Ground-Up Construction Loans

What underwriting looks at before the first draw

Ground-up financing is underwritten as a schedule, not just as an asset. The two governing leverage tests are total cost and completed value: the loan advances up to 85% of land plus vertical cost, and cannot exceed 75% of the completed or after-repair value. As with any construction facility, the more restrictive of the two controls proceeds.

Experience is a genuine requirement rather than a preference. A prior ground-up project, a general contracting background or a substantial renovation track record demonstrates that the borrower has managed a draw schedule, an inspection cycle and a subcontractor base. Construction risk is concentrated in execution, and execution history is the most reliable predictor available at underwriting.

Site condition matters as much as the plans. Land that is already zoned for the intended use with utilities lateral-ready can move to a term sheet in one to two days. A site still pending entitlement, a use variance or a utility extension is underwritten as land rather than as a construction project, because the timeline to first vertical work is not yet defined.

• Up to 85% of total cost including land, capped at 75% of completed value
• Interest charged only on the drawn balance, not on the committed facility
• Draws released against inspected milestones on an agreed schedule
• 12 to 24 month interest-only term designed to reach certificate of occupancy

How draws and interest actually work

Closing funds the land and the first construction tranche. From there, the facility releases on a milestone draw schedule: foundation, framing, mechanical rough-in, drywall, finishes and completion, adjusted to the project. Each release follows an inspection confirming the milestone is in place, which keeps the outstanding balance aligned with the value actually built.

Interest is charged only on the drawn balance. A project that has drawn a third of its facility pays interest on a third of it, and the undrawn remainder costs nothing. Over a 12 to 24 month build, that structure meaningfully reduces total carry compared with a facility that charges interest on the full commitment from closing — and it removes the incentive to draw ahead of the work.

The practical consequence is that schedule discipline is financial discipline. Milestones completed on time release capital on time, keep subcontractors paid and hold interest carry inside the pro forma. Slippage does not accrue interest on undrawn funds, but it does extend the period over which the drawn balance carries.

Bridge-to-permanent by design

The construction loan is not the end state. Once vertical work is complete and the certificate of occupancy is issued, the project either sells or refinances — into a DSCR rental loan if it will be held and leased, or into permanent debt if it is a longer-term commercial hold. Underwriting the takeout at the outset is what makes the construction term the right length.

For build-to-rent in particular, the completed property must clear a rental loan’s coverage test, not merely appraise. That means projected market rent, the local tax assessment on the newly improved value and an insurance quote on the finished structure all belong in the original pro forma. A build that appraises well but covers poorly will refinance at reduced leverage.