Horizontal construction loans are specialized financing products that fund the site work and infrastructure development required to transform raw land into buildable lots. Unlike vertical construction loans that finance buildings, a horizontal construction loan covers grading, roads, utilities, drainage, and other below-grade or at-grade improvements that make land suitable for development.
For subdivision developers, land developers, and infrastructure-focused builders, understanding how horizontal construction financing works is essential to structuring successful projects. This guide breaks down the requirements, rates, draw schedules, and strategies that developers need to know in 2026.
If you are planning a land development or subdivision project and need financing for site work, contact Clearhouse Lending to discuss horizontal construction loan options tailored to your project.
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What Does Horizontal Construction Mean in Real Estate?
Horizontal construction refers to all the site-level improvements that happen before any buildings go up. It includes grading the land, building roads, installing water and sewer lines, running electrical conduit, constructing storm drainage systems, and adding curbs, gutters, and sidewalks. These improvements are called "horizontal" because the work spreads across the land surface rather than rising vertically into a structure.
In real estate development, horizontal construction is the foundation of every subdivision, master-planned community, and commercial site. Without completed horizontal improvements, vertical construction (the buildings themselves) cannot proceed. According to the National Association of Home Builders (NAHB), land development is one of the three pillars of the acquisition, development, and construction (AD&C) financing cycle, representing a critical phase that sets the stage for everything that follows.
Horizontal improvements typically account for 20% to 35% of total project costs in residential subdivisions, though this percentage can climb higher in projects that require extensive earthwork, environmental mitigation, or long utility runs. The scope of work varies significantly based on topography, soil conditions, and proximity to existing municipal infrastructure.
How Does a Horizontal Construction Loan Work?
A horizontal construction loan provides short-term financing to cover the costs of site development, with funds disbursed through a structured draw schedule as work milestones are completed. The lender advances money in phases, and a third-party inspector verifies that each phase is finished before the next draw is released.
The typical horizontal construction loan functions as an interest-only facility during the construction period. Developers only pay interest on the drawn amount, not the full loan commitment, which helps manage cash flow during the months when no revenue is being generated. Once horizontal improvements are complete, the developer either sells improved lots to builders, transitions to vertical construction financing, or refinances into a longer-term product.
Most horizontal construction loans carry terms of 12 to 24 months, reflecting the time needed to complete site work and begin lot sales or vertical development. Lenders typically require a loan-to-cost (LTC) ratio of 60% to 75%, meaning the developer must contribute 25% to 40% of total project costs as equity. This higher equity requirement compared to vertical loans reflects the added risk that lenders associate with land-level improvements, which are harder to value and more difficult to liquidate in a default scenario.
Interest rates on horizontal construction loans typically range from 9% to 13% depending on the lender type, borrower experience, project location, and market conditions. According to the NAHB AD&C Financing Survey, the effective interest rate on land development loans was 10.92% in Q3 2025, down slightly from 11.77% in Q2 2025.
What Does a Horizontal Construction Loan Cover?
A horizontal construction loan covers the physical site improvements and associated soft costs required to prepare raw land for vertical construction. The specific line items funded by the loan depend on the project scope, but most lenders will finance a consistent set of development activities.
The core categories covered by horizontal construction financing include mass grading and earthwork, road construction and paving, water and sewer line installation, storm drainage systems, electrical and gas conduit to individual lots, curbs, gutters, and sidewalks, as well as the engineering, permitting, and impact fees associated with this work. Some lenders will also finance environmental mitigation, retaining walls, and common-area amenities, though these items often fall into a gray area that depends on the specific lender's guidelines.
It is important to understand what horizontal loans typically do not cover. Building foundations, framing, roofing, interior finishes, HVAC systems, and any other work associated with constructing the actual buildings are funded through vertical construction loans, not horizontal financing.
The average cost of horizontal improvements ranges from $20,000 to $100,000 per acre, depending on the site's topography, soil conditions, and distance from existing utility connections. For residential subdivisions, developers should expect to spend $40,000 to $60,000 per finished lot on horizontal improvements in most markets, though costs can exceed $80,000 per lot in areas with challenging terrain or high impact fees.
How Do Horizontal Construction Loans Differ from Vertical Construction Loans?
Horizontal and vertical construction loans serve different phases of the same development process, and understanding their distinctions is essential for structuring your capital stack correctly. The primary difference comes down to what each loan finances and how lenders evaluate the associated risk.
A horizontal construction loan funds everything that happens at or below ground level before buildings go up. A vertical construction loan funds the buildings themselves, from foundations to rooftops. Because vertical construction creates immediately visible, appraisable structures, lenders generally view vertical loans as lower risk and offer more favorable terms. Horizontal improvements, while essential, create value that is harder to quantify and recover in a foreclosure scenario.
For a deeper dive into structuring debt across both phases, read our guide on horizontal vs. vertical construction loans.
The risk differential between horizontal and vertical financing shows up in several key metrics. Horizontal loans typically carry LTC ratios of 60% to 75%, while vertical loans can reach 70% to 85%. Interest rates on horizontal loans run 1% to 3% higher than comparable vertical loans. Approval timelines are often longer for horizontal financing because lenders must evaluate environmental factors, municipal entitlements, and market absorption rates for finished lots.
One structural difference that developers should understand is the collateral profile. With a vertical loan, the lender's collateral is an actual building with quantifiable market value. With a horizontal loan, the collateral is improved land, which may have limited value if market conditions change or if the development plan stalls. This is why horizontal lenders place significant emphasis on the developer's track record and the strength of the local housing or commercial market.
What Are the Requirements for a Horizontal Construction Loan?
Qualifying for a horizontal construction loan requires demonstrating both financial strength and development expertise. Lenders evaluate the borrower, the project, and the market before approving financing for site development.
Developer experience is typically the most important qualification factor. Most bank and institutional lenders require the borrower to have completed at least two to five similar projects successfully. Private and bridge lenders may work with developers who have less experience, but they compensate for this added risk with higher interest rates and lower LTC ratios. First-time developers often need to partner with an experienced developer or bring additional equity to secure horizontal financing.
Beyond experience, lenders evaluate credit scores (typically 640 to 700+ depending on lender type), personal and business financial statements, the development budget and timeline, market absorption studies, and pre-sale agreements if available. Many lenders also require personal guarantees and full recourse on horizontal construction loans, meaning the developer is personally liable for repayment if the project fails.
Project-level requirements include approved entitlements and permits, a detailed engineering plan with cost estimates, environmental assessments (Phase I and sometimes Phase II), a market study or absorption analysis, and proof of equity contribution. The entitlement status of the land is particularly important because lenders want assurance that the developer has legal approval to build the planned number of lots or units before committing funds to infrastructure.
Planning to apply for horizontal construction financing? Reach out to Clearhouse Lending to understand what documentation and qualifications you will need for your specific project.
What Are Typical Horizontal Construction Loan Rates and Terms?
Horizontal construction loan rates vary based on lender type, borrower profile, and market conditions, but developers should expect to pay a premium compared to vertical construction financing. The higher rates reflect the specialized risk profile of land development, where value creation is less visible and liquidation options are more limited.
As of early 2026, horizontal construction loan rates from banks and credit unions typically range from Prime + 1% to Prime + 3%, which translates to approximately 9% to 11% at current prime rate levels. Private and bridge lenders charge 10% to 14%, with origination fees of 1.5% to 3.0 points. Specialty commercial real estate lenders fall in between, generally offering 9% to 12% with moderate fee structures.
Loan terms for horizontal construction typically run 12 to 24 months, with extension options available for an additional fee. Most lenders build in an interest reserve, which means a portion of the loan proceeds is set aside to cover interest payments during the construction period. This reduces the developer's out-of-pocket carrying costs but also reduces the net loan proceeds available for actual construction work.
One important cost consideration is the origination fee structure. Bank loans typically charge 0.5% to 1.0% in origination fees, while private lenders may charge 1.5% to 3.0%. On a $5 million horizontal construction loan, this difference can amount to $50,000 to $100,000 in additional upfront costs. Developers should factor these fees into their total project budget when comparing lender options. Use our commercial bridge loan calculator to model different rate and fee scenarios for your project.
How Are Draw Schedules Structured for Horizontal Construction?
Draw schedules for horizontal construction loans follow a milestone-based structure where funds are released as specific phases of site work are completed and verified by a third-party inspector. This approach protects the lender by ensuring that loan proceeds are only disbursed as tangible improvements are made to the property.
A typical horizontal construction draw schedule includes five to six phases, starting with pre-development costs and ending with a retainage release after all work passes final municipal inspection. The percentage allocated to each draw varies based on the project scope, but most schedules follow a predictable pattern that mirrors the natural sequence of site development work.
Each draw request requires documentation including a completed draw request form, an updated budget showing costs to date and remaining costs, lien waivers from contractors and subcontractors, a third-party inspection report confirming work completion, and photographs of completed work. The inspection and approval process typically takes 5 to 10 business days, so developers should plan their cash flow accordingly.
Retainage is a standard feature in horizontal construction draw schedules. Lenders typically hold back 5% to 10% of each draw as retainage, which is not released until all work is complete and municipal sign-offs are obtained. This holdback ensures that contractors have an incentive to complete punch-list items and that the developer cannot draw the full loan amount before all improvements are accepted by the local jurisdiction.
For a detailed look at how road and infrastructure costs break down in subdivision projects, see our guide on subdivision road construction costs.
When Should Developers Transition from Horizontal to Vertical Financing?
The transition from horizontal to vertical financing is one of the most critical milestones in a land development project, and timing it correctly can significantly impact project economics and cash flow. Developers should begin planning the transition well before horizontal work is complete.
The ideal time to secure vertical financing commitments is when horizontal construction is approximately 60% to 75% complete. At this stage, the project's viability is demonstrable, utility installations are substantially done, and vertical lenders can see a clear path to lot delivery. Waiting until horizontal work is 100% complete before starting vertical loan conversations can create a costly gap in the project timeline.
The mechanics of transitioning between loan types depend on the lot release provisions negotiated in the horizontal loan agreement. A lot release provision allows the developer to free individual lots from the horizontal lender's blanket lien so those lots can be sold to builders or used as collateral for vertical construction loans. The release price is typically 100% to 125% of the per-lot allocated loan amount, meaning the developer must pay down a portion of the horizontal loan to release each lot.
Developers who plan to build vertically on their own lots rather than selling to third-party builders have additional flexibility. They can often negotiate a single lender to provide both horizontal and vertical financing under a unified facility, which eliminates the complexity of lot releases and dual lender coordination. Clearhouse Lending offers both horizontal and vertical construction financing, allowing developers to streamline their capital stack.
For developers planning ground-up projects that span both horizontal and vertical phases, our ground-up development financing guide provides a comprehensive overview of the full capital stack.
Frequently Asked Questions
What is the minimum loan amount for a horizontal construction loan?
Most lenders set minimum loan amounts between $500,000 and $2 million for horizontal construction loans. Smaller site development projects may qualify for land improvement loans or lines of credit through local community banks, but the specialized nature of horizontal financing generally makes it most practical for projects with total development budgets of $1 million or more.
Can I use a horizontal construction loan to buy the raw land?
Some lenders offer combined acquisition and development (A&D) loans that include both the land purchase and horizontal improvements in a single facility. However, many horizontal construction loans assume the developer already owns the land or is purchasing it separately through a land acquisition loan. The structure depends on the lender and the overall project economics.
How long does it take to get approved for a horizontal construction loan?
Approval timelines vary significantly by lender type. Banks and credit unions typically take 45 to 90 days to close a horizontal construction loan due to extensive underwriting and committee reviews. Private and bridge lenders can close in 7 to 21 days. Specialty commercial real estate lenders generally fall in the 21 to 45 day range. Having complete documentation, approved entitlements, and a detailed engineering plan ready before applying can shorten these timelines.
What happens if my horizontal construction project goes over budget?
Budget overruns are common in horizontal construction due to unforeseen soil conditions, rock excavation, weather delays, or regulatory changes. Most lenders require a 10% to 15% contingency reserve in the initial budget. If costs exceed the contingency, the developer typically needs to contribute additional equity or negotiate a loan modification with the lender. This is why accurate upfront budgeting and thorough geotechnical investigation are essential before closing on a horizontal construction loan.
Do I need pre-sales to qualify for a horizontal construction loan?
Pre-sale requirements vary by lender. Banks often require 20% to 50% of lots to be under contract or reserved before funding, while private lenders rarely require pre-sales. The pre-sale requirement is closely tied to the lender's confidence in the local market's absorption rate. In strong housing markets with demonstrated demand, pre-sale requirements may be reduced or waived entirely.
What is the difference between a land development loan and a horizontal construction loan?
The terms are often used interchangeably, but there is a subtle distinction. A land development loan may cover only the entitlement and planning phase, bringing raw land to a "shovel-ready" state. A horizontal construction loan specifically funds the physical site improvements like grading, roads, and utilities. In practice, many lenders combine both phases into a single facility. Use our commercial mortgage calculator to estimate payments on different loan structures.