Commercial construction loans

A construction loan funds a building that does not exist yet, so the lender is underwriting three things at once: the budget, the builder and the exit. It is the hardest commercial loan to get and the one with the most moving parts after closing. Banks are still the main source: $453 billion in bank construction and development loans³ at mid-2026, and NCUA data show $11 billion in credit union commercial construction and development loans⁴.

Conditions are not loose. In the Federal Reserve’s July 2026 survey, bank standards for construction and land loans were basically unchanged (Q2 2026)⁵, demand was weaker (Q2 2026)⁵, and standards remained at the tighter end of banks' historical range⁵.

The rules behind every bank construction loan

Three regulatory facts shape every term sheet, whether or not the banker mentions them:

1. The supervisory ceiling. Bank policy cannot exceed 80% maximum LTV for commercial, multifamily and other nonresidential construction¹. That is measured against value, and LTC = the loan amount divided by total cost (property plus all construction costs)⁶.
2. HVCRE. A commercial construction loan is a high volatility exposure, carrying a 150%⁷ capital risk weight, unless it meets an exemption. The main one requires an LTV inside the supervisory limit and 15% of appraised as-completed value² contributed by the borrower, kept in the project until permanent financing or sale. Banks price HVCRE loans higher or avoid them, so plan your equity to clear the test.
3. Concentration. Examiners flag banks whose construction and land book reaches 100% of total capital⁸. A bank near that line may pass on a good deal for reasons that are not about you.

Sizing a construction loan (worked example)

Illustration: a 60-unit apartment building. Land bought for $2,000,000 in cash, hard costs of $11,000,000 on a guaranteed maximum price contract, and soft costs of $2,000,000 including fees and the interest reserve. Total cost $15,000,000. The appraiser’s as-completed value is $19,000,000 and projected stabilized NOI is $1,235,000. Suppose the bank offers 60% of cost.

Test	Math	Result
Loan-to-cost	$15,000,000 × 60%	$9,000,000 loan
Loan-to-value, as completed	$9,000,000 ÷ $19,000,000	47%, inside the supervisory ceiling
Equity required	$15,000,000 − $9,000,000	$6,000,000, including the land
HVCRE contributed capital test	15% × $19,000,000 = $2,850,000	$6,000,000 contributed clears it
Debt yield at stabilization	$1,235,000 ÷ $9,000,000	13.7%
Takeout check	A permanent loan at 1.25x, 6.25% and 30 years supports about $13.4 million	Comfortably repays $9.0 million

The takeout check is the step borrowers skip. A construction lender wants to see that a permanent lender will repay it at stabilization under conservative rates. Run your project through the LTV and LTC calculator and the debt yield calculator.

The interest reserve. You pay interest only on drawn money, and the balance grows as work is done. A rough rule for budgeting: the average balance over the build is a bit more than half the loan. On $9,000,000 at an illustrative 8.50% over 18 months with an average draw of 55%, interest is about $631,000. That reserve is part of the budget, and part of what the loan funds.

How draws work

1. The borrower’s equity goes in first, before the bank funds a dollar.
2. Each month the contractor submits a pay application. The lender’s inspector confirms the work in place.
3. The bank funds the verified amount less retainage (a holdback paid at completion), after a title date-down confirms no new liens.
4. Change orders over a set threshold need the lender’s consent. If the budget runs over, the borrower funds the gap before the next draw. That is what the completion guarantee enforces.

Guarantees

Guarantee	What it covers	How to negotiate it
Completion	Finishing the building lien-free, on the plans the lender accepted	Tie it to the agreed budget plus a contingency
Carry or interest	Interest, taxes and insurance until stabilization	Ask for it to end at a coverage test
Repayment	Some or all of the loan balance	Ask for a step-down at completion and again at stabilization
Environmental and carve-outs	Standard bad acts	Usually not negotiable

Costs and timeline

The lender reviews plans, the budget, the construction contract, the contractor’s financials and the permit status, and orders an as-completed appraisal and a plan and cost review. Expect the commitment to take noticeably longer than a permanent loan. Fees are charged on the full commitment, and each draw inspection and any extension carry their own fee.

Common deal killers

• Equity that is mostly land appreciation or deferred developer fees. Banks and HVCRE rules may not count it as you do.
• No guaranteed maximum price contract, or a contractor without the balance sheet to stand behind it.
• Permits not in hand. Most banks will not close before building permits issue.
• A takeout that only works at today’s rents and a low rate. The bank will stress both.
• Thin sponsor liquidity against the size of the completion guarantee.

Alternatives when a bank says no

• HUD 221(d)(4) for apartments: long, fixed, non-recourse construction-to-permanent debt, at the cost of time and Davis-Bacon wages. See FHA 221(d)(4) and 221(d)(4) vs bank construction.
• Debt funds lend at higher leverage and higher cost, with lighter recourse: debt fund loans.
• Gap capital between the senior loan and your equity: mezzanine loans or preferred equity. Price the blend in the blended rate calculator.
• C-PACE can fund qualifying energy and resiliency costs, often with a long fixed term, if the senior lender consents: C-PACE financing.
• Land first. If you are not ready to build, finance the site with a land loan and come back with permits.