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Commercial real estate
Commercial Construction Loans
Commercial construction loans provide structured financing for business owners building or renovating facilities for their own operations, with staged draws tied to project progress.
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20–30%
Equity Required
6–18 Months
Construction Term
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6.0–8.5%
Typical Rate Range
70–80%
Max LTC
FINANCING OPTIONS
Construction Financing Options
These commercial construction financing options cover ground-up builds, major renovations, light improvements, and SBA-backed owner-occupied construction projects.
6.0–8.5% rate range
70–80% LTC
6–18 month construction term
BEST FOR:
Best for medical offices, professional offices, warehouses, and light industrial facilities.
6.25–8.0% rate range
75-85% LTC
12-24 month construction term
BEST FOR:
Value-add projects, building repositioning, adaptive reuse
6.0–7.5% rate range
80–85% LTC
6–18 month construction term
BEST FOR:
Tenant improvements, cosmetic updates, equipment installation.
6.5–10.5% rate range
85-90% LTC
12-36 month construction term
BEST FOR:
Small businesses, medical/dental offices, veterinary clinics, owner-occupied facilities
DRAW PROCESS
How Draw Schedules Work
A construction loan draw schedule controls how funds are released in phases, with lender inspections required before each draw is approved.
10
Pre-Construction
Trigger: Loan closing, permits in place
Typical Uses:
Mobilization, permits, insurance, initial materials
15
Foundation Complete
Trigger: Foundation poured and inspected
Typical Uses:
Labor, materials, equipment
20
Framing Complete
Trigger: Structural framing finished
Typical Uses:
Framing materials, labor, roofing
20
Rough-In Complete
Trigger: Mechanical, electrical, plumbing rough-in
Typical Uses:
HVAC, electrical, plumbing systems
15
Drywall & Exterior
Trigger: Drywall hung, exterior complete
Typical Uses:
Drywall, exterior finishing, windows
15
Final Finishes
Trigger: Interior finishes, fixtures installed
Typical Uses:
Flooring, fixtures, cabinets, paint
5
Project Completion
Trigger: Certificate of Occupancy received
Typical Uses:
Final inspections, punch list, cleanup
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Important Draw Rules:
An inspector must approve each draw before funds are released, which typically takes 3–7 days. A 5–10% retainage is held back until final completion. Lien waivers are required from all contractors and suppliers, and phases cannot be skipped — each must be completed in order.
HOW IT WORKS
How to Get a Commercial Construction Loan
From pre-qualification through completion and conversion, this is the standard process for securing and using a commercial construction loan.
Pre-Qualification & Planning
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Key Tasks:
Discuss project scope with lender
Get preliminary approval
Hire architect/engineer
Develop preliminary budget
CRITICAL POINT
Start early - involve lender BEFORE spending on plans
Design & Bidding
Key Tasks:
Complete construction drawings
Obtain contractor bids (3+ required)
Finalize project budget
Site surveys and studies
CRITICAL POINT
Get multiple bids - single bid may not be accepted
Permitting & Due Diligence
Key Tasks:
Apply for building permits
Environmental Phase I
Appraisal (as-completed value)
Title work and survey
CRITICAL POINT
Longest phase - budget 8-12 weeks minimum
Loan Closing
Key Tasks:
Final loan documents
Establish escrow account
Wire down payment
Contractor agreements executed
CRITICAL POINT
Cannot close until ALL permits received
Construction Phase
Key Tasks:
Monthly draw inspections
Progress payments to contractor
Change order approvals
Compliance monitoring
CRITICAL POINT
Inspector must approve each draw before funds released
Completion & Conversion
Key Tasks:
Final inspection
Certificate of Occupancy
Convert to permanent loan
Final draw release
CRITICAL POINT
Must convert to permanent financing within 60-90 days
Common Questions
Frequently asked questions
These answers cover the most common questions about commercial construction loans, including draw schedules, rates, reserves, SBA options, and conversion to permanent financing.
What is a commercial construction loan and how is it different from a permanent mortgage?
It is short-term, interest-only financing (12–36 months) to build or renovate. Funds are disbursed in 'draws' as work is completed. At completion, you must refinance into a permanent loan or pay it off. SBA 7(a) offers a combined construction-to-permanent loan in one closing, saving time.
How does a construction loan draw schedule work?
Funds are released in stages tied to milestones (Foundation -> Framing -> Roofing -> Finishes). Process: Contractor completes milestone → Lender inspector verifies → Lender releases funds (3–7 days). Lenders hold back 5–10% retainage until final completion to ensure punch-list items are
What are current commercial construction loan rates?
Construction loans are typically priced 1.5–3.0% above Prime or SOFR. Most are floating rate and interest-only during the build. Key rate factors: Credit score (680+ required), project experience (3+ completed projects), and contractor quality.
How much down payment and reserves are needed for construction?
Conventional Ground-up: 25–30% down. SBA Construction (Owner-Occupied): 10–15% down. Reserves: Interest Reserve (12–18 months) + Contingency Reserve (10–15% of budget). Total cash required is often 30–40% of project cost including reserves.
What happens if there are construction cost overruns?
Budget 10–15% contingency as a baseline. If overruns occur, you must typically inject additional equity out of pocket; lenders will not advance beyond the approved loan amount. Prevention: Detailed pre-construction budgeting and a fixed-price contract with your General Contractor.
Can I use an SBA loan to finance commercial construction?
Yes. SBA 7(a) allows for construction up to $5M with a single closing and 10–15% down. SBA 504 involves a Bank loan (50%) + SBA debenture (40%) + 10% down. Both require the business to occupy at least 51% of the space (60% for new construction).
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