San Jose is in the midst of a construction surge driven by state housing mandates, transit-oriented development, and transformative projects like Google's Downtown West. The city must plan for 62,200 new homes by 2031, and a recently expanded development incentive program is helping accelerate production with a 50% cut to construction taxes for qualifying projects. For developers, builders, and investors, understanding how to secure and structure construction financing in one of the most expensive building markets in the country is critical to project success.
Whether you are developing a multifamily tower near a BART station, building ground-up commercial space, or constructing infill housing in an established neighborhood, this guide covers the construction lending landscape for San Jose projects in 2026.
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What Types of Construction Loans Are Available in San Jose?
San Jose developers and builders have access to several construction financing structures, each designed for different project types and risk profiles.
Vertical Construction Loans: For ground-up vertical construction projects including multifamily apartments, mixed-use buildings, and commercial properties, vertical construction loans fund the building phase from foundation to completion. These loans disburse funds in draws as construction milestones are met, with interest charged only on the drawn amount. Typical terms range from 18 to 36 months.
Horizontal Construction Loans: Horizontal construction financing covers site preparation, grading, utility installation, road construction, and other infrastructure work required before vertical building begins. In San Jose, horizontal costs can be substantial due to environmental remediation requirements, seismic considerations, and the city's extensive infrastructure standards.
Bridge-to-Construction: For developers acquiring entitled land or existing buildings slated for demolition and redevelopment, bridge loans provide acquisition financing that transitions into construction lending once building permits are secured.
SBA Construction Loans: Small business owners building their own commercial facilities can access SBA 504 construction financing with down payments as low as 10%. This is particularly useful for businesses constructing medical offices, restaurants, or other owner-occupied commercial spaces.
Affordable Housing Construction Financing: San Jose's affordable housing projects often utilize layered financing that combines conventional construction loans with public agency funds. Recent projects have secured construction financing from banks like JPMorgan Chase alongside funding from Santa Clara County, the City of San Jose, and the California Housing Finance Authority.
What Does It Cost to Build in San Jose in 2026?
San Jose's construction costs rank among the highest in the nation, second only to New York City in the Bay Area. Understanding these costs is essential for structuring realistic construction loan requests.
Residential Construction: Custom homes in San Jose cost $400 to $700 per square foot, with luxury builds exceeding $800 per square foot. Mid-scale spec homes range from $350 to $450 per square foot. Multifamily construction typically costs $350 to $550 per square foot depending on building type (wood-frame vs. concrete/steel), unit count, and amenity level.
Commercial Construction: Ground-up commercial construction in San Jose ranges from $250 to $500 per square foot for standard office and retail buildings, with specialty facilities (lab space, data centers) reaching $600+ per square foot.
Key Cost Drivers: Several factors push San Jose construction costs well above national averages. Prevailing wage requirements on many projects increase labor costs 20% to 40% above open-shop rates. Seismic design requirements add structural costs. Environmental remediation of former industrial sites is common, particularly in North San Jose and downtown. Permitting timelines and city fees add both direct costs and carrying costs.
City Incentives: San Jose's development incentive program, expanded in late 2024, provides a 50% reduction in construction taxes for qualifying projects. The program has already helped five projects totaling more than 1,400 homes begin construction, and the city expanded eligibility from 1,800 to 3,600 units.
What Are Current Construction Loan Rates in San Jose?
Construction loan rates in San Jose reflect both the broader interest rate environment and the specific risk characteristics of each project.
Market-Rate Multifamily: Construction loan rates for conventional multifamily projects range from 7.50% to 9.50%, with LTC (loan-to-cost) ratios of 60% to 75%. Higher leverage is available for projects with strong pre-leasing or pre-sales activity.
Commercial Construction: Rates for ground-up office, retail, and industrial construction range from 7.50% to 10.00%, depending on the project's pre-leasing status, sponsor experience, and location. Speculative commercial construction faces the most conservative underwriting.
Affordable Housing: Construction rates for affordable housing projects are typically 5.50% to 7.50% due to the layered public financing and tax credit equity that reduces lender risk. Projects with Low Income Housing Tax Credit (LIHTC) allocations receive the most favorable terms.
Single-Family/Townhome: Construction loans for for-sale housing developments range from 8.00% to 10.00%, with LTC ratios of 60% to 70%. Pre-sales activity significantly improves terms and reduces lender risk.
ADU Construction: For smaller accessory dwelling unit projects, some lenders offer renovation-style construction loans at 7.50% to 9.00% with loan amounts from $150,000 to $500,000.
How Are Lenders Underwriting San Jose Construction Projects?
Construction lending in San Jose requires lenders to evaluate project feasibility in a high-cost, high-regulation environment. Here is what lenders focus on.
Sponsor Experience: Lenders place enormous weight on the developer's track record. Sponsors who have successfully completed projects of similar size and type in the Bay Area receive significantly better terms than first-time developers. A proven ability to manage construction budgets, timelines, and permitting in San Jose specifically is highly valued.
Entitlements and Permits: Projects with fully approved entitlements and building permits represent lower risk than those still navigating the approval process. San Jose's permitting timeline can range from 6 to 18 months depending on project complexity, and lenders want to see a clear path to construction commencement.
Cost Verification: Independent third-party cost reviews are standard for San Jose construction loans. Lenders engage construction consultants to verify the reasonableness of the developer's budget, assess contingency adequacy (typically 5% to 10% of hard costs), and evaluate the general contractor's qualifications.
Market Feasibility: For rental projects, lenders evaluate projected rents against current market rates and absorption trends. For for-sale projects, comparable sales data and pre-sale activity are critical. San Jose's strong rental demand and constrained supply generally support project feasibility for well-located developments.
Completion Guarantees: Construction loans typically require personal guarantees from the developer (or key principals) for project completion and cost overruns. Non-recourse construction lending is rare in the current market.
Environmental Considerations: Many San Jose development sites, particularly former industrial parcels in North San Jose and near downtown, require Phase I and sometimes Phase II environmental assessments. Remediation costs must be incorporated into the project budget and can add $500,000 to $5 million or more to total project costs.
Which San Jose Locations Are Attracting the Most Construction Activity?
San Jose's development pipeline is concentrated in several key areas, each with distinct characteristics that affect construction financing.
Downtown/Diridon Station (Google Downtown West): Google's 80-acre Downtown West project near Diridon Station represents the largest development in San Jose's history, with approvals for up to 7.3 million square feet of office space and 4,000+ residential units (25% affordable). While Google is the primary developer, the project is catalyzing additional development in the surrounding area. Construction financing for projects near Diridon benefits from the anticipated infrastructure improvements and employment growth Google will bring.
Berryessa BART Station: The Berryessa BART Urban Village Plan creates capacity for over 5,000 new homes, with a recent 708-unit project launched in October 2025. Transit-oriented development here benefits from direct BART access to San Francisco and Oakland, making it attractive to commuters and supporting strong rental demand. Lenders view Berryessa favorably due to the transit infrastructure investment.
North San Jose: This area is planned for significant residential growth alongside its existing tech campus character. Proximity to Cisco's headquarters campus and the Milpitas BART station supports demand for new housing. Construction financing here benefits from established infrastructure and clear market demand.
Downtown SoFA District: The Gateway Tower project (220 affordable units at 470 South Market Street) recently secured construction financing from JPMorgan Chase alongside $64 million from Santa Clara County, $38 million from the City of San Jose, and $4 million from the California Housing Finance Authority. This area is attracting both affordable and market-rate development.
Willow Glen and South San Jose Infill: Smaller-scale infill development, including townhome projects and ADU construction, is active in established neighborhoods. These projects typically use smaller construction loans from local banks and credit unions.
How Does San Jose's Regulatory Environment Affect Construction Lending?
San Jose's regulatory landscape creates both challenges and opportunities for construction financing.
Housing Mandate Pressure: The state requires San Jose to plan for 62,200 new homes by 2031, creating political pressure to approve projects and streamline permitting. This mandate has led to policy changes that benefit developers, including the expanded construction tax incentive program and eased development requirements.
Inclusionary Housing Requirements: San Jose requires that new residential developments include a percentage of affordable units or pay an in-lieu fee. These requirements affect project economics and must be factored into construction loan underwriting. The specifics vary by project size and location.
Single-Stair Reform: San Jose moved forward in late 2025 on single-stair housing reform, which allows certain mid-rise residential buildings to be designed with a single staircase rather than two. This change can reduce construction costs by 10% to 15% and increase the number of units per floor, improving project economics.
Seismic Requirements: San Jose sits near several active fault lines, and seismic design requirements add to structural costs. However, these requirements are well-understood by local builders, and lenders are accustomed to underwriting projects that comply with California's seismic codes.
Environmental Review: CEQA (California Environmental Quality Act) review can add 6 to 18 months to project timelines for larger developments. Streamlining provisions exist for certain housing projects, particularly those near transit and those that include affordable units.
What Is the Construction Loan Draw Process for San Jose Projects?
Understanding how construction loan funds are disbursed is critical for managing cash flow during the building process.
Initial Draw: The first draw typically covers land acquisition costs (if included in the construction loan), initial site preparation, and demolition. Some lenders fund the land purchase separately through a bridge loan that is later folded into the construction facility.
Monthly Draws: Construction loans disburse funds monthly based on the percentage of work completed. The developer submits a draw request with documentation from the general contractor showing work progress, and the lender's construction inspector verifies the work before releasing funds.
Retainage: Lenders typically hold back 5% to 10% of each draw as retainage, which is released upon project completion. This retention provides a buffer against cost overruns and incentivizes timely, quality construction.
Interest Reserve: Most construction loans include an interest reserve that covers the interest payments during the construction period. This reserve is built into the loan amount so the developer does not need to make out-of-pocket interest payments during construction.
Contingency: A contingency reserve of 5% to 10% of hard costs is standard. This fund covers unexpected cost increases, change orders, and unforeseen conditions. In San Jose, where environmental and site conditions can produce surprises, adequate contingency is critical.
Completion and Stabilization: Once construction is complete, the developer has a limited period (typically 6 to 12 months) to lease up the property or sell units before the construction loan matures and must be repaid or refinanced into permanent financing.
How Can Developers Transition from Construction to Permanent Financing?
The construction-to-permanent transition is a critical planning element for San Jose development projects.
Construction-to-Permanent (C-to-P) Loans: Some lenders offer single-close loans that automatically convert from a construction facility to a permanent mortgage once the project is completed and stabilized. These loans eliminate the uncertainty and transaction costs of securing separate permanent financing, though they may carry slightly higher rates during the construction phase.
Separate Construction and Permanent Loans: Many developers prefer to negotiate construction and permanent financing separately, allowing them to optimize terms for each phase. The construction lender is repaid when the permanent loan closes, typically 3 to 12 months after project completion.
Agency Financing (Post-Stabilization): For multifamily projects, Fannie Mae and Freddie Mac (agency) permanent loans offer some of the most competitive long-term financing available. To qualify, the property must be substantially leased (typically 90%+ occupied for 90+ days) with stabilized operations.
CMBS Permanent Takeout: For larger commercial and mixed-use projects, CMBS lenders can provide permanent financing with non-recourse terms and competitive rates.
Explore San Jose commercial loan options for a comprehensive view of both construction and permanent financing available in this market.
What Are the Biggest Risks in San Jose Construction Lending?
Construction lending inherently carries more risk than permanent financing, and San Jose's market adds several location-specific considerations.
Cost Overruns: San Jose's high construction costs and skilled labor shortages create persistent cost overrun risk. Material price volatility, subcontractor availability, and change orders can push projects 10% to 20% above initial budgets. Lenders mitigate this risk through conservative initial underwriting and contingency requirements.
Timeline Delays: Permitting delays, weather events, inspection bottlenecks, and labor shortages can extend construction timelines by 3 to 12 months. Each month of delay adds carrying costs (interest, insurance, property taxes) that erode project returns.
Market Timing: Multifamily projects that break ground in one market environment may deliver units 18 to 30 months later in a different market. If rental rates decline or vacancy increases during construction, the project's stabilized income may fall short of projections.
Entitlement Risk: Projects that begin the financing process before securing full entitlements face the risk of denial, conditions of approval, or design changes mandated by the city. Lenders strongly prefer projects with fully approved entitlements.
Interest Rate Risk: Construction loans are typically floating-rate instruments. If benchmark rates increase during the construction period, interest costs rise and project returns shrink. Some developers purchase interest rate caps to mitigate this risk.
Frequently Asked Questions
What is the minimum down payment for a San Jose construction loan?
Most construction lenders require developers to contribute 25% to 40% of total project costs as equity. The specific requirement depends on the project type, sponsor experience, and pre-leasing/pre-sale status. SBA construction loans for owner-occupied commercial buildings can reduce the equity requirement to 10% to 15%. Land equity can count toward the developer's contribution if the land was purchased separately.
How long does it take to close a construction loan in San Jose?
Construction loans typically take 60 to 120 days to close, longer than most other commercial loan types. The extended timeline reflects the complexity of construction underwriting, including third-party cost reviews, environmental assessments, market feasibility studies, and contractor vetting. Projects with fully approved entitlements, experienced sponsors, and well-documented budgets close faster.
Can I get a construction loan for a single-family home in San Jose?
Yes, construction loans are available for custom single-family homes, spec homes, and small infill developments. These loans typically come from local banks and credit unions, with terms of 12 to 18 months and LTC ratios of 65% to 80%. In San Jose's market, where custom home construction can cost $400 to $700+ per square foot, these loans can reach $1 million to $5 million or more.
What happens if my San Jose construction project goes over budget?
Cost overruns on construction projects are typically the developer's responsibility under the completion guarantee. The construction loan agreement requires the borrower to fund any costs that exceed the original budget, either from additional equity or a line of credit. Adequate contingency reserves (5% to 10% of hard costs) help absorb unexpected costs without requiring additional capital calls.
Does San Jose offer any incentives that reduce construction costs?
Yes, San Jose's development incentive program provides a 50% reduction in construction taxes for qualifying projects, and eligibility has been expanded to cover up to 3,600 units. The city has also eased certain development requirements and is pursuing single-stair housing reform that could reduce construction costs by 10% to 15% for qualifying mid-rise buildings. Additionally, projects that include affordable units may qualify for density bonuses under state law.
What construction loan products work best for ADU projects in San Jose?
ADU construction in San Jose can be financed through renovation-style construction loans, home equity lines of credit, or specialized ADU lending programs. Loan amounts typically range from $150,000 to $500,000, with terms of 12 to 18 months for the construction phase. Some lenders offer ADU construction-to-permanent products that convert to a long-term mortgage once the unit is complete. Contact our team to explore ADU construction financing options.
Ready to Finance a San Jose Construction Project?
San Jose's combination of housing mandates, transit-oriented development opportunities, city incentive programs, and sustained demand from Silicon Valley's economy creates a compelling environment for construction and development. Whether you are building a multifamily tower near a BART station, developing ground-up commercial space, or constructing infill housing in an established neighborhood, the right construction financing structure is essential to project success.
Explore vertical construction loans, review horizontal development financing, or contact our team to discuss your San Jose construction project financing needs.