Horizontal vs vertical construction loans are the two primary financing tools used to fund different phases of ground-up commercial development. Horizontal construction loans cover site work, including grading, utility installation, road building, and drainage infrastructure. Vertical construction loans finance the actual buildings and structures erected on the improved land. Understanding how lenders treat each phase differently, and how to structure a debt stack that bridges both, is essential for developers who want to minimize equity requirements and keep projects on schedule.
This guide covers the critical differences between horizontal and vertical construction financing in 2026, including LTC ratios, interest rates, draw schedules, risk factors, and strategies for structuring debt across both phases.
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What Does Horizontal Construction Financing Cover?
Horizontal construction financing covers all site development work that happens before a building goes up. This is the "dirt work" phase where raw land is transformed into improved, buildable lots or pads. Lenders consider horizontal work the highest-risk phase of development because if the project fails, they are left with underground infrastructure and no revenue-generating structure.
The scope of horizontal construction typically includes:
Site Clearing and Mass Grading. Removing vegetation, demolishing existing structures, and reshaping terrain to planned elevations. This establishes drainage patterns and creates level building pads.
Utility Infrastructure. Installing water mains, sanitary sewer lines, storm drainage systems, and conduit for electric, gas, and telecommunications.
Roads and Access. Building internal streets, intersections, curbing, sidewalks, and connections to the public road network, including street lighting and signage.
Drainage and Stormwater Management. Constructing detention or retention ponds, swales, culverts, and stormwater systems that meet local and federal environmental regulations.
For developers working on subdivisions, master-planned communities, or multi-pad commercial sites, the horizontal construction loan program is designed specifically for this phase. Horizontal loans typically carry terms of 12 to 24 months, with extensions available if absorption takes longer than projected.
What Does Vertical Construction Financing Cover?
Vertical construction financing covers the building phase, from foundation work through certificate of occupancy. This phase begins once horizontal site work is substantially complete and the land is considered shovel-ready. Lenders view vertical construction as lower risk because the collateral is a tangible structure with identifiable market value.
Vertical construction scope typically includes:
Foundation and Structural Systems. Excavation, footings, foundation walls, and the primary structural system (steel frame, concrete tilt-up, wood frame, or masonry).
Building Envelope. Exterior walls, roofing, windows, doors, and waterproofing. Once the building is "dried in," interior work can proceed regardless of weather.
Mechanical, Electrical, and Plumbing (MEP). HVAC systems, electrical distribution, plumbing, fire suppression, elevators, and life safety systems. These represent 30 to 40% of total vertical construction costs.
Interior Finishes and Tenant Improvements. Drywall, flooring, paint, fixtures, cabinetry, and tenant-specific build-outs.
Our vertical construction financing program covers single-building projects as well as phased multi-structure developments. Vertical construction loans generally run 12 to 36 months depending on project size and complexity.
How Do Lenders Underwrite Horizontal vs Vertical Construction Differently?
Lenders underwrite horizontal and vertical construction loans using fundamentally different risk frameworks. The key distinction is collateral quality: horizontal improvements are largely invisible (buried underground), while vertical improvements create a tangible, marketable asset.
Horizontal Underwriting Approach
Horizontal lenders focus on three factors: the developer's track record with similar projects, absorption assumptions for lot sales or pad deliveries, and entitlement status. Because the collateral has limited salvage value, horizontal lenders compensate with lower LTC ratios and higher rates.
Typical horizontal underwriting parameters include:
- Loan-to-cost (LTC): 50 to 65% of total horizontal development costs
- Interest rates: 9 to 13%, depending on borrower strength and project location
- Recourse: Almost always full recourse to the borrower and guarantors
- Reserves: Interest reserves covering the full loan term plus 3 to 6 months
- Pre-sales: Many lenders require 20 to 40% of lots under contract before funding
Vertical Underwriting Approach
Vertical lenders have more traditional criteria because the collateral is a building with comparable sales or income potential. They underwrite based on completed project value, projected stabilized income, and construction budget feasibility.
Typical vertical underwriting parameters include:
- Loan-to-cost (LTC): 65 to 80% of total vertical construction costs
- Loan-to-value (LTV): 60 to 75% of the completed, stabilized appraised value
- Interest rates: 7 to 10%, generally 200 to 300 basis points lower than horizontal loans
- Recourse: Partial recourse or non-recourse for strong sponsors with larger projects
- Pre-leasing: 30 to 50% pre-leased for speculative commercial projects
Vertical lenders will typically credit the value uplift from completed horizontal work as vested equity, meaning the developer may not need additional cash for the building phase if site improvements have created enough value.
What LTC Ratios Should You Expect for Each Phase?
LTC ratios vary by project phase, sponsor strength, and market conditions. In 2026, developers should plan around these benchmarks.
Raw land acquisition loans offer the lowest leverage at 40 to 50% LTC because the collateral is unentitled, unimproved land. Private lenders and hard money shops are the most common sources.
Horizontal development loans step up to 50 to 65% LTC. The increase reflects secured entitlements and permits. Regional banks and specialty development lenders are active in this space.
Vertical construction loans provide 65 to 80% LTC. With improved, shovel-ready land, lenders have a clearer picture of completed project value. Banks, credit unions, and CMBS lenders are the primary sources.
Permanent or takeout financing after stabilization offers 70 to 80% LTV with the lowest rates and longest terms. Agency lenders, life insurance companies, and CMBS conduits dominate this phase.
To model your project's financing needs, use our commercial bridge loan calculator to estimate debt service and compare scenarios.
How Do Interest Rates Compare Between Horizontal and Vertical Loans?
Interest rates on horizontal construction loans run significantly higher than vertical construction loans because of the elevated risk profile.
Horizontal development loans typically price at 9 to 13%. The wide range reflects differences in sponsor experience, project location, entitlement status, and pre-sale activity. A well-capitalized developer in a primary market will land closer to 9%, while a less experienced sponsor in a secondary market may see rates approaching 13%.
Vertical construction loans generally price at 7 to 10%. These loans benefit from tangible collateral, clearer exit strategies, and a broader pool of willing lenders.
The rate differential means the horizontal phase, while shorter, can generate surprisingly high interest costs relative to loan size. A $5 million horizontal loan at 11% for 18 months generates $825,000 in interest expense. A $15 million vertical loan at 8% for 24 months generates $2.4 million. Despite the vertical loan being three times larger, the interest cost is less than three times higher.
For projects involving bridge financing between phases, rates typically fall at 8 to 12% depending on collateral position and exit strategy.
What Does the Draw Schedule Process Look Like for Each Phase?
The draw schedule is the mechanism by which lenders disburse construction loan proceeds in increments as work is completed and inspected. The process differs between horizontal and vertical phases in both frequency and complexity.
Horizontal Draw Schedules
Horizontal draws are tied to completion of specific infrastructure milestones. A typical project might have 4 to 8 major draws aligned with site clearing, grading, utility installation, road base, paving, and final improvements.
Each draw requires a third-party inspection, a title update showing no new liens, and a budget reconciliation. Horizontal draws can be lumpy because earthwork happens in large, discrete phases. It is common for 40 to 50% of the loan to fund in the first two draws.
Vertical Draw Schedules
Vertical draws follow a more predictable monthly cadence tied to a schedule of values prepared by the general contractor. Most vertical projects process monthly draws based on percentage of completion for each trade.
A typical draw package includes the general contractor's application for payment (AIA G702/G703 forms), lien waivers from subcontractors, an updated construction schedule, and a third-party inspection report. Vertical projects typically have 12 to 24 draws, creating a smoother funding curve.
How Do You Structure a Debt Stack That Covers Both Phases?
Structuring debt across both phases is one of the most important decisions a developer makes. The right structure minimizes equity requirements, eliminates financing gaps, and ensures cost overruns in one phase do not jeopardize the other.
Approach 1: Separate Loans for Each Phase
This is the most common structure for phased developments such as residential subdivisions. The developer secures a horizontal loan from one lender and a vertical loan from another (or the same) lender. Advantages include working with specialist lenders and flexibility to sell improved lots. Challenges include coordinating two closings and the risk of a financing gap between phases.
Approach 2: Combined Construction Facility
A combined facility funds both phases under a single loan agreement. This works best for single-asset developments where one developer controls the entire project. Benefits include a single closing, seamless phase transitions, and automatic equity credit. The downside is that fewer lenders offer combined facilities.
Approach 3: Horizontal Loan with Vertical Takeout Commitment
The developer secures the horizontal loan first and simultaneously obtains a forward commitment from a vertical lender. The vertical loan "takes out" the horizontal loan at closing. This provides exit certainty while letting each lender specialize. The forward commitment typically requires a 0.5 to 1.0% commitment fee.
Regardless of approach, your capital stack must account for interest reserves, a contingency budget of 15 to 20% on horizontal costs and 5 to 10% on vertical costs, soft cost funding, and working capital for lease-up after completion.
When Should You Use Separate Loans vs a Combined Facility?
Choose separate loans when developing a subdivision or multi-pad site where lots will be sold to different builders. Separate loans let you release individual lots as they sell. They also make sense when timelines are uncertain or different equity partners are involved in each phase.
Choose a combined facility when building a single asset on a single site, such as an apartment complex or office building. Combined facilities eliminate the coordination of managing two lenders.
Consider a hybrid approach for phased multi-building projects where horizontal work covers the entire site but vertical construction happens in stages.
For guidance on structuring your specific project, contact our team for a consultation.
What Risk Factors Are Unique to Each Phase?
Horizontal and vertical construction carry distinct risk profiles that affect both project execution and loan structuring.
Horizontal-Specific Risks
Soil and Environmental Conditions. Unforeseen rock, contaminated soil, or poor bearing capacity can dramatically increase costs. A $500,000 rock removal expense on a $3 million horizontal budget represents a 17% overrun from a single line item. Always complete Phase I, Phase II, and geotechnical investigations before closing.
Entitlement and Permitting Delays. Wetland delineations, endangered species surveys, and municipal review processes can add 6 to 12 months to timelines.
Utility Connection Delays. Municipal water and sewer authorities operate on their own schedules. Tap fees may increase and capacity allocation can change between approval and construction.
Vertical-Specific Risks
Material Cost Volatility. Steel, lumber, and concrete can fluctuate 10 to 30% during construction. Early procurement or escalation clauses protect against overruns.
Labor Availability. Skilled trade shortages can delay schedules and increase bids. General contractors may struggle to hold pricing for more than 30 to 60 days.
Lease-Up and Absorption Risk. If leasing takes longer than projected, interest reserves may run dry. Pre-leasing 30 to 50% before breaking ground mitigates this risk.
For more on the construction-to-permanent transition, review our guide on the construction-to-permanent loan process.
What Timelines Should You Plan for Each Phase?
Realistic timeline planning is critical because construction loan interest accrues daily and every month of delay increases carrying costs.
Land Entitlement: 6 to 12 months. Includes rezoning, subdivision plat approval, environmental permitting, and plan review. Complex projects can take 12 to 18 months.
Horizontal Construction: 6 to 18 months. Small commercial pad sites may complete in 6 to 9 months. Large subdivisions typically require 12 to 18 months. Weather is a major variable.
Vertical Construction: 12 to 36 months. Single-story commercial buildings may complete in 12 to 14 months. Mid-rise multifamily takes 18 to 24 months. High-rise structures can extend to 36 months.
Lease-Up and Stabilization: 6 to 18 months. Achieving 90%+ occupancy takes 6 to 12 months in strong markets and up to 18 months in weaker locations.
The total development cycle from raw land to stabilized asset runs 30 to 48 months. Your financing strategy must account for this full timeline, including contingency for delays.
For faster timelines on horizontal work, our guide on fast approval for horizontal development loans covers strategies for accelerating the process.
How Can Mezzanine Financing Fill Gaps in Your Capital Stack?
Mezzanine financing sits between the senior construction loan and developer equity. For projects where the senior lender's LTC falls short, mezzanine debt can bridge the gap without requiring additional cash equity.
Mezzanine financing typically provides an additional 10 to 20% of project costs on top of the senior loan. A developer could achieve total leverage of 75 to 85% by combining a 65% LTC senior loan with a 15% mezzanine piece, reducing cash equity to 15 to 20% of total costs.
Mezzanine rates run 12 to 18% because the debt occupies a subordinate position. However, the cost is justified by the return on incremental equity it frees up. If freed capital goes into another project generating 20%+ returns, the 15% mezzanine cost is accretive to overall portfolio performance.
Key considerations include the intercreditor agreement between senior and mezzanine lenders, the mezzanine lender's cure rights, and the impact on stabilized DSCR.
Ready to explore financing options? Contact Clearhouse Lending to discuss horizontal, vertical, or combined construction loan structures tailored to your project.
Frequently Asked Questions
Can you get a single loan that covers both horizontal and vertical construction?
Yes, some lenders offer combined construction facilities that fund both horizontal site work and vertical building construction under a single loan agreement. These work best for single-asset developments where one developer controls the entire project. The lender underwrites total project cost and sets internal milestones for transitioning between phases. However, fewer lenders offer this structure, so your options may be more limited.
What is the typical LTC ratio for a horizontal construction loan?
Horizontal construction loans typically offer 50 to 65% loan-to-cost, significantly lower than vertical construction loans at 65 to 80% LTC. The lower leverage reflects the higher risk profile of horizontal work, where collateral consists primarily of underground infrastructure with limited salvage value. Developers with stronger track records and significant pre-sales can achieve LTC closer to 65%.
How long does it take to get approved for a construction loan?
Horizontal development loans typically take 30 to 60 days from application to closing, while vertical construction loans take 45 to 90 days due to more detailed underwriting requirements such as appraisals, environmental reports, and construction budget reviews. Having a complete documentation package ready can reduce timelines by 2 to 3 weeks.
What happens if horizontal construction costs exceed the budget?
Cost overruns on horizontal work are common, with 15 to 25% overruns occurring frequently due to unforeseen soil conditions, rock removal, or utility conflicts. If costs exceed the loan amount, the developer must fund the shortfall with additional equity. This is why experienced lenders require 15 to 20% contingency reserves. If overruns threaten project viability, the developer may need mezzanine capital to cover the gap.
Do vertical lenders give credit for completed horizontal work?
Yes, most vertical construction lenders will credit the value created by completed horizontal improvements as vested equity. If horizontal work cost $3 million but the improved land appraises at $5 million, the developer receives credit for $5 million rather than $3 million. This value uplift can significantly reduce the additional cash equity needed for the vertical phase. The credit is determined through an independent appraisal commissioned by the vertical lender.
Clearhouse Lending works with developers across the country on horizontal development, vertical construction, and combined construction financing. Whether you are grading a greenfield site or structuring debt across multiple project phases, our team can help you find the right capital stack. Schedule a consultation today to discuss your next project.