In commercial real estate development, capital is the lifeblood. Whether you’re building a 40-unit apartment complex, a retail center, or a new industrial park, the ability to fund construction from the ground up is often the key to making the project viable. That’s where construction loans come into play.
Construction loans for developers are unique financial instruments tailored to fund the build phase of a project. Unlike traditional commercial mortgages, which are secured by stabilized, income-generating properties, construction loans finance labor, materials, and time. They come with more complexity, more scrutiny, and more moving parts—but they’re also essential for turning your vision into a built reality.
Let’s break it down.
What Is a Construction Loan for Developers?
A construction loan is short-term, interim financing that covers the cost of developing a commercial property from the ground up. It’s not designed to fund acquisitions or stabilized assets. Instead, it funds:
- Site preparation and land development
- Material costs
- Labor and subcontractors
- Permits, engineering, and architectural work
- Contingency and interest reserves.
These loans typically range from 12 to 36 months and are replaced by long-term permanent financing once the project is complete and cash-flowing.
Key Features of Developer-Focused Construction Loans
Construction financing includes terms and features developers need to navigate carefully:
- Short-Term Structure: Most loans have a term of 12 to 36 months, aligning with project timelines.
- Interest-Only Payments: Developers only pay interest during the construction period, preserving cash flow.
- Draw Schedule: Funds are disbursed in phases based on construction milestones.
- Interest Reserve: Lenders often require a built-in interest reserve to ensure payments are covered.
- Conversion Options: Some loans convert to permanent financing (construction-to-permanent loans) after completion.
These characteristics help mitigate risk for lenders while supporting developers through the build cycle.
Types of Construction Loans Developers Use
Depending on the project, developers can choose from a range of construction financing options:
- Ground-Up Construction Loans
Used to finance new developments from an empty parcel to finished structure. Ideal for multifamily, retail, or industrial developments.
- Construction-to-Permanent Loans
This hybrid loan converts to a permanent mortgage upon project completion. Fewer closings, less paperwork.
- Hard Money Construction Loans
Offered by private lenders. Ideal for developers needing quick closings, flexible underwriting, or funding for unconventional projects.
- Land Development Loans
Fund infrastructure improvements such as grading, roads, sewers, and utilities. Often a precursor to vertical construction.
- Rehab or Conversion Loans
Used to reposition or repurpose existing structures into new commercial uses.
Typical Terms and Requirements for Developer Construction Loans
Here’s what most lenders expect:
| Term | Details |
| Loan Size | $2M to $50M (sometimes more) |
| Loan-to-Cost Ratio (LTC) | Typically 65% to 85% of total project cost |
| Equity Requirements | Developers usually contribute 15% to 35% equity |
| Timeline | 12 to 36 months, depending on scope and complexity |
| Appraisals | Required based on “as-completed” value |
| Pre-Development Costs | Must often be covered upfront by borrower |
The Construction Loan Draw Process Explained
Unlike traditional loans that fund at once, construction loans work on a draw schedule. This is a disbursement plan based on construction milestones. Here’s how it usually works:
- Initial Draw: Funds released to cover land, permits, and pre-construction.
- Ongoing Draws: Tied to milestones (e.g., foundation, framing, MEP installation).
- Inspections: Lender requires third-party inspections before each draw.
- Documentation: Borrowers submit invoices, lien waivers, and budget updates.
This ensures the lender maintains control and verifies progress before releasing more capital.
Working with a Loan Broker vs. Going Direct
Some developers prefer to go straight to banks. But in today’s fragmented lending environment, working with a commercial loan broker often leads to better terms, faster execution, and more lender options. Here’s why:
- Expanded Network: Brokers have access to private lenders, institutional capital, and non-bank funding sources.
- Better Structuring: Brokers understand how to shape loan terms around your timeline and risk profile.
- Negotiation Power: Brokers can advocate for you, especially when it comes to interest reserves, guarantees, and LTV.
- Speed: Brokers can expedite underwriting and funding, especially for tight deadlines.
A reputable broker becomes a strategic partner who understands your goals and can translate them into bankable deals.
Case Study: Funding a 28-Unit Multifamily in Austin
A developer in Austin, TX had a 28-unit Class A multifamily project ready to break ground. Traditional lenders were slow, citing labor cost volatility and market saturation.
By working with a private construction lender through a broker, the developer:
- Secured $7.4M in 3 weeks
- Locked in a 75% LTC structure
- Avoided prepayment penalties
- Used the land value as part of their equity.
The broker’s knowledge of local lenders and familiarity with the developer’s track record made the difference.
Tying It All Together: Planning Ahead for Smarter Financing
Understanding construction loans isn’t just about checking boxes—it’s about strategy. Developers who plan ahead, align the right loan type with their project, and leverage relationships with brokers and lenders can unlock greater flexibility and efficiency.
Here’s why that matters:
- Timelines are tight: Delays in funding can stall projects and drive up holding costs. A well-structured loan with a reliable draw schedule can prevent costly slowdowns.
- Equity is precious: Using tools like land equity or interest reserves can preserve your capital for future phases or contingencies.
- Lenders evaluate experience: Your track record, development plan, and budget transparency all influence approvals. Packaging your deal professionally pays off.
- No two loans are alike: The more complex the project, the more customization you’ll need. Partnering with a commercial broker ensures you’re not settling for generic terms.
Even experienced developers benefit from reevaluating their loan strategies. Markets shift. Underwriting tightens. Construction costs fluctuate. What worked three years ago might not work now. That’s why having a team that keeps pace with lender expectations and evolving capital sources is critical to long-term success.
Whether it’s your first ground-up development or your tenth, the most successful projects start with the right financing foundation. And in a competitive landscape, smart borrowing often makes the difference between staying on schedule—or not getting started at all.
FAQs: Construction Loans for Developers
What’s the typical interest rate on a construction loan?
Rates vary, but most fall between 7% and 12%, depending on the lender, borrower profile, and risk.
How does a draw schedule work?
Lenders release funds in stages, based on completed construction milestones. Documentation and inspections are required.
Can land value count toward equity?
Yes. Most lenders accept current land value as part of the developer’s equity contribution.
Is pre-leasing required?
Sometimes. For larger projects, lenders may require a percentage of pre-leased space, especially for retail or office.
What happens after construction is complete?
The loan is either paid off with a sale, refinanced into permanent debt, or converted if it’s a construction-to-permanent loan.
Ready to Fund Your Next Development?
Whether you’re planning a ground-up multifamily build, redeveloping commercial land, or pursuing a time-sensitive opportunity, understanding your construction loan options is key to securing the right deal. Our team brings years of experience navigating the nuanced world of development finance. From term negotiation to lender matchmaking, we help developers access funding quickly, strategically, and with confidence. Schedule a consultation today to explore how we can help finance your next commercial project—and get it off the ground, faster.
