Construction loans are a different animal from standard commercial real estate loans. Instead of a lump sum at closing, you draw funds in stages as construction progresses. The structure is designed to protect the lender — and you — by releasing capital only as milestones are hit.
Here's how construction financing works and what to expect as a borrower.
How Construction Loans Are Structured
A construction loan is typically short-term — 12 to 24 months — and interest-only during the construction period. You don't receive the full loan amount upfront. Instead, funds are released in draws as work is completed and verified by a lender-appointed inspector.
At the end of construction, the loan either converts to permanent financing (a "construction-to-perm" loan) or is paid off through a separate takeout loan — a conventional mortgage you arrange before or during construction.
Types of Construction Loans
- Ground-up construction: Financing for building a new commercial property from scratch
- Renovation or gut rehab: Major renovations to an existing structure
- Construction-to-perm: A single loan that covers both construction and long-term financing
- SBA construction: SBA 7(a) or 504 loans can fund construction of owner-occupied commercial property
What Lenders Require
- Detailed construction plans and specifications
- Cost breakdown and contractor bids
- Contractor credentials and licensing
- Building permits
- Project timeline
- Borrower experience in construction or real estate development
- Evidence of equity or down payment (typically 20 to 30%)
The Draw Process
As construction progresses, you submit draw requests to the lender for completed work. A lender-appointed inspector visits the site to verify the work before funds are released. Interest accrues only on the amounts drawn, not the full loan commitment — which means your carrying costs are lower early in the project.
Budget contingency matters. Most lenders want to see a 10 to 15% contingency built into your construction budget. Cost overruns are common, and having reserves protects both the lender's position and your ability to complete the project.
Takeout Financing
If your construction loan doesn't automatically convert to permanent financing, you'll need a takeout loan — a conventional CRE mortgage, DSCR loan, or SBA loan — lined up before construction ends. Lenders often want to see a takeout commitment letter before they'll fund construction. Plan for this from the start, not at the end.
Who Should Consider Construction Financing?
Construction loans are the right tool when you need to build or substantially renovate a property and there's no existing asset to collateralize. They're more complex and require more lender oversight than standard purchase loans, but they're the only way to finance ground-up development.
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Talk to KQT AdvisorsKQT Advisors is a commercial loan broker and does not make lending decisions. All loan approvals, rates, and terms are subject to lender underwriting. Information in this article is for general informational purposes only.
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