Commercial construction loans: ground-up financing for builders

A commercial construction loan is a different animal from a regular business loan. Lenders aren't really underwriting you. They're underwriting the project.

The budget, the timeline, the general contractor, and the exit all matter as much as your credit. Get those right and the financing follows. Get them wrong and no rate in the world saves the deal.

Here's how these loans actually work, what they cost, and what lenders need to see before they fund a ground-up build.

What is a commercial construction loan?

A commercial construction loan finances building property meant to produce income or be sold. Think apartment complexes, retail centers, offices, or spec homes built for resale.

It's not the same as a mortgage on a finished building. You're borrowing to create the asset, which is riskier for the lender, so the structure and pricing are different.

The borrower is usually a developer, builder, or investor with a plan to complete the project and then either sell it or hold it with long-term financing.

How commercial construction loans work

The lender commits to a total amount, then releases it in pieces called draws as the project progresses.

You don't get the money up front. Complete the foundation, the lender inspects it, and the first draw releases. Same for framing, mechanicals, and finishes. The process protects the lender from funding a building that never gets finished.

During construction you pay interest only on the amount drawn so far, which keeps carrying costs manageable while you build. Our guide to how draw schedules work covers the mechanics in detail.

Not sure a construction loan is the right structure for your project? Start here.

Types of commercial construction loans

Ground-up construction finances a project from raw land through completion. The lender funds a percentage of total cost and releases draws as the build progresses.

Multifamily and apartment construction is among the most fundable, thanks to strong rental demand. Lenders scrutinize your rent-roll projections and your path to permanent agency financing.

Land development is earlier-stage — acquiring and improving land with grading, utilities, and roads before vertical construction. It's riskier, so terms are tighter and experience matters more.

If your model is buying and rehabbing rather than building new, compare these against fix and flip loans, which fund purchase plus renovation.

Loan-to-cost and how much you can borrow

The number that sizes your loan is loan-to-cost, or LTC.

Most lenders fund 70 to 85% of total project cost. At 80% LTC on a $1 million project, the lender puts in $800,000 and you bring $200,000.

Your equity can come from cash or from the value of land you already own. Land you bought years ago at a good price can cover a big chunk of your required equity, which is one reason developers hold land.

Rates and terms

Commercial construction loan rates run higher than permanent mortgages because building carries more risk. They're often floating — a benchmark rate plus a spread — rather than fixed.

The construction phase usually lasts 12 to 24 months. That's deliberately short, because the loan is meant to get you to completion and then convert or pay off.

Strong sponsors with experience and real equity in the deal get the best pricing. Thin equity or no track record means a higher rate, lower leverage, or both.

What lenders look at

Four things carry the decision. The project budget, the timeline, your experience as a sponsor, and the exit.

A detailed, realistic budget signals you know the job. A padded or vague one signals the opposite, and lenders have seen plenty of both.

Your general contractor matters too. A first-time developer with a proven GC is far more fundable than an experienced one paired with an unknown builder. For the company side of your operation, a construction business loan can fund overhead while project loans fund the builds.

The exit: how you repay

Every commercial construction loan needs an exit, and lenders evaluate it before they fund a dollar.

You either sell the completed property and repay from the proceeds, or you refinance into permanent long-term financing and hold the asset. For owner-occupied projects, an SBA 504 loan can be a strong permanent-financing exit.

One real-world wrinkle. If your permanent financing is approved but delayed, or a draw lags, a short-term bridge keeps the project moving. eBoost Partners offers bridge construction financing for exactly that gap between phases.

Best commercial construction lenders

These lenders rate highest for builders and developers, judged on leverage, draw handling, and experience with ground-up projects.

How to apply

Lead with the project package. Lenders want the budget, the timeline, the site, your GC's credentials, and your pro forma with realistic projections.

Show your equity clearly — cash, land value, or both — and your exit plan in writing. A clean package moves faster and earns better terms.

Then compare offers on leverage and structure, not just the headline rate, since LTC and draw terms change your real return more than a quarter-point on the rate. If cash flow gets tight between draws, a line of credit bridges the gap. You can also compare project-friendly lenders through eBoost's construction business financing on a single application.

When your package is ready, pre-qualify with a soft credit pull — no impact to your score.