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Commercial Construction Loans

Commercial construction loans provide short-term financing to fund the construction, renovation, or expansion of commercial properties before transitioning to permanent financing.

What Is a Commercial Construction Loan?

A commercial construction loan is a short-term financing solution used to fund the development, renovation, or expansion of commercial real estate projects. These loans are designed to cover construction-related costs such as land acquisition, materials, labor, permits, and professional fees during the build phase.

Unlike permanent commercial mortgages, construction loans are temporary by design. They are typically replaced with long-term financing—such as a traditional commercial loan or DSCR loan—once the project is completed and stabilized.

Commercial construction loans are commonly used by developers, investors, and business owners undertaking ground-up construction or major improvements.

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How Commercial Construction Loans Work

Commercial construction loans operate differently from standard commercial real estate loans. Instead of receiving the full loan amount upfront, funds are released incrementally as the project progresses.

Key features include:

Draw-based funding, where loan proceeds are disbursed in stages
Inspections before draws to confirm construction milestones
Interest-only payments during the construction phase
Short-term loan terms, typically 12 to 36 months

This structure helps manage risk for both the borrower and the lender while ensuring funds are used appropriately throughout the build.

Construction Draw Schedule Explained

Most commercial construction loans follow a draw schedule tied to project milestones. Common phases include:

Site preparation and foundation
Framing and structural work
Mechanical, electrical, and plumbing
Interior build-out and finishes
Final inspection and completion

Before each draw is released, the lender may require an inspection or documentation confirming that work has been completed according to the approved plans and budget.

Eligible Property Types

Commercial construction loans can be used for a wide range of property types, including:

Office buildings
Retail centers and mixed-use developments
Industrial and warehouse facilities
Hotels and hospitality properties
Multifamily apartment complexes
Owner-occupied commercial buildings

Eligibility depends on project scope, market conditions, and lender guidelines.

Common Uses for Commercial Construction Loans

Commercial construction loans are often used for:

Ground-Up Construction

Financing new commercial properties built from the ground up.

Property Expansion

Adding square footage, additional units, or operational space to existing properties.

Major Renovations

Repositioning or redeveloping properties that require significant improvements.

Build-to-Suit Projects

Constructing facilities designed for a specific tenant or business use.

Qualification Requirements for Commercial Construction Loans

Because construction lending carries higher risk, lenders typically require more detailed underwriting than permanent loans.

Common qualification factors include:

Credit profile
Strong credit history is important. Many lenders look for credit scores in the upper ranges, though requirements vary.
Project experience
Prior experience with similar construction or development projects strengthens approval odds.
Detailed project plans
Lenders require architectural drawings, construction timelines, contractor agreements, and a comprehensive budget.
Equity contribution
Borrowers are typically required to contribute 20–30% of total project costs.
Loan-to-cost (LTC) and loan-to-value (LTV)
Financing is often based on total project cost and projected completed value.

Loan Terms and Structures

While terms vary by lender and project, commercial construction loans often include:

Loan terms from 12 to 36 months
Interest-only payments during construction
Fixed or variable interest rates
Extension options in some programs
Origination fees and closing costs

These loans are designed to support construction—not long-term holding.

The Importance of an Exit Strategy

Every commercial construction loan requires a clearly defined exit strategy.

Common exits include:

Refinancing into a traditional commercial mortgage
Refinancing into a DSCR loan once income is stabilized
Selling the completed property
Transitioning to owner-occupied permanent financing

Lenders evaluate exit strategies carefully to ensure the loan can be repaid at or before maturity.

Commercial Construction Loans vs Other Loan Options

Construction loans serve a unique role within commercial financing.

Commercial Construction Loans – Short-term funding for building or major renovation
Bridge Loans – Short-term financing for transitional or repositioning properties
DSCR Loans – Long-term financing based on stabilized rental income
Traditional Commercial Loans – Permanent financing for completed properties

Choosing the right loan depends on project phase, timeline, and long-term goals.

Benefits of Commercial Construction Loans

Access to capital for new development projects
Draw-based funding aligned with construction progress
Interest-only payments during the build phase
Flexibility to transition into permanent financing

When structured correctly, construction loans provide a clear path from development to long-term ownership.

Risks and Considerations

Commercial construction loans also come with added complexity:

Higher underwriting requirements
Exposure to construction delays or cost overruns
Market risk during development
Dependence on a successful project completion and exit
Careful planning and experienced guidance are essential.

Frequently Asked Questions About Commercial Construction Loans

Are commercial construction loans permanent loans?

No. These loans are temporary and are typically replaced with permanent financing after construction.

Do construction loans require a down payment?

Yes. Most lenders require a significant equity contribution from the borrower.

Are interest payments required during construction?

In most cases, borrowers make interest-only payments on disbursed funds.

Can construction loans be used for renovations?

Yes. Major renovations and expansions often qualify as construction financing.

Explore Commercial Construction Loan Options

If you are planning a ground-up build, expansion, or major redevelopment, a commercial construction loan may provide the financing structure needed to move forward.

Speaking with a commercial loan specialist can help determine whether construction financing aligns with your project scope, timeline, and long-term strategy.