Ground-up development financing is one of the most complex corners of commercial real estate lending. Unlike purchasing a stabilized property, building from the ground up requires lenders to underwrite a project that does not yet exist, making the process longer, riskier, and more document-intensive. If you are planning a new commercial construction project in 2026, this guide covers everything you need to know about securing the right loan, structuring your capital stack, navigating draw schedules, and meeting lender requirements.
Whether you are building multifamily apartments, developing a retail or industrial site, or converting raw land into income-producing property, ground-up development financing follows a distinct set of rules. Let us walk through them step by step.
What Is Ground-Up Development Financing and How Does It Work?
Ground-up development financing is a short-term loan product designed to fund the construction of a new commercial property from raw or improved land through to completion. Unlike a traditional commercial mortgage that is secured by an existing building, a construction loan is secured by the future value of a project that has not been built yet.
The loan is disbursed in stages called draws rather than as a lump sum. Each draw corresponds to a completed phase of construction, and a third-party inspector verifies the work before funds are released. This protects the lender from funding work that has not actually been done.
Most ground-up development loans carry a term of 12 to 36 months, covering the construction period plus a brief lease-up window. Interest accrues only on the funds that have been drawn, not the full loan commitment. After the building is complete and stabilized (meaning tenants are in place and cash flow is established), the developer typically refinances into permanent financing such as a bridge loan or a long-term agency or CMBS loan.
How Much Can You Borrow With a Ground-Up Construction Loan?
Most lenders will finance between 65% and 85% of total project costs, depending on the lender type, property type, and the developer's experience. The key metric here is Loan-to-Cost (LTC), not Loan-to-Value (LTV). LTC measures the loan amount against the total development budget, including land, hard costs, soft costs, and financing costs. LTV becomes relevant later, during the refinance into permanent debt.
For example, if your total project cost is million and a lender offers 75% LTC, your maximum loan is .5 million. You would need to bring .5 million in equity. Bank lenders typically cap at 65% to 70% LTC with full recourse, while private lenders and debt funds may stretch to 80% to 85% LTC but charge higher rates and fees.
Use our Commercial Mortgage Calculator to model different leverage scenarios and see how rate and LTC changes affect your monthly interest carry.
What Is the Difference Between LTC and LTV for Development Loans?
LTC (Loan-to-Cost) measures the loan against what you spend to build. LTV (Loan-to-Value) measures the loan against what the finished project is worth. During construction, lenders use LTC because the property does not have a current market value in its completed form. Once the building is finished and appraised, LTV takes over for refinancing purposes.
This distinction matters because a project can have a favorable LTV but a tight LTC, or vice versa. For instance, if you spend million to develop a property that appraises at million upon completion, a 75% LTC loan would be million, but a 65% LTV loan on the appraised value would be .8 million. Developers with strong value-creation plays benefit from the spread between cost and value.
Understanding both metrics is essential when comparing loan offers. If you are evaluating a ground-up deal alongside a repositioning strategy, see our guide on commercial bridge loans to compare financing structures.
What Does a Typical Capital Stack Look Like for Ground-Up Development?
The capital stack is the combination of debt and equity sources used to fund a project. A well-structured stack for ground-up development typically includes senior construction debt at the base, with one or more layers of subordinate capital (mezzanine debt or preferred equity) and developer equity at the top.
For a million ground-up project, a common capital stack might look like this: .5 million in senior construction debt (65% LTC), .5 million in mezzanine financing, million in preferred equity from a capital partner, and million in developer cash equity (10% of total cost). The senior lender gets repaid first, followed by the mezzanine lender and preferred equity investors, with the developer's equity being last in line but first to benefit from upside.
If you are exploring layered financing structures for your development project, contact our team for a free capital stack analysis. We work with developers to identify the optimal mix of debt and equity sources.
How Does the Draw Schedule Process Work?
The draw schedule is the mechanism by which construction loan funds are released to the borrower over time. Rather than receiving the full loan amount at closing, the developer submits draw requests at predetermined milestones or on a monthly basis. Each request triggers a third-party inspection to verify that the work described in the draw has been completed satisfactorily.
A typical draw schedule for a 14-month ground-up build might include six to ten draws tied to construction phases: site preparation and foundation, structural framing, mechanical/electrical/plumbing (MEP) rough-in, exterior envelope, interior finishes, and final punch list completion. The lender's construction monitor visits the site, confirms progress, and authorizes the next disbursement.
Most lenders require draws to be submitted with supporting documentation: contractor invoices, lien waivers from subcontractors, updated budgets, and photos. The turnaround from draw request to funding typically takes 5 to 10 business days. During this period, the general contractor may need to float costs, which is why adequate working capital or a line of credit for the GC is critical.
What Interest Rates Should Developers Expect in 2026?
Bank construction loan rates in early 2026 are averaging between 7.0% and 8.5%, typically structured as a floating rate tied to Prime or SOFR plus a spread of 200 to 350 basis points. Private and bridge lenders charge more, with rates ranging from 10% to 13%, while debt funds fall in between at 8.5% to 11%. These rates reflect the higher risk profile of ground-up lending compared to stabilized property loans.
It is important to note that construction loan interest is calculated only on the outstanding balance (funds actually drawn), not the total commitment. Early in the project, when only a small portion of the loan has been drawn, monthly interest payments are relatively low. They increase as more funds are disbursed. Many lenders include an interest reserve within the loan proceeds so the developer does not need to make cash payments during construction.
Compare these rates against the cost of a bridge loan for post-construction stabilization. Bridging from construction to permanent financing is a standard strategy that most experienced developers plan for from day one.
What Are the Developer Experience and Equity Requirements?
Lenders require developers to demonstrate relevant experience before approving ground-up financing. The minimum bar for most bank lenders is completion of two to three similar projects (comparable property type, size, and market). Private lenders and debt funds may work with first-time developers who have an experienced general contractor, development consultant, or co-sponsor on the team.
Equity requirements vary by property type and lender. Multifamily projects, viewed as lower risk due to strong rental demand, may require as little as 15% developer equity. Office and retail projects in secondary markets might demand 25% to 30% equity. Hospitality developments often need 30% or more. These equity figures represent cash in the deal, not deferred fees or sweat equity.
Net worth requirements are also standard. Most lenders require the sponsor's net worth to equal or exceed the total loan amount, with post-closing liquidity of at least 10% of the loan balance. For a .5 million construction loan, that means roughly ,000 in liquid assets after closing.
Review our down payment requirements guide for a detailed breakdown across all commercial loan types.
What Completion Guarantees Do Lenders Require?
Completion guarantees protect lenders from the risk that a project stalls mid-construction. Nearly every ground-up construction lender requires some form of completion assurance, and the specific type depends on the lender category, deal size, and developer track record.
The most common forms include personal (recourse) guarantees where the developer is personally liable for project completion, payment and performance bonds issued by a surety company, completion escrows where additional funds are held in reserve, and Guaranteed Maximum Price (GMP) contracts with the general contractor that cap construction costs.
Bank lenders almost always require full personal recourse guarantees for construction loans, meaning the developer's personal assets are on the hook if the project fails. Private lenders and debt funds are more flexible, often accepting a combination of a completion escrow, a GMP contract, and limited carve-out guarantees rather than full recourse.
What Documents Do You Need to Apply for Ground-Up Financing?
The documentation package for a ground-up construction loan is significantly more extensive than for a stabilized property acquisition. Lenders need to underwrite not just the borrower, but also the project feasibility, the construction budget, the contractor, and the market.
Here is the core documentation checklist:
Borrower/Sponsor Documents:
- Personal financial statement and tax returns (2 to 3 years)
- Development resume with project history
- Entity formation documents (LLC operating agreement, articles)
- Net worth and liquidity verification
Project Documents:
- Full architectural and engineering plans (construction drawings)
- Detailed construction budget with line items
- Project timeline and phasing schedule
- Environmental reports (Phase I, Phase II if applicable)
- Geotechnical and survey reports
- Zoning confirmation and entitlement approvals
Contractor Documents:
- General contractor qualifications and license
- GC financial statements
- References from prior similar projects
- AIA contract or GMP agreement
- Subcontractor list and scopes
Market Documents:
- Appraisal (as-is land value and as-complete value)
- Market study or feasibility analysis
- Pre-leasing or pre-sale commitments (if applicable)
- Comparable project data
Missing even a few of these items can delay your loan closing by weeks. Preparing a complete package upfront signals professionalism and accelerates the underwriting process.
How Long Does the Ground-Up Development Process Take From Start to Finish?
The full lifecycle of a ground-up development project, from initial concept through stabilization and permanent financing, typically spans 24 to 36 months. Understanding each phase helps developers plan their financing, manage cash flow, and set realistic timelines for investors and partners.
Pre-development (including site selection, due diligence, entitlements, and design) takes roughly 4 to 8 months. The loan application and underwriting period adds another 2 to 4 months. Construction for a mid-size commercial project runs 12 to 18 months. Lease-up and stabilization can add 3 to 6 months post-completion. Finally, refinancing into permanent debt takes another 2 to 3 months.
Developers who plan financing for each phase from the outset have a significant advantage. For the pre-development phase, land acquisition might be funded with a bridge loan or developer equity. The construction phase uses the ground-up development loan. Post-completion, a bridge-to-permanent strategy allows time for lease-up before locking in long-term rates.
What Are the Biggest Risks in Ground-Up Development Financing?
Cost overruns are the primary risk in ground-up development. Material prices, labor shortages, weather delays, and change orders can push a project 10% to 20% over budget. Lenders mitigate this by requiring a 5% to 10% contingency reserve in the construction budget and often holding back a portion of each draw (retainage, typically 5% to 10%) until the project reaches substantial completion.
Other key risks include construction delays that extend the loan term and increase interest carry costs, market shifts that reduce the as-complete value or slow lease-up, contractor default or performance issues, and entitlement or permitting complications that arise mid-project.
Strong developers manage these risks through several strategies: GMP contracts with experienced general contractors, thorough pre-development due diligence, conservative underwriting assumptions (assuming longer lease-up and lower rents than projected), and maintaining adequate liquidity reserves beyond what the lender requires.
Use our DSCR Calculator to stress-test your projected cash flows under different rent and occupancy scenarios.
How Should You Structure the Transition From Construction to Permanent Financing?
The transition from a construction loan to permanent financing is one of the most critical phases in ground-up development. Plan for it before breaking ground, not after. Most construction loans include a maturity date that assumes the project will be complete and stabilized within the loan term. If lease-up takes longer than expected, the developer may face a maturity default or need an expensive extension.
The most common exit strategies include:
Construction-to-Permanent (C2P) Loans: Some lenders offer a single loan that converts from a construction draw facility to a permanent fixed-rate mortgage upon completion. These provide certainty but often come with less favorable permanent terms than shopping the market.
Bridge-to-Permanent: The developer takes a short-term bridge loan after construction to allow additional time for lease-up, then refinances into agency, CMBS, or bank permanent debt once the property is stabilized.
Direct Permanent Takeout: If the project is pre-leased or leases up quickly, the developer can go directly from the construction loan to permanent financing, skipping the bridge entirely.
Ready to discuss your ground-up development project? Schedule a free consultation with our development financing team. We will help you identify the right lender, structure your capital stack, and plan your exit strategy before you break ground.
What Are the Most Common Questions About Ground-Up Development Financing?
What is the minimum down payment for a ground-up construction loan? Most lenders require 15% to 35% of total project cost as developer equity, depending on property type and the lender. Multifamily projects may qualify for lower equity requirements (15% to 20%), while riskier asset classes like hospitality or speculative office may require 25% to 35%. See our down payment guide for a full breakdown.
Can first-time developers get ground-up construction financing? Yes, but with conditions. First-time developers typically need to bring on an experienced co-sponsor, hire a proven general contractor, and contribute more equity (often 25% to 30% minimum). Private lenders and debt funds are more open to newer sponsors than banks are.
What credit score is needed for a ground-up development loan? Bank lenders typically require 680 or higher. Private lenders may accept scores as low as 620, though this will result in higher rates and fees. The project fundamentals and developer experience often matter more than the credit score alone.
How is interest calculated on a construction loan? Interest accrues only on the outstanding balance (the amount drawn to date), not the total loan commitment. Most construction loans use a floating rate tied to Prime or SOFR. An interest reserve is often included in the loan so the developer does not need to make monthly payments out of pocket during construction.
What is a construction draw inspection? A draw inspection is a third-party site visit conducted before each disbursement. The inspector verifies that the work described in the draw request has been completed, matches the approved plans, and meets quality standards. Inspections typically cost to ,500 per visit and are charged to the borrower.
What happens if construction costs exceed the budget? The developer is responsible for covering cost overruns, typically from the contingency reserve or personal funds. If overruns exceed the contingency, the lender may require additional equity, a GMP contract amendment, or a payment and performance bond. Severe overruns can trigger a loan default.
Can land value count as equity in a ground-up deal? Yes. If you own the land free and clear, its appraised value is typically credited as part of your equity contribution. For example, if you own land worth .5 million and total project cost is million, the lender may count that .5 million toward your 20% ( million) equity requirement, meaning you would only need to contribute ,000 in additional cash.
What is the difference between horizontal and vertical construction financing? Horizontal construction covers site work, grading, utilities, roads, and infrastructure. Vertical construction covers the actual building structure from foundation up. Some projects require separate financing for each phase. Learn more about vertical construction financing and horizontal construction financing.
Where Can You Find the Right Ground-Up Development Lender?
Finding the right lender for your ground-up project requires matching your deal profile with the lender's appetite. Start by evaluating your project across four dimensions: property type, deal size, your experience level, and your target leverage.
For experienced developers with strong track records: Regional and national banks offer the lowest rates (7.0% to 8.5%) but require full recourse, 65% to 70% LTC, and thorough documentation. The process takes 60 to 90 days.
For mid-experience developers or mid-size deals: Debt funds offer a balance of competitive rates (8.5% to 11%) and higher leverage (75% to 80% LTC) with faster closings (30 to 45 days). Many debt funds specialize in specific property types.
For speed, flexibility, or first-time developers: Private and bridge lenders move fastest (14 to 30 days) and offer the highest leverage (80% to 85% LTC) but at premium pricing (10% to 13% with 2 to 3 points in origination). This is often the right choice for time-sensitive land acquisitions or developers building their track records.
At Clear House Lending, we work with developers across all experience levels to source ground-up development financing from our network of banks, debt funds, and private lenders. Contact us today to discuss your project and get a custom financing proposal.
Sources:
- Federal Reserve Economic Data (FRED), Bank Prime Loan Rate, 2024 to 2026
- Mortgage Bankers Association, Commercial/Multifamily Origination Index, Q4 2025
- National Association of Home Builders, Construction Cost Survey, 2025
- U.S. Census Bureau, Value of Construction Put in Place, 2025
- Deloitte, 2026 Commercial Real Estate Outlook
- CBRE, U.S. Construction Cost Trends, Mid-Year 2025
- Marcus and Millichap, National Development Pipeline Report, 2025