Commercial Construction and Renovation Loans

Renovation and commercial construction loans for developers and business owners

Commercial Construction and Renovation Loans: Many developers and builders dream of making a living from commercial construction. You could flip it if you are a builder and see the potential in an old commercial building. You could also be a developer looking to build your subdivision or tract home. These ideas are great, but many people are discouraged by the lack of capital.

A commercial construction loan can help you make your dream project a reality. Builders can use construction and renovation mortgages to purchase properties they rent out or flip. Construction financing is another option that qualifies developers to start their subdivision projects.

Developers, business owners, and builders can get commercial construction loans to help with renovation and construction projects.

Construction mortgages are also available for business owners who wish to build commercial properties. It is essential to find a suitable space for your business. While many commercial spaces are available for rent or lease, you may need something else.

Building or renovating your commercial space is an excellent option for business owners. Allows you to design your space according to your company’s needs. It also results in lower labor costs and lower costs. You will save a lot of money in the long term. Most people and businesses cannot afford to spend millions or hundreds of thousands of dollars all at once. Commercial construction loans may be an option if you find yourself in this position.

This article will explain everything you need about commercial construction loans and how to qualify. You can compare it with other loan options by reading about these creative real estate loans with flexible requirements.

What’s a commercial construction loan?

construction loan for commercial real estate is short-term financing to build or renovate commercial real estate (CRE). This loan is to buy the land on which the structure will be built and cover labor and materials costs.

Construction financing is riskier than other CRE loans because the property to be financed may not be in good standing. Construction loans are often subject to higher interest rates and shorter repayment terms to compensate for these risks.

Which types of commercial property can be financed?

Construction loans can finance a wide variety of commercial properties. These properties include:

* Multifamily (five units or more);

* Single-family residences (SFRs) or townhouses.

* 2-4 units (duplexes, triplexes, quadplexes);

* Mixed-use;

* Office;

* Retail;

* Industrial;

* Storage and warehouse

* Medical;

* Hotels and motels

* Mobile home parks;

* Vacant land zoned commercial

* Properties with special-purpose uses, such as:

* Places of worship for religious purposes

* Places for marijuana-related transactions

* Convenience stores and gas stations

* Auto shops

* Senior care facilities (assisted living facilities (ALFs));

* Restaurants.

SFRs, townhomes, and 2-4 units are generally considered residential real property. Therefore, commercial construction loans are not available for tract homes or new subdivisions. A builder might want to create a neighborhood with multiple SFRs, or a developer may want a subdivision with multiple townhomes within its premises. The builder or developer can apply for commercial construction financing in these cases.

Residential construction loans are best for those who intend to build one SFR or two units. Here’s all you need to know about home construction loans.

Which occupancy types are eligible for financing?

There are two types of occupancy for CRE: owner-occupied or investment. These occupancy types can limit your options for construction loans depending on which lender you choose. Traditional lenders may only finance owner-occupied properties, while other lenders may finance investment properties.

Creative lenders offer construction loans that can be for owner-occupied or investment properties. They are more flexible and easier to apply. These creative loan programs will be the focus of this article.

Let’s first define each type of occupancy:


Owner-occupied is also known as owner-user and refers to commercial property owners use for their business’ daily operations. If you plan to build a warehouse for your business, your warehouse will be considered owner-occupied.


Property rented to third parties to generate monthly income are considered investment properties. These properties are not intended to be occupied but used as an investment. You might build an office building, renovate it and then lease the space to businesses for monthly rent. Your office building’s type of occupancy will fall within the investment category.

What are commercial construction loans?

Interest rates

Construction financing generally has higher interest rates than commercial real estate mortgages. If the borrower defaults, they can only foreclose vacant land and a partially-built commercial structure. It will less likely be enough to pay the mortgage debt.

Lenders to greater risk. The lender reduces this risk by paying higher interest rates. Variable interest rates, which fluctuate with the prime rate, are also used.


A commercial construction loan is a form of short-term financing that typically lasts between 1 and 3 years, depending on the construction timeline submitted by the borrower at the time of the loan application. The builder prepares this timetable to give lenders enough information to evaluate the borrower’s request. It includes a detailed plan, reasonable budgetary requirements, and a construction timeline. These are all important considerations when determining the loan amount and drawing schedules.

Your loan term will likely be the same as your construction project. If your builder anticipates that your warehouse will be in one year, you can expect your commercial construction loan to last for the same time.

Drawing schedule

Contrary to other mortgages, proceeds from construction loans are paid in installments and not as one lump sum.

After completing your loan application, you can expect to work closely with the lender to create a drawn plan. The schedule will include information about when and how many milestones will be before funds. This schedule ensures that construction projects will proceed as planned and that funds are used only for ongoing projects.

A draw could be after clearing the land. After the foundations have been, another draw might be. Before they release the next payment, lenders must ensure that all milestones have been. Lenders send third-party inspectors out to assess the progress at various stages of construction.

Your draw schedule will also determine your monthly mortgage payments. Construction loans are repayable as interest only over the life of the loan. The balloon payment will be due only after the project.


Unlike residential construction loans, commercial properties are typically not eligible for a construction-to-permanent loan. Borrowers must pay the balloon payment at maturity or get a second permanent loan to refinance their commercial construction loan.

Borrowers should plan their exit strategy for a short-term, interest-only loan before maturity. Is this particularly true as they will need to apply for another loan and get approved, which could take some time?

What is a commercial construction loan?

You can get loans to finance your project from the beginning until completion.

The funds may pay for renovations and construction of your commercial building. Buy the land on which the building will be built, pay the labor and materials, and cover other soft costs such as engineering, architectural, and permit fees. Some lenders also allow borrowers to borrow money for landscaping and fixtures.

You may be required to have a contingency fund, depending on the lender. A contingency reserve, a percentage of your total construction costs, acts as a buffer for upgrades or other required changes. Your lender might ask for 5% contingency funds based on the total project cost and the land value.

You can waive this requirement by submitting documentation proving that you have at least 10% cash reserve after you pay the down payment. Will ensure that construction stays within budget.

Types and amounts of commercial construction loans

It is challenging to construct a commercial building. There are many stages involved, each of which comes with high costs. Construction projects can be pretty expensive in individual stages and as a whole.

There are three main stages. The acquisition of raw land is the first. Borrowers who still need land will search for the desired parcel of land and choose the best option based on their requirements.

The land development stage and horizontal construction are the second. This stage involves the preparation of the existing or purchased raw land for the project. Initial site preparation, land grade, pipe laying, and pipe installation. The land entitlement stage is where the developer, builder, or investor completes the process to obtain the required building permits from the local governments.

Next, Vertical construction. This stage is where the vertical structures are. Begins with the foundation and continues until the property is completed.

This loan can help you purchase a piece of land if you don’t have one. Your construction loan will not cover horizontal construction if you have one before or during vertical construction. A renovation loan is available if you have a commercial property that you want to renovate to increase its value.

Commercial loans available for all stages of construction

These are the commercial construction loans that are available at each stage.

Raw land loans

Depending on the project’s purpose, borrowers may choose to begin their construction on a piece of undeveloped land.

It is an excellent option for those looking to save money on land acquisitions. They can also choose the most convenient location for their construction project. For example, an infill lot is easily accessible to their target market or a suburb with a high demand for housing and subdivisions. Although acquiring land can take some time, borrowers who choose this route are not worried about the extra time required to develop the land.

Borrowers can get raw land loans to help them purchase the perfect lot for their commercial construction projects. These transactions are by lenders who specialize in purchasing land parcels that have yet to. Lenders are willing to take additional risks because vacant land has yet to appreciate. You may need to meet additional requirements when you apply for raw land financing.

* Cross-collateral;

* Evidence that the land is suitable for development

* Plan for entitlement

* Eligibility to finance future developments by the lender

Raw land loans have more requirements than others, but if approved, they will allow your business to thrive in the best location. Or, you can save a lot of money by developing the land yourself.

Horizontal development loans

Borrowers who have secured their land but need more funds to finance the next construction phase can use horizontal development loans. If you’re a developer and need to pay for the land you want quickly, consider a cash-out refinance to finance the next phase of your project. This financing option is also available for those borrowers who need a budget for horizontal development. So construction can continue as planned, the proceeds can help to fill the gap.

Borrowers who have also financed their land must ensure they take out only a little. Overleverage can make it more difficult to approve horizontal loans. It is possible to find a lender that does not heavily rely on leverage and offers horizontal development loans and vertical loan options.

As development proceeds, the land’s value and unfinished structures also increase, which makes it possible to refinance at almost any stage of construction, including horizontal development.

This type of loan’s for a variety of purposes, including:

* Installation of sewage

* gas lines;

* Electric lines

* Laying concrete pads

* Construction of roads around the property.

You can also use the funds to get permits through land entitlements. Before any other horizontal construction.

Vertical construction loans

Most people are familiar with vertical construction loans. These loans can finance vertical infrastructures like SFRs and condominium complexes, as well as apartment buildings, office buildings, and retail stores. They are available after horizontal construction has.

Unlike the other types, the funds for vertical construction are in a series of payments called “draws.” Each draw is paid to the developer or builder upon completion of milestones as specified in the draw schedule. To ensure the project runs as planned, third-party inspectors inspect the construction site. Lenders can reduce the risks of vertical construction projects by having draws and inspections.

Multiple property development loans

Borrowers can get development loans for multiple properties without paying out of pocket.

There may need to be more than a commercial construction loan for one property, especially if the borrower is a contractor or builder who wants to construct multiple properties simultaneously.

Development loans for multiple properties are a better option. These loans are similar to raw 

land and horizontal and vertical development loans. However, they are only available to contractors or builders who want to build multiple SFRs (e.g., 2-5 properties or 10 to 100 properties in new subdivisions or tract home projects).

These loans give borrowers a line of credit known as “builder’s credit” and “contractor’s credit.” Lenders determine how much each borrower will receive, and then the contractor or builder can draw the budget they require from the line. The flexibility of development loans is one advantage. The lender does not monitor the progress and draws of the projects. Borrowers can draw money whenever they need it.

Development loans best serve developers looking to build

* Five properties or more per property;

* Dispersed lots; and

* Infill projects

Renovation loans for construction

Some people have existing real estate that is for renovations or improvements. Construction loan explicitly for this purpose?

Redevelopment and heavy rehab loans

You can improve and renovate your commercial property with heavy rehab and redevelopment loans to increase its value and maximize its potential income.

Heavy rehab and redevelopment loans are available to those who wish to improve their commercial properties. These loans are available to finance renovations of multifamily units, commercial space, office buildings, hotels, resorts, warehouses, and other industrial and hospitality buildings. The proceeds can renovate or redevelop your commercial space.

These loans are for borrowers who meet the following criteria:

* Own value-add properties

* require renovations;

* Do fix and flip

* Fix and hold.

You can increase the income from your commercial space by using heavy rehab or redevelopment loans. It will allow you to make the property more beneficial for your business operations.

Traditional lenders usually have higher equity requirements. It will help if you are looking for creative lenders that require less equity and more cash to get the best deal. This lender will consider the property’s value after improvements, not its current state. It will leave you with more money for the project.

After project completion

Borrowers must pay their balloon payment by the maturity date after the completion of construction. Some borrowers might sell their properties to make a profit and repay the loan balance. It is an option for developers and builders involved in new subdivisions and tract home projects, as well as investors who do fix and flip.

Financing options are available for those who intend to sell something other than newly-built commercial real estate and need the cash.

End Loans

End loans are considered regular commercial realty loans. They are against commercial property. These are permanent, long-term loans with lower interest rates and longer repayment terms. End loans may have more stringent requirements if you have a lower credit score or a low debt service ratio (DSCR).

These flexible commercial real estate loans are a good option if you need help getting a loan. These loan programs offer alternative solutions to borrowers in all circumstances, including low credit scores, income documentation, or non-U.S. citizenship.

Borrowers are responsible for paying the balloon payment by the maturity date. Therefore, they should apply for an end loan as soon as possible to ensure they receive the payment date. They must account for any delays or underwriting periods in their applications.

Bridge loans

Bridge loans are an alternative option to end-loan applications that were delayed due to the approaching maturity and needing to be approved soon.

Bridge loans are short-term financing that can bridge the gap between the maturity date of a construction loan and approval for permanent loans. This loan has a fast closing time so you will get your payment deadline.

It’s also an ideal solution for “Broken Construction Loans,” loans that become due while construction is ongoing.

Bridge financing is typically subject to higher interest rates than traditional loans. Therefore, it is essential to have an exit strategy before applying for this loan.

To maximize your offer, you should seek creative lenders that will underwrite your loan against the property’s total value, not its current condition. It will lower your equity requirements and reduce the amount you need to close the deal. As a guideline, this article will explain everything you need to know about bridge loans and your mortgage options.

Commercial construction loan parameters

Loan amount

Your loan amount will be by the plans for construction and renovation submitted with your application. A borrower can get up to $50M to finance construction or renovations to their commercial buildings. Although the minimum loan amount is usually $500,000, it may be possible to obtain a lower amount on a case-by-case basis.

Lenders consider two key ratios to determine your loan amount: (1) the loan value (LTV) or (2) the loan cost (LTC).

LTV is the amount of risk the lender is willing to accept in return for your loan. The LTV by subtracting the loan amount from the anticipated market value of the commercial property once construction is complete. LTVs range from 70% to 75%, according to lenders.

LTC, on the other hand, is a relative comparison of the loan amount and total construction costs. LTC by subtracting the loan amount from the total construction costs. Lenders will often allow an LTC between 85% and 90%.


As with any loan, the borrower must pay the down payment at closing. The lender determines the down payment amount that a borrower must pay. Depends on many factors, including your creditworthiness, the loan program, the nature of the project, and the lender.

Commercial construction loans require a larger down payment than other types of commercial financing to cover the risks. You may need to pay up to 30% down if your credit score is high.

Credit score

Due to the risky nature of construction loans, lenders may impose higher credit score limits than commercial loans. Your credit score should be at most 700. Lenders have more confidence that the loan will be since the property or renovated.

Debt service coverage rate (DSCR),

The debt-coverage ratio (also known as the debt-coverage rate) is a ratio lenders use to evaluate the deal’s income potential about its expenses. The DSCR measures whether cash flow is sufficient to “service” the expenses.

DSCR is a factor in commercial construction loans. It is relevant for renovation and end loans where the property exists. The lender may also require that you provide a proforma. This statement uses hypothetical data or makes assumptions about the future value to project performance for a period that has yet to occur.

The better the deal cash flows are, the higher the DSCR.

Generally, dividing income and expenses. For example, DSCR for a multifamily property would be as follows: Divide the expected rental income (as projected in the proforma) with the principal, interest taxes, taxes, and insurance.

The exact calculation for DSCR will depend on whether the property is occupied by the borrower or leased to others.

For owner-user properties, dividing earnings before interest taxes, depreciation, and amortization (EBITDA), by total debt service.

However, the lender will only perform a DSCR analysis for investment properties precisely by dividing the property’s net operating income (NOI) by the total debt service.

Some lenders require a minimum DSCR of 1.15 to 1.25. A DSCR of 1.15 would mean that the property generates enough income for all its monthly debt payments, plus a 15% surplus.

Lenders that allow a minimum DSCR 1.0 are more accommodating to borrowers who want to finance new properties that do not expect to cash flow.


Creative construction loans are available to anyone, even foreign nationals.

Borrowers who want to renovate or build commercial properties in the U.S. face another problem: Citizenship. Traditional lenders typically only finance loans for U.S. residents, so they do not have to meet non-U.S. citizen requirements.

This gap is by creative lenders who offer construction solutions for non-U.S. citizens and foreign nationals. To find the right program for you, consider all your options.

Construction plan

Construction plans must be submitted with your loan application for construction loans. The plan must be by a licensed general contractor or builder and should include practical and detailed information about what you hope to accomplish over the life of the loan. The plan should reflect your vision of the property once development is complete.

The construction plan is a visual representation of the project for lenders. It allows them to see how it will progress once funding has been. They are more confident in the project and the borrower’s ability to repay, increasing their chances of approval.


Construction loans can be by building or renovating a property like any other real estate mortgage. To ensure the loan amount is sufficient, the lender must comply with the commercial property’s value before construction or renovation. The after-completion value (or after-renovation value (ARV ) is the property’s expected value after construction or renovation.

These values allow the lender to offer to cover the loan default.

Recourse vs. Non-recourse

You should carefully read the terms of commercial construction loans. They will state whether the loan is a non-recourse or recourse.

A recourse construction loan requires that the borrower sign a personal guarantee, which makes them personally responsible for the loan. The lender may take your assets and garnish your wages if you fail to pay the loan balance.

Non-recourse lenders can only foreclose or sell collateral real property to pay the debt. They can’t seize your assets. Serves as additional protection for borrowers.

Even if your loan is a non-recourse loan, it’s essential to exercise caution. “bad boy” clauses state that if a borrower is involved in negligence or fraud, the loan will automatically become a full-recourse loan.

What factors should you consider when applying for a commercial loan for construction?

Construction loans are not subject to other mortgages’ exact requirements and processes. It can be more time-consuming and tedious than other mortgages. Documents that you need for other types of loans may be required.

Here are some guidelines and things to remember when applying for commercial construction loans.

A licensed, expert builder

When building commercial properties, it is essential to find a qualified and licensed builder. You don’t want to have a poor building or an unfinished one because of the potential opportunities and the cost involved.

Lenders like you prefer to work with skilled builders with a proven track record. As an added guarantee of booming construction, lenders prefer projects that involve professional and experienced builders.

You can ask your friends, family, and colleagues for referrals to help you find a builder. Because they have worked with builders before, their recommendations are valuable.

You can search for licensed contractors and builders online if you are still looking for referrals. This directory of U.S. construction companies is an excellent place to start. This database includes contact information, websites, and other services.

It would help if you did your research on the company before you hire a contractor or builder. Compare all options and choose the builder that offers the best value for your project. Don’t settle for less, as you or your buyer will be using the property for many years.

Documentary requirements

You will be required to submit multiple documents in your application. These documents include all the requirements for other mortgages.

Additionally, you need to prepare construction-specific requirements such as:

* Sign a contract with the builder

*Detailed project plan

* Specific budgetary requirements

*Detailed timetable

* Contact number of the builder, credentials, and insurance.

These documents can take time, primarily if your builder still needs to be licensed. It is better to plan than to rush to complete everything.


You will be required to give a detailed timeline for your construction project when you apply for a loan. This gives the lender a detailed timeline of your construction project and allows them to prepare your draw schedule.

Your timeline should be accurate and realistic, considering any delays that may occur during the project’s duration. While you, as the borrower, may not be able to anticipate what delays might occur, your builder should have an excellent idea.

In 2021, for example, many commercial constructions were delayed by a limited raw material supply. The Commercial Real Estate Development Association report shows that 86.6% experienced delays or shortages in construction projects between 2021 and now. This bottleneck will improve in 2022. However, builders should still be aware of any delays due to supply constraints and other delays.


Although it may seem strange to borrowers that they need insurance for a property not yet built, this is a common practice, especially in the eyes of lenders. Both traditional and creative lenders require you to obtain commercial property insurance as soon as possible to protect it against unanticipated disasters like fire, vandalism, and accidents.

How do you find the best commercial loans for construction?

Construction loans are more complicated and time-consuming than commercial loans. Additional requirements will be required, and additional documents must be submitted.

The significant differences in terms and construction programs offered by different lenders add to the burden. It is common for borrowers to become overwhelmed by all the information available, making it even more challenging to decide.

You can focus on more than just the information and requirements. Experienced mortgage brokers can help you sort the options and find the best deal. You can then focus on the essential things, such as the construction and renovation of your home.

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