Commercial Construction Loans 101: Part One

Seeking financing for a commercial construction project? Here’s what you can expect . . .

You have a site. Check. You have a project. Check. And you even have basic project information and ballpark estimates. Check and check. Now you’re ready to start thinking about financing with potential lenders. Let’s review the ins and outs of construction loans and basic steps to attain financing for a commercial project.

Construction loans are typically a short-term loan—serving to fund both the construction costs of a building and the interest on the loan during the construction period and initial lease-up. When the project is completed and leases up to the market level of occupancy, long-term, or permanent financing, is available to retire or pay out the short-term construction loan. When the lender commits to both short- and long-term structures it’s called a “mini-perm” or “construction-permanent” mortgage. In this case, the lender has agreed to fund the project from breaking ground to ribbon cutting, and even market stabilization.

The Loan Request

The process begins when a developer submits a loan request with a local lender. It should be noted: nearly all construction and development lenders are almost always local community and regional banks. From a lender’s point of view, new construction loans are risky—simply because there isn’t an operating history to boost the applicant’s credibility. As a result, commercial construction loans are almost always entertained by regional or local lenders deeply familiar with the local markets.


After the loan request is submitted, banks proceed through an internal vetting process to evaluate the proposed project details, the budget, local market conditions, financial capacity of the borrower, and review any other risks inherent to the loan request. Typical documents you’ll need in the underwriting process are as follows:

  • Borrower tax returns
  • Financial statements
  • List of real estate owned
  • Contingent liabilities of the borrower
  • Construction loan sources and uses
  • Cost estimates
  • Full project plans
  • Engineering specifications
  • and any other documents that can support the loan request.

Next time on Commercial Construction Loans 101: Part 2, we’ll discuss closing, if/when to get attorneys involved, and what to expect throughout the process.

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