What are the requirements for a commercial construction loan?
A commercial construction lender typically requires approved plans and permits, a line-item budget with a 5 to 10 percent contingency, a fixed-price contract with a licensed general contractor, equity of 20 to 35 percent of total cost, reserves of 10 to 15 percent of the loan, and a documented exit such as a permanent loan or sale comps. The lender also underwrites the team's experience.
The checklist
| Requirement | Typical standard |
|---|---|
| Plans | Stamped architectural and structural drawings |
| Permits | Approved, or a clear date; unentitled land is a land loan, not a construction loan |
| Budget | Line-item hard and soft costs, reviewed by the lender's cost consultant |
| Contingency | 5 to 10 percent of hard costs |
| Contractor | Licensed, insured, fixed-price or guaranteed-maximum contract, references |
| Equity | 20 to 35 percent of total cost, including land equity |
| Loan-to-cost | 65 to 85 percent |
| Loan-to-completed-value | 60 to 75 percent |
| Reserves | 10 to 15 percent of the loan amount after closing |
| Interest reserve | Construction period plus lease-up, funded from the loan |
| Insurance | Builder's risk, general liability, workers' compensation for the contractor |
| Exit | Permanent loan pre-qualification or sale comps with a margin |
| Experience | Prior projects, or an experienced contractor and partner |
Ranges vary by lender and project type.
The two value tests
Lenders size the loan against cost and against the appraiser's as-completed value, and the lower limit controls. A $2 million project with a $2.4 million completed value at 80 percent of cost is $1.6 million; at 70 percent of value it is $1.68 million; the loan is $1.6 million. If the appraisal comes in at $2.1 million, 70 percent is $1.47 million and the loan shrinks to that.
What experience means
Banks want at least one completed project of similar size. Private lenders will work with a first-time developer when the general contractor has the track record, the budget is realistic, and the equity is strong. The lender is underwriting the team as much as the building.
Documents to expect
- Plans, specs, and the permit set.
- Budget and schedule from the contractor.
- Contractor's license, insurance, references, and financials.
- Personal financial statement and two years of returns for the sponsors.
- Entity documents.
- Appraisal with as-completed value, ordered by the lender.
- Environmental report on commercial sites.
- Exit support: a permanent lender's term sheet or a sales plan with comps.
Common reasons for a decline
- Permits not in hand and no realistic date.
- Budget without contingency or below market cost per square foot.
- Contractor without comparable projects.
- Equity that depends on a land value the appraisal does not support.
- No exit, or an exit that requires rents above the market.
How CommFi handles it
One application with plans, budget, contractor, and financials. Our lending desk prices the project first and funds direct when it fits. When it needs a construction specialist for the asset type or market, the desk searches a database of 7,000+ lenders and the ones that build there compete for it. Zero upfront fees.
Related reading
Related questions
- How much equity do I need for a commercial construction loan?
- Typically 20 to 35 percent of total project cost, including any equity in land you already own.
- Do I need permits before a construction loan closes?
- Most lenders want approved permits at closing or a firm date. Before entitlement, the land is financed with a land loan.
- Can I be my own general contractor?
- Some lenders allow owner-builders with a track record. Most require a licensed contractor under a fixed-price contract.
- What contingency do construction lenders require?
- Five to ten percent of hard costs, and ten is safer on a first project.
- What exit does a construction lender want?
- A permanent loan you can qualify for at completion, or sale comps that support the completed value with a margin.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.