A construction takeout loan is the permanent financing that replaces your short-term construction debt once a project is completed or stabilized. It is the planned exit strategy that every developer and construction lender requires before breaking ground. Without a reliable takeout plan, most construction lenders will not fund your project at all.
If you are building a commercial property and wondering how you will pay off that 12- to 24-month construction loan when it matures, this guide covers everything you need to know about takeout financing, from basic definitions to forward commitments, current rates, and the real risks of going without one.
Clearhouse Lending structures construction loans and takeout financing for developers and builders across the country. If you need help lining up your exit strategy before closing on construction debt, reach out to our team today.
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What Is a Construction Takeout Loan?
A construction takeout loan is a long-term mortgage that "takes out" or pays off a short-term construction loan once the building is finished. The takeout loan replaces high-cost interim financing with permanent debt that typically features lower interest rates, longer amortization periods, and fixed payment schedules. This is the standard exit strategy for nearly every commercial construction project in the United States.
Construction loans are designed as short-term instruments, usually lasting 12 to 36 months with interest-only payments drawn against a budget. They carry higher rates because the lender is funding an asset that does not yet exist and generates no income during the build. Once the project reaches substantial completion and begins generating revenue through leases or sales, the developer refinances into a takeout loan that reflects the property's new, stabilized value.
According to Walker & Dunlop, agency takeout options from Fannie Mae and Freddie Mac are among the most popular permanent financing vehicles for multifamily construction projects, offering competitive rates and non-recourse terms. Life insurance companies, CMBS lenders, banks, and credit unions also originate takeout loans for stabilized commercial properties.
The takeout loan typically covers the full outstanding balance of the construction loan. In some cases, it can also return a portion of the developer's initial equity investment, functioning similar to a cash-out refinance. This allows the developer to recycle capital into the next project while retaining the completed asset.
How Does a Takeout Loan Differ from a Construction-to-Permanent Loan?
A takeout loan and a construction-to-permanent (CTP) loan both provide long-term financing after construction, but they are structurally different products that serve different borrower needs. A takeout loan is a separate, standalone mortgage originated by a new lender after the project is complete. A construction-to-permanent loan is a single loan that automatically converts from a construction phase to a permanent phase with the same lender.
With a CTP loan, the borrower closes once and the loan converts to permanent terms at a predetermined point, often when the certificate of occupancy is issued. This simplifies the process and reduces closing costs, but the permanent terms are typically locked in at origination, which limits flexibility if market conditions improve during the build. For a deeper walkthrough, see our guide on the construction-to-permanent loan process.
A standalone takeout loan, by contrast, requires a second closing with a separate lender. While this adds transaction costs and requires the borrower to qualify again, it offers significant advantages. The developer can shop for the best permanent rates and terms available at the time of stabilization rather than locking in rates months or years earlier. This flexibility is especially valuable in volatile interest rate environments.
Construction-to-permanent loans are more common for smaller projects and owner-occupied properties where simplicity is a priority. Standalone takeout loans dominate the large commercial and multifamily space, where developers want to maximize leverage and minimize long-term debt costs. Many institutional lenders, including life insurance companies and agency lenders, only participate at the takeout stage and do not offer construction financing at all.
When Do Developers Need Takeout Financing?
Developers need takeout financing whenever they are using a short-term construction loan or bridge loan that must be repaid within a fixed period. The takeout loan is required at the point when construction is complete and the property has reached a level of occupancy or revenue that satisfies the permanent lender's requirements. This typically occurs 12 to 36 months after the construction loan closes.
The most common scenarios where takeout financing is needed include:
Ground-up development projects. Any new construction project funded by a short-term draw loan needs a permanent takeout. This applies to multifamily apartments, office buildings, retail centers, industrial facilities, and mixed-use developments. Learn more about structuring ground-up deals in our ground-up development financing guide.
Value-add renovations with bridge financing. Developers who acquire and renovate properties using bridge loans need takeout financing once the renovation is complete and the property is re-stabilized at higher rents.
Subdivision and lot development. Builders who finance horizontal infrastructure through horizontal construction loans may need takeout financing to pay off the development loan as lots sell or vertical construction begins.
Projects funded by ADC loans. Acquisition, development, and construction (ADC) loans bundle land purchase and construction into a single facility. These still require a takeout at maturity. For more on ADC structures, see our guide on what is an ADC loan.
The timing of the takeout depends on the property type. Multifamily projects often achieve stabilization (typically defined as 90% to 95% occupancy) within 6 to 18 months after the certificate of occupancy. Retail and office properties may take longer due to lease-up timelines. Developers should begin discussions with takeout lenders 6 to 12 months before their construction loan matures to ensure a smooth transition.
What Are the Requirements for a Construction Takeout Loan?
Takeout lenders evaluate both the borrower and the property to determine eligibility for permanent financing. The property must demonstrate that it can generate sufficient income to service the new debt, while the borrower must show financial strength and a track record of successful projects. Requirements vary by lender and property type but generally follow consistent patterns.
Property requirements include a certificate of occupancy confirming the building was constructed to code and approved plans, a minimum occupancy rate (typically 85% to 95% depending on the lender and property type), executed leases at or near pro forma rental rates, clean title with no outstanding construction liens or mechanic's liens, and a current appraisal reflecting the stabilized market value.
Borrower requirements include three years of corporate and personal tax returns, current personal financial statements, bank statements demonstrating liquidity, a schedule of real estate owned with operating histories, and relevant development experience on comparable projects.
Financial metrics that takeout lenders focus on include debt service coverage ratio (DSCR) of at least 1.20x to 1.35x for most commercial property types, loan-to-value (LTV) ratios typically capped at 70% to 80%, and minimum debt yield of 7% to 9%. You can estimate your project's debt service capacity with our commercial mortgage calculator.
According to Fannie Mae's Near-Stabilization Execution program, multifamily properties can secure agency takeout financing with as little as 75% physical occupancy at rate lock, provided the property has certificates of occupancy for 100% of units. This provides a valuable bridge for developers who want to lock in permanent rates before achieving full stabilization.
Clearhouse Lending works with developers at every stage of the construction process, from initial construction financing through permanent placement. If you need help structuring a takeout that meets your timeline and financial goals, contact our advisory team.
What Are Typical Takeout Loan Rates and Terms?
Takeout loan rates and terms vary based on property type, borrower strength, leverage level, and the specific lender category. As of early 2026, permanent loan rates for stabilized commercial properties generally range from 5.18% to 7.50%, depending on the financing source and deal structure. This represents a significant reduction from construction loan rates, which typically price at SOFR plus 300 to 450 basis points.
According to Select Commercial, current commercial mortgage rates as of February 2026 start at 5.18% for the most competitive permanent loan products. The federal funds rate stands at 3.50% to 3.75% following the Federal Reserve's January 2026 decision, and base SOFR remains near 3.25%.
Amortization and term. Most takeout loans amortize over 25 to 30 years with balloon payments due in 5, 7, or 10 years. Agency loans from Fannie Mae and Freddie Mac can offer terms up to 35 years for multifamily properties. Life insurance company loans typically feature 10-year terms with 25- to 30-year amortization.
Prepayment provisions. Unlike construction loans that can typically be prepaid freely, permanent takeout loans usually include yield maintenance, defeasance, or step-down prepayment penalties. These provisions protect the lender's yield over the loan term and are an important consideration when evaluating your long-term hold strategy.
Recourse vs. non-recourse. Many takeout loan products are available on a non-recourse basis, meaning the borrower's personal assets are not at risk beyond standard "bad boy" carve-outs. This is a significant advantage over construction loans, which are almost always full recourse. Use the commercial bridge loan calculator to compare your current construction loan costs against projected takeout terms.
How Do Takeout Commitments Strengthen Construction Loan Applications?
A takeout commitment is a written promise from a permanent lender to provide long-term financing at a future date, contingent on the project meeting specified conditions. This document is one of the most powerful tools a developer can bring to a construction loan application because it directly addresses the construction lender's primary concern: how the loan will be repaid.
Construction lenders face significant risk. They are funding an asset that does not yet exist, relying on the developer to complete the project on time and on budget, and trusting that market conditions will support permanent financing when the loan matures. A takeout commitment removes much of this uncertainty by providing documented evidence that a creditworthy lender has underwritten the project and committed to funding the exit.
According to C-Loans.com, most construction lenders require borrowers to provide a takeout commitment before they will fund a construction loan. The commitment serves as the construction lender's assurance that permanent financing exists to repay the construction debt at maturity. Without it, the construction loan is considered "uncovered" or "open-ended," which significantly increases the construction lender's risk.
A strong takeout commitment can result in better construction loan terms, including lower spreads, higher leverage, reduced reserve requirements, and more flexible draw schedules. It demonstrates to the construction lender that the project has been independently underwritten and validated by a second institutional lender, which reduces perceived risk across the entire capital stack.
For builders and developers managing complex projects, having the takeout commitment in place early also simplifies the overall capital structure. To learn how different loan layers work together, see our guide on what is a takedown loan.
What Are Forward Takeout Commitments and How Do They Work?
A forward takeout commitment is a binding letter from a permanent lender promising to deliver a takeout loan at a specific future date, provided the project meets agreed-upon conditions. These commitments are typically issued 12 to 36 months before the anticipated funding date, aligning with the expected construction timeline. They are the standard mechanism through which developers secure their exit strategy before breaking ground.
Forward commitments specify the loan amount, interest rate or rate-setting mechanism, term, amortization, and all conditions that must be met before funding. Common conditions include completion of construction according to approved plans and specifications, issuance of a certificate of occupancy, achievement of a minimum occupancy rate (usually 90% to 95%), effective rents meeting or exceeding pro forma projections, and clean title with no outstanding liens.
The cost of a forward takeout commitment typically runs 1 to 2 points of the committed loan amount, paid at issuance. Some lenders charge an additional 0.50 to 1.00 point if the loan actually funds. According to Accounting Insights, the tri-party agreement among the borrower, construction lender, and permanent lender outlines all conditions under which the permanent financing will fund.
Forward commitments vs. standby commitments. It is important to distinguish between forward takeout commitments and standby takeout commitments. A forward commitment is genuine permanent financing with competitive rates and terms that the developer fully expects to use. A standby commitment is a backup arrangement with expensive terms (often prime plus 3% to 5%) that is not expected to fund. Standby commitments exist primarily to satisfy the construction lender's requirement for documented takeout, and they typically cost 2 to 4 points. If a standby commitment actually funds, it generally means the project is underperforming and the developer could not secure more favorable permanent financing.
Most forward takeout commitments for large commercial projects are issued by life insurance companies, agency lenders (Fannie Mae and Freddie Mac for multifamily), and CMBS conduits. The forward commitment market is a critical part of the commercial construction ecosystem, providing the certainty that both developers and construction lenders need to move projects forward.
What Are the Risks If You Cannot Secure Takeout Financing?
Failing to secure takeout financing before a construction loan matures is one of the most serious risks in commercial real estate development. If the developer cannot refinance into permanent debt, the construction loan goes into default, potentially triggering foreclosure and the loss of the entire project. Understanding these risks is essential for any developer carrying short-term construction debt.
Maturity default. According to the FDIC, maturity defaults on construction loans occur when the borrower cannot sell the collateral at an adequate price or cannot obtain sufficient permanent financing to pay off the construction loan. Unlike payment defaults, which happen gradually, maturity defaults can occur suddenly when the loan term expires.
Rising interest rates. If market rates increase significantly during the construction period, the property's value and the borrower's ability to qualify for permanent financing may be compromised. A property that penciled at a 1.30x DSCR when the construction loan was originated might only achieve a 1.05x DSCR at current rates, making it ineligible for most takeout programs.
Lease-up delays. If the property has not achieved the required occupancy level by the time the construction loan matures, permanent lenders may decline to fund. Multifamily projects in oversupplied markets, office properties facing remote-work headwinds, and retail centers in shifting trade areas are all vulnerable to slower-than-projected absorption.
Extension costs and penalties. When developers cannot secure takeout financing in time, they may negotiate a construction loan extension, but these typically come with extension fees of 0.25% to 1.00%, higher interest rate spreads, additional reserve requirements, and personal guarantee enhancements. These costs erode project returns and can turn a profitable development into a marginal one.
Forced sale. In the worst case, the developer may be forced to sell the property at a discount to repay the construction loan, capturing little or none of the development profit. This scenario became common during the 2008-2010 financial crisis when permanent credit markets froze and construction borrowers could not refinance.
The best way to mitigate these risks is to secure a forward takeout commitment before closing on the construction loan, build adequate interest reserves into the construction budget, maintain strong relationships with multiple permanent lenders, and start the takeout application process 6 to 12 months before the construction loan maturity date.
What Are the Most Common Questions About Construction Takeout Loans?
What is the difference between a takeout loan and a refinance?
A takeout loan is technically a type of refinance, but the term specifically refers to permanent financing that replaces short-term construction or bridge debt. A general refinance replaces any existing mortgage with a new one, often to access better rates or pull out equity. The key distinction is that a takeout loan is planned from the start as the exit strategy for interim construction financing.
How long does it take to close a construction takeout loan?
Most takeout loans take 45 to 90 days to close, depending on the lender and property complexity. Agency loans through Fannie Mae or Freddie Mac typically close in 45 to 60 days. Life insurance company loans may take 60 to 90 days. CMBS conduit loans can range from 60 to 120 days due to the securitization process. Developers should begin their takeout application 6 to 12 months before the construction loan maturity to allow adequate processing time.
Can I get a takeout loan before the property is fully stabilized?
Yes. Some lenders, particularly Fannie Mae through its Near-Stabilization Execution program, will provide takeout financing for multifamily properties with as little as 75% physical occupancy. Bridge lenders also offer "bridge-to-permanent" solutions for properties that need additional lease-up time. However, rates and leverage will be less favorable compared to fully stabilized takeout loans.
What happens if my construction project runs over budget?
Cost overruns during construction can complicate the takeout process. If the total project cost exceeds the original budget, the loan-to-cost ratio changes, and the developer may need to inject additional equity. The takeout lender will re-evaluate the project based on the actual completed cost and current appraised value. Having contingency reserves of 5% to 10% of the construction budget helps mitigate this risk.
Do all construction lenders require a takeout commitment?
Most institutional construction lenders, particularly banks and credit unions, require a takeout commitment or at least a demonstrated exit strategy. However, some private lenders and hard money construction lenders may fund without a formal takeout commitment, though they charge significantly higher rates and fees to compensate for the additional risk. The construction loan will be considered "uncovered" without a takeout commitment.
What is a tri-party agreement in takeout financing?
A tri-party agreement is a contract among the borrower, the construction lender, and the permanent (takeout) lender. It outlines the conditions under which the permanent lender will fund the takeout loan and the construction lender will assign its lien position. This agreement protects all three parties by clearly defining responsibilities, timelines, and the conditions precedent to the permanent loan closing.