Commercial Construction Finance and Owner Advisory

A commercial construction loan is short-term debt (typically 12-36 months) that funds construction in monthly draws against documented work in place. The lender disburses against an approved schedule of values, with each draw verified by a project monitor. Interest is paid monthly on the outstanding balance (commonly via interest reserve). At completion the loan converts to mini-perm or pays off through permanent takeout. Standard structures: senior debt 60-75% of total cost, balance funded by sponsor equity, mezz, or preferred equity. TCG owner rep manages the draw process. Draw schedule deep-dive.

LTC typically runs 60-75% on commercial construction loans in 2026. Industrial, build-to-suit, and credit-tenant: often 70-75%. Speculative office, hospitality, cannabis: 55-65%. Balance funded by sponsor equity, LP equity, mezz, or preferred equity. LTC differs from LTV (loan-to-value) - LTV applies to stabilized appraised value at takeout, often allowing higher leverage at refinance. MBA publishes industry benchmarks.

Stabilized NOI / Total Project Cost. 2026 typical: industrial 7-9%, multifamily 5.5-7%, cold storage / data center 8-11%, healthcare 6-8%, QSR / outparcel 8-10%. Spread between yield-on-cost and exit cap rate is the developer value-creation margin - 150-250 basis points typical on viable deals. Compress the spread and the deal stops working. NOI strategy.

Hard costs = physical construction (site work, foundation, structure, envelope, MEP, finishes, FF&E) - typically 70-85% of TPC. Soft costs = non-construction (A&E 8-12%, legal, financing/interest carry, permits/impact fees, taxes, insurance, surveys/environmental, marketing, owner rep) - 15-30% of TPC. Full A&E and soft cost breakdown.

An engineering-based study reclassifies portions of building basis from 39-year (commercial real property) into 5/7/15-year recovery periods. For a $20M building, typical reclassification of 15-30% of basis generates $1M-$3M in present-value tax savings depending on owner marginal rate, time horizon, and current bonus depreciation rules. Study cost $5K-$25K. ROI generally 10x-50x the study fee on $5M+ projects.

Bonus depreciation allows immediate first-year deduction of a defined percentage of qualifying property (recovery period 20 years or less). The applicable rate has shifted multiple times under recent tax legislation, so the percentage depends on the year property is placed in service. Pairs with cost segregation: cost seg identifies eligible property; bonus depreciation accelerates the deduction. Confirm current applicable rate with tax counsel for the placed-in-service year.

Section 179D is a federal deduction for energy-efficient commercial building property - envelope, HVAC, lighting exceeding ASHRAE standards. Substantially expanded by the Inflation Reduction Act with deduction values up to $5+/SF when prevailing wage and apprenticeship requirements are met. For tax-exempt entities (government, nonprofit, REITs, tribes), the deduction can be allocated to the designer (architect, MEP engineer, design-build contractor). Highly impactful on IMP-envelope cold storage and high-performance industrial.

Opportunity Zones are federally designated low-income census tracts where investors can defer and reduce capital gains tax by reinvesting gains into a Qualified Opportunity Fund (QOF). Three benefits: deferral of original gain; potential basis step-up; elimination of QOF appreciation tax if held 10+ years. OZ-eligible commercial includes industrial, multifamily, mixed-use, healthcare. Tax mechanics complex and have been modified by subsequent legislation; consult counsel for current rules.

Mezzanine debt: secured by pledge of equity interests; structured as debt with defined coupon and maturity; typical pricing 10-15%. Preferred equity: structured as equity; receives preferred return ahead of common; typical pricing 9-13% with optional kickers. Mezz generally lower cost; preferred more flexible because no senior lender consent required. Most $10M-$50M deals stack senior + mezz + sponsor or senior + preferred + sponsor.

The owner representative is the owner advocate - distinct from GC, architect, lender. Validates draw schedules, reviews pay applications and lien waivers, monitors budget vs SOV, manages change order review, coordinates with project monitor, oversees commissioning and closeout, protects owner contingency. On $5M+ projects, typically pays for itself many times over by catching draw discrepancies and incomplete close-out. TCG owner rep.

The timing/amount mechanism by which the lender disburses loan proceeds. GC submits monthly pay application showing percent-complete by line item against the schedule of values. Project monitor verifies; lien waivers collected; lender funds. Standard cycle 30-60 days from work to draw funding. Owners track three metrics: budget burn vs percent complete (early-loaded SOVs are a red flag), retainage held, stored materials documentation. Full draw schedule guide.

Independent third party retained by lender to monitor on its behalf - verifying work in place, reviewing pay apps, evaluating change orders, reporting risk. Monitor performs full plan and cost review at loan closing and conducts site visits at each draw. Fees typically 0.05-0.25% of loan amount; paid by borrower as soft cost. Owners should treat the monitor as a partner; the monitor catches problems on the lender behalf, which protects equity too.

Debt Service Coverage Ratio = stabilized NOI / annual debt service. Most commercial permanent loans require minimum DSCR of 1.20x-1.30x; some asset classes (hospitality, cannabis, speculative) require 1.40x-1.50x. Construction-to-perm requires borrower demonstrate project will achieve minimum stabilized DSCR (often 1.25x) at takeout. Run sensitivities at -10% rents and +100bp rates - deals failing the stress test are vulnerable.

Spread = Yield-on-Cost minus Exit Cap Rate. 150-250 basis points typical on viable ground-up development. The spread is the developer value-creation margin. When cap rates compress (rates fall, asset values rise) spreads widen. When cap rates expand (rates rise) spreads compress and deals stop pencilling. The spread test is the single most important feasibility filter on commercial development. CBRE cap rate research.

A single loan that funds construction at a short-term variable rate, then converts to a permanent fixed-rate mortgage at substantial completion or stabilization - eliminating second closing and refinance risk. Available primarily on owner-occupied, build-to-suit, and credit-tenant industrial. Investor multifamily and speculative product more commonly use construction loan + separate permanent takeout. C2P closes faster and locks rate but limits refinance optionality. Full C2P guide.

Pre-development (incurred before construction loan closing) typically includes: land acquisition / earnest money; site due diligence (Phase I, geotech, ALTA survey, title); A&E fees through SD or DD; market study and appraisal; legal and financing fees; permit application and impact fees; preliminary marketing; pre-opening opex for owner-operators. Total 3-7% of TPC. Most lenders require this equity in place before construction loan closing. Underbudgeting pre-development is a leading cause of capital stack failure. Environmental site assessment.