Commercial Construction Financing Overview
Commercial construction loans fund the development or major renovation of commercial real estate. Unlike a permanent mortgage, construction loans are short-term (12–36 months) and disbursed in stages (“draws”) as construction milestones are completed. When construction is complete, the loan converts to or is replaced by permanent financing.
Types of Commercial Construction Loans
Construction-to-Permanent Loans (C2P)
A single loan that covers both construction and permanent phases. During construction: interest-only payments on drawn amounts. After completion: converts to amortizing permanent mortgage automatically. Saves on closing costs vs. two separate loans. Best for owner-occupied commercial properties.
SBA 504 Construction Loan
The SBA 504 program covers ground-up construction and major renovations for owner-occupied commercial property. Structure: 50% conventional lender + 40% CDC + 10% borrower. The SBA portion locks in below-market fixed rates (typically 6.5–9%). Up to $14M total project with $5.5M SBA portion.
Conventional Construction Loan
Bank-provided construction lines of credit disbursed against inspected milestones. Typically 70–75% LTC (loan-to-cost) or 65% LTV (loan-to-value) of completed appraised value. 12–24 month term, Prime-based or SOFR-based floating rate. Requires experienced general contractor and architect’s plans.
Key Requirements for Commercial Construction Loans
| Requirement | Standard |
|---|---|
| LTC (Loan-to-Cost) | 65–75% of total construction costs |
| Contractor Experience | Licensed GC with commercial track record |
| Plans & Permits | Full architectural plans and permitted drawings required |
| Personal Guarantee | Required for most SBA and conventional construction loans |
| Pre-Leasing | 30–50% pre-leased preferred for investment properties |
| DSCR (Permanent Phase) | 1.25+ on stabilized cash flow |