Construction-to-Permanent Loans Work for Developers
How Construction-to-Permanent Loans Work for Developers
What is a Construction-to-Permanent Loan
A construction-to-permanent loan, often called “construction-to-perm,” is a single facility that covers both the construction and permanent phases of a project. The loan funds construction draws during development and automatically converts into a stabilized, long-term mortgage once the property receives its Certificate of Occupancy and meets debt service requirements.
This structure helps developers avoid multiple closings, duplicative fees, and interest rate risk between construction completion and long-term takeout. The lender underwrites both stages upfront and prices the permanent phase based on forward rates and stabilization assumptions.
Construction-Only vs Construction-to-Perm Financing
The distinction between a construction-only loan and a construction-to-permanent loan is critical. A construction-only facility funds the build phase and requires refinancing or payoff at completion. In contrast, a construction-to-permanent loan rolls over automatically into a mortgage with the same lender once the project meets performance triggers.
| Feature | Construction-Only Loan | Construction-to-Permanent Loan |
|---|---|---|
| Number of Closings | Two (construction and refinance) | One closing for both phases |
| Interest Rate Risk | Exposed to market rates at refinance | Permanent rate locked before construction |
| Documentation | Separate notes and covenants for each loan | Single facility agreement with conversion terms |
| Best Use Case | Speculative or short-term projects | Stabilized income-producing developments |
Lender Requirements for Construction-to-Permanent Loans
- Experienced developer with a verifiable track record in the asset class
- Minimum 20–30% sponsor equity contribution
- Permits, entitlements, and guaranteed maximum price (GMP) contract in place
- Pre-leasing or signed LOIs where relevant (multifamily or commercial)
- Feasibility, appraisal, and environmental reports completed
- Exit underwriting with DSCR and NOI projections reviewed upfront
DSCR and Appraisal Rules for Permanent Conversion
Before a construction loan converts to permanent status, lenders verify income and valuation through a new appraisal and debt service coverage ratio (DSCR) test. Most lenders require a DSCR of at least 1.20x to 1.30x based on stabilized net operating income and prevailing interest rates.
The appraisal confirms both the as-built market value and the stabilized value. If either metric falls short, lenders may adjust the loan balance or require additional principal reduction before conversion.
Best Practices for Closing a Construction-to-Permanent Loan
- Provide a comprehensive financial model with sensitivity scenarios
- Lock construction costs under a fixed-price contract with a reputable GC
- Secure completion guarantees and builder’s risk insurance early
- Document equity contributions clearly through bank statements or escrow verification
- Plan the permanent phase interest structure (fixed vs floating) upfront
- Allow time for final inspections and DSCR testing before conversion
Financely’s Role
Financely structures and arranges construction-to-permanent financing for developers and sponsors. We coordinate underwriting, prepare lender packages, and negotiate conversion triggers that protect the sponsor’s economics. Our team maintains relationships with banks, private credit funds, and life insurers active in long-term CRE lending.
Request a Construction-to-Permanent Loan Proposal
Financely arranges construction-to-permanent facilities for commercial real estate projects worldwide. Submit your project to receive indicative terms and lender feedback.
Request Term SheetFrequently Asked Questions
How much equity do lenders require?
Most lenders expect sponsors to contribute between 20% and 30% of total project cost as equity, either through cash or land value. Stronger sponsors can sometimes negotiate lower equity thresholds.
When does the conversion to permanent status occur?
Conversion typically occurs when the project is completed, leased, and meets the lender’s DSCR and valuation criteria. This is confirmed through inspection, rent rolls, and updated appraisals.
Can construction-to-permanent loans be fixed rate?
Yes. The construction phase is typically floating-rate, while the permanent phase can convert to either fixed or floating terms, depending on lender and borrower preferences.
Do you arrange non-recourse construction-to-perm loans?
Yes. Financely arranges limited and non-recourse structures depending on asset type, sponsor experience, and leverage. Completion guarantees may still apply during construction.
Financely acts as an arranger and advisor. All financing is subject to underwriting, due diligence, and lender approval. We do not issue or guarantee loans directly. Services are delivered through regulated partners under best-efforts engagement.
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