Construction Loans Part 1: Fundamentals for Real Estate Development
Construction loans finance building projects and often include land acquisition, though developers frequently own land already after lengthy approvals. Banks provide the most common option, while private debt funds offer alternatives; specialized products like HUD loans serve multifamily, and high-leverage build-to-suit loans fit single-tenant net lease properties.
Loan Sizing: Loan-to-Cost Ratios
Aggressive banks size loans at 65-70% of total project costs. If land value has appreciated since purchase, lenders may credit the increase, pushing effective loan-to-cost (loan ÷ project cost) higher.
Private lenders like debt funds reach 75-85% loan-to-cost but charge premium rates—bank loans might be in the 4s, while debt funds hit the 7s.
| Lender Type | Typical Loan-to-Cost | Interest Rate Range |
|---|---|---|
| Banks | 65-70% | 4-6% |
| Debt Funds | 75-85% | 7%+ |
Disbursement Process
Funds disburse progressively as construction advances via borrower draw requests. Banks review submissions including actual vs. budgeted expenses, contractor lien waivers, and attestations before releasing funds.
This staged approach minimizes lender risk while aligning capital with project milestones.
Contact Randy Efron at randy.efron@skylatus.com for construction financing at Skylatus Property Capital.
