 5 to 10% of each draw as "retainage" until the project is fully complete. This protects against incomplete work and incentivizes prompt punch list completion. The full retainage is released after the final inspection and CO issuance.
The interest reserve is the most underestimated cost in the draw process. During construction, you pay interest on all drawn funds while the property generates no income. These payments come from the interest reserve funded at closing. If construction takes longer than expected, an inadequate reserve creates a serious cash shortfall.
What Interest Rate Lock Options Are Available for C2P Loans?
Interest rate management is one of the biggest advantages of a construction to permanent loan. With the right lock strategy, you can eliminate rate risk entirely before construction begins.
C2P lenders offer three main rate lock approaches. A forward lock lets you lock your permanent rate at closing for 12 to 24 months, covering the entire construction period. Forward locks typically cost 0.25 to 0.50% of the loan amount.
A float-to-lock keeps the permanent rate floating during construction, with a lock window 30 to 90 days before the projected CO date. This works if you expect rates to decline but carries upside risk.
A float-down lock combines forward lock security with float flexibility. You lock upfront, but if market rates drop below your locked rate by 0.25% or more, you capture the lower rate. Float-down options add 0.125 to 0.25% to the lock fee.
For projects funded through bridge financing that will transition to permanent debt, rate lock timing is especially important because the conversion window is often narrower.
What Does a Construction to Permanent Loan Cost?
C2P loans have both upfront costs and ongoing expenses during the construction phase. Understanding the full cost structure helps you budget accurately.
Upfront costs include the origination fee (0.75 to 1.5% of loan amount), as-complete appraisal ($3,000 to $10,000), title insurance, legal fees, environmental reports (Phase I ESA), and the survey. For a $3 million C2P loan, total upfront closing costs typically range from $30,000 to $55,000.
Ongoing construction-phase costs include interest payments (covered by the interest reserve), draw inspection fees ($250 to $500 per inspection), and builder risk insurance. On a $3 million loan at 8.5% interest with a 15-month draw period, budget approximately $190,000 to $215,000 for interest reserves assuming a gradual draw schedule.
The permanent phase brings standard mortgage costs: principal and interest, property taxes, insurance, and association dues. A major advantage of C2P is zero additional closing costs at conversion. A two-close structure would add $15,000 to $40,000 in permanent loan closing fees.
If you are considering a USDA-eligible rural project, our guide on USDA construction loans covers programs that may reduce your costs.
When Should You Choose a C2P Loan Over Separate Financing?
The decision depends on your project size, timeline, experience, and long-term strategy.
A C2P loan is the better choice when you plan to hold the property for five or more years, want to eliminate rate risk, are working on a project under $10 million, and prefer the simplicity of a single closing. C2P loans are especially attractive for owner-occupants building commercial space, because you lock in your occupancy cost for decades before the building is finished.
Separate financing makes more sense for larger projects where you need specialized construction capital and plan to secure permanent financing from a different lender at stabilization. Experienced developers with strong lender relationships often prefer the flexibility of a two-close approach.
For developers working on land development and horizontal construction, a C2P loan may not be available because most C2P programs require vertical improvements. In these cases, a standalone construction loan followed by permanent financing is the standard path.
What Are the Most Common Pitfalls in the C2P Process?
Even well-planned construction projects encounter challenges. Knowing the most common pitfalls helps you build safeguards into your plan from day one.
The most frequent problem is an underfunded interest reserve. Construction delays are common, and every extra month adds interest expense. If your reserve runs dry before completion, you must bring additional cash or face potential default.
Choosing an underqualified builder is the second most common issue. Lenders underwrite the builder almost as carefully as the borrower. A builder without adequate experience or bonding capacity can delay approval or force you to find a new contractor mid-process.
Failing to monitor as-complete appraisal assumptions is a third pitfall. If market conditions shift during construction (comparable rents decline or cap rates increase), the appraised value may be lower than projected, creating a funding gap at conversion.
Budgeting without a contingency reserve rounds out the major mistakes. Change orders are nearly inevitable in commercial construction. Without a 5 to 10% contingency reserve, unexpected costs can consume your equity cushion.
How Can You Get Started With a Construction to Permanent Loan?
Begin by gathering your personal financial statements, tax returns, project plans, and builder information at least 60 to 90 days before you need to break ground. Reach out to at least three lenders who specialize in C2P loans for your property type. Compare rates, fees, draw schedules, and rate lock options, paying particular attention to interest reserve and contingency reserve policies.
If you are ready to discuss your construction to permanent loan options, contact our team for a no-obligation project review. We work with borrowers nationwide on commercial construction projects from $500,000 to $50 million and can help you determine whether a single-close or two-close approach is the right fit.
For those still in the planning stages, use our commercial mortgage calculator to model your permanent payment and reach out to our lending specialists when you are ready to move forward.
Frequently Asked Questions
What is the minimum down payment for a construction to permanent loan?
The minimum down payment ranges from 10% to 25% of total project cost. SBA programs (7(a) and 504) offer the lowest at 10 to 15% for owner-occupied properties. Conventional bank C2P loans typically require 20 to 25% for investment properties. Most lenders also require 6 to 12 months of payment reserves in addition to the down payment.
How long does it take to close a construction to permanent loan?
Most commercial C2P loans take 45 to 75 days from application to closing. SBA C2P loans may take 60 to 90 days due to additional government approval layers. Accelerate the process by having construction plans, builder contracts, and financial documents organized before applying. Environmental reports (Phase I ESA) should be ordered early because they take 3 to 4 weeks to complete.
Can you lock in your interest rate before construction begins?
Yes. One of the primary benefits of a single-close construction to permanent loan is locking your permanent rate at closing, before construction begins. Most lenders offer extended rate locks of 12 to 24 months for a fee of 0.25 to 0.50% of the loan amount. Some also offer float-down provisions that let you capture a lower rate if the market moves in your favor. With a two-close structure, you cannot lock the permanent rate until you apply for the second loan near the end of construction.
What happens if construction takes longer than expected?
Your interest reserve will be depleted faster than planned. Most C2P lenders build in a buffer of 3 to 6 months beyond the projected completion date, but extended delays may require additional deposits into the interest reserve. Your rate lock may also expire. To protect yourself, budget a conservative timeline, maintain a 5 to 10% contingency reserve, and communicate proactively with your lender about schedule changes.
Is a construction to permanent loan better than getting two separate loans?
For most commercial borrowers building projects under $10 million, a construction to permanent loan is the better choice. You save $8,000 to $15,000 in duplicate closing costs, eliminate requalification risk, and lock your long-term rate before breaking ground. The trade-off is a slightly higher rate (0.125 to 0.375%) compared to separate permanent financing at completion. Two separate loans make more sense for projects over $10 million where specialized permanent capital offers significantly better terms. Contact us to discuss which approach best fits your project.