Construction financing is the bridge between a set of drawings on paper and a completed building that generates income. Without the right structure and lender, even strong projects can stall, run short of cash or fail to meet their business plan. With the right funding in place, developers can move from land acquisition through construction and lease-up with clear visibility on capital.
Traditional bank lending still plays a role in construction finance, but tighter regulation, capital rules and risk limits mean that many projects now depend on private credit funds, specialist construction lenders and joint venture partners. Sponsors need a clear view of where they sit in this market and what each type of lender expects.
This guide explains what construction financing is, how construction loans are structured, the main funding types available, the metrics lenders use and the documentation developers should prepare. It also sets out practical strategies to improve approval chances and explains how Financely Group connects sponsors with global construction lenders and capital partners.
Construction financing refers to short to medium term loans used to fund land acquisition, site preparation, ground-up development and major redevelopment of property. Instead of drawing the entire loan on day one, the borrower receives funds in stages as work progresses, which helps manage interest costs and align capital with physical progress.
Construction finance appears across:
The core purpose is to provide capital for the riskiest phase of a project, when costs are high and income is limited or non-existent. Once a scheme is built and stabilised through leasing or sales, it can be refinanced with longer-term, lower-cost debt or sold to long-term investors.
Construction loans follow a sequence that starts with underwriting and ends with refinance or sale. Understanding each stage helps developers design projects and capital stacks that match lender expectations.
Lenders first look at feasibility. This includes land value, planning status, development costs, projected revenues, absorption or leasing assumptions and overall market conditions. They stress-test construction timelines, contingencies and exit values under different scenarios.
Sponsor and developer experience carry real weight. Lenders want to see that the team has delivered similar schemes, managed contractors, handled delays and resolved issues in the past. A first-time developer with a complex, large scheme will face more scrutiny than an established sponsor repeating a proven model.
From day one, lenders ask about exit strategy. They want to know whether the project will be sold on completion, refinanced into a permanent loan, held in a portfolio or partially exited. Assumptions on cap rates, pricing, loan markets and buyer demand must be grounded in real comparable evidence.
Construction loans are usually interest-only during the build period, with terms that range from 12 to 36 months, sometimes longer for large or phased schemes. Repayment is often structured as a bullet at maturity, linked to refinance or sale, although partial repayments as units are sold are common in residential projects.
Draw schedules can be fixed or flexible, with pre-agreed milestones that trigger releases. Lenders require contingencies built into the budget, cost overrun reserves and interest reserves. They also define covenants around cost to complete, presales, pre-leasing and minimum equity levels.
Instead of wiring the full facility at closing, lenders release funds in tranches as the contractor and project team complete stages of work. Independent quantity surveyors or inspectors verify progress against the budget and timeline before each draw.
This staged approach protects the lender from funding ahead of value and encourages disciplined cost control. For the borrower, it limits interest charges to amounts actually drawn, rather than on the full committed amount from day one, although commitment fees may apply on undrawn balances.
A construction loan is not permanent capital. The exit strategy may involve:
Lenders expect the exit to be realistic for the asset type, location and cycle. If the exit depends on aggressive rent growth, optimistic cap rates or untested buyer demand, credit committees will push back or reduce leverage.
Developers rarely fund an entire project with one product. Capital stacks combine senior loans, subordinated capital and equity in different ways. The main construction financing types are outlined below.
Land loans help sponsors secure sites before full construction funding is in place. Lenders focus on current land value, planning prospects, holding costs and the sponsor’s plan to move from raw land through entitlements into development.
Ground-up construction loans fund the full build-out of new projects. They are sized against total development costs and projected stabilised value, with lender focus on cost-to-complete, contingencies and contractor strength.
These structures combine a construction phase with a built-in conversion to a long-term, amortising mortgage once the project reaches agreed milestones. They can reduce refinance risk, but terms are more rigid and require higher certainty on income and valuation.
Bridge construction loans cover transitional situations where a project is partly built, requires recapitalisation or needs financing for final stages before sale or term debt. They can also support heavy value-add on existing assets.
Mezzanine construction capital sits behind the senior facility and ahead of equity to increase total funding. It is used when sponsors want to reduce their cash equity or when senior lenders cap leverage at a conservative level. Pricing is higher and intercreditor terms are detailed.
Joint venture equity involves a capital partner that funds a large share of the equity in exchange for a preferred return, promoted interest and governance rights. It is relevant for larger projects where sponsor balance sheets or investor bases are not sufficient to carry all equity.
Hard money construction loans are short-term, high-margin facilities issued by lenders who focus on collateral and exit value. They are used in urgent or complex situations where traditional banks or mainstream construction lenders will not engage, or where timing is critical.
| Construction Capital Type | Typical Role in the Capital Stack | Key Considerations |
|---|---|---|
| Land Acquisition Loans | Short-term funding to secure sites and cover early costs before full project financing. | Lower leverage, strong focus on planning risk, holding costs and take-out strategy into construction finance. |
| Ground-Up Construction Loans | Core senior facility funding hard and soft build costs for new developments. | Drawn in stages, interest-only, covenants around cost-to-complete, contingencies and pre-sales or pre-leasing. |
| Construction-to-Permanent Loans | Construction finance with an agreed shift into long-term amortising debt at stabilisation. | Reduced refinance risk but more rigid structure; underwriting focuses heavily on long-term cash flows. |
| Bridge Construction Loans | Transitional funding for partially complete or value-add projects. | Higher pricing, shorter tenor, strong emphasis on exit, may involve recapitalisation of existing lenders. |
| Mezzanine Construction Financing | Subordinated layer boosting total leverage above senior limits. | High coupon, detailed intercreditor agreements, often includes step-in rights or profit share. |
| Joint Venture Equity | Equity partnership to fund larger or riskier projects beyond sponsor capacity. | Shared control, preferred returns and promote structures, negotiation around governance is critical. |
| Hard Money Construction Loans | Short-term, collateral-focused alternative where mainstream lenders will not participate. | Highest pricing, strict collateral focus, very clear and near-term exit needed to justify risk. |
Lenders expect more detail for construction projects than for stabilised assets. The project is still on paper, so they rely on the sponsor’s plan, budget, team and track record to assess risk.
A credible development plan describes the site, planning status, design concept, target market, competitive positioning, phasing and exit. It should be concise but specific, with realistic timelines tied to permitting, build and lease-up or sales.
Lenders scrutinise the cost budget in detail. They expect clearly separated hard and soft costs, documented contingencies and evidence that pricing reflects current market conditions. The timeline must be consistent with contractor capacity, weather, permitting and supply chain realities.
Sponsors should present a project list showing comparable schemes completed, roles played, outcomes achieved and references where possible. Where a developer is less experienced, pairing with a strong general contractor, project manager or co-sponsor can reduce perceived risk.
Independent appraisal and feasibility work give lenders external validation of demand, pricing, lease-up assumptions and value on completion. These reports also help sponsors challenge their own assumptions before committing significant equity.
Most construction lenders expect developers to contribute at least 10 to 30 percent of total project costs in true equity, sometimes more for higher-risk schemes or markets. Mezzanine or preferred equity can supplement cash equity but will be analysed carefully at credit committee level.
Construction lenders rely on a small set of ratios to frame risk. These metrics do not replace judgement, but they shape leverage, pricing and covenants.
| Metric | Typical Range | Why It Matters |
|---|---|---|
| Loan-to-Value (LTV) | Often 55 to 70 percent of completed value | Protects the lender against drops in value and provides a cushion if exit pricing softens. |
| Loan-to-Cost (LTC) | Often 70 to 85 percent of total development cost | Ensures sponsors share risk through equity and that lenders are not funding 100 percent of costs. |
| Debt Service Coverage Ratio (DSCR) | Target DSCR 1.20 to 1.40 times at stabilisation | Shows that projected net operating income can cover interest and, where relevant, principal once the project is stabilised. |
| Exit IRR | Many sponsors target 12 to 20 percent plus | Indicates whether the project compensates equity investors for construction, leasing and market risk after debt costs. |
These ranges are indicative. Each lender has its own risk thresholds by asset class, market and sponsor quality, and they will tighten or relax them as cycles change.
Construction loans price above senior term loans because they fund a riskier stage of the asset life cycle. Pricing reflects lender type, sponsor quality, project risk, geography and market conditions. The spread between bank construction loans and private credit or hard money can be significant, but so can the difference in leverage and speed.
In general, banks sit at the lower end of the pricing curve with tighter structures and lower leverage. Private credit funds and specialist construction lenders sit in the middle, trading higher pricing for flexibility and faster decisions. Hard money sits at the top, with pricing that reflects urgency and complexity.
| Lender Type | Relative Rate Level | Typical Position |
|---|---|---|
| Commercial Banks | Lowest to lower-middle | Focus on strong sponsors, lower leverage, straightforward projects, tighter covenants and more regulatory requirements. |
| Private Credit and Debt Funds | Middle | Will consider higher leverage, more complex projects and cross-border sponsors in exchange for higher spread and fees. |
| Specialist Bridge and Construction Lenders | Middle to upper-middle | Focus on speed and structure for transitional and development assets; pricing reflects business-plan and execution risk. |
| Hard Money Construction Lenders | Highest | Short-term, collateral-driven funding for distressed or highly time-sensitive projects with very clear exits. |
Even experienced developers encounter headwinds during the life of a project. Lenders are aware of these realities and often ask upfront how sponsors plan to manage them.
Securing construction funding is about reducing uncertainty for credit committees. The following strategies can make the difference between a soft decline and a workable term sheet.
A well-prepared package bundles the project plan, budgets, timelines, feasibility studies, appraisals, contractor information and draft legal structures into a coherent file. Lenders should not have to chase basic information.
If you have a track record, highlight it clearly. If you do not, surround yourself with experienced co-sponsors, contractors and advisers whose credentials you can present to lenders. Teams matter as much as sites.
Pushing leverage to the theoretical limit on day one leaves no room for surprises. Sensible leverage, backed by real equity and appropriate contingencies, tends to attract better lenders and terms than highly stretched structures.
Pre-leasing commitments, pre-sales, letters of intent, market studies and broker opinions all help lenders believe in the exit. Data-backed demand is more persuasive than high-level narratives about an area being “up and coming”.
Construction lenders differ by ticket size, geography, asset focus and risk appetite. Financely Group helps developers identify which lenders are actually open for their type of deal, present projects in a lender-friendly format and coordinate questions around structure, security and exit.
Construction finance supports a wide range of real estate strategies. Common examples include:
Financely Group works with developers, sponsors and property investors who need structured construction capital and do not want to rely on a single local bank. Our role is to help clients assemble credible development packages, test leverage against lender appetite and find funding partners whose mandates match the project.
Through regulated partners, we access private credit funds, debt funds, bridge and construction lenders, hard money providers, larger commercial real estate lenders and joint venture equity partners. We focus on projects where professional underwriting, clear governance and disciplined information flow can attract serious capital.
On each mandate, we help sponsors think through capital stack design, from senior and mezzanine layers to equity and potential joint ventures. We then coordinate lender outreach, address credit questions and work toward term sheets that have a realistic chance of closing rather than staying as indicative offers.
If you are planning a new development, redevelopment or heavy value-add project, construction financing should be planned at the same time as design and permitting. Waiting until late in the process compresses timelines and weakens negotiating leverage.
Financely Group can review your project, give an honest view on bank versus private options and outline what documentation is needed to start a serious funding process. With the right preparation, lenders can move faster and with more confidence.
Share your project brief, development budget, feasibility work and capital stack outline with our team to explore construction financing options.
Submit Your Construction Funding RequestDisclaimer: This page is for general information only and does not constitute legal, tax, accounting or investment advice. Financely Group acts as advisor and arranger through regulated partners and is not a bank or direct lender. Any construction financing, loan, security or capital raising structure is subject to underwriting, KYC, AML, sanctions screening, legal review, documentation, perfected security and approvals by relevant stakeholders. No public offer or solicitation is made on this page.
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