commercial construction loans

All You Need to Know About Commercial Construction Loans

commercial construction loans

All You Need to Know About Commercial Construction Loans

As the name suggests, commercial construction loans are structured specifically for businesses and individuals seeking to construct a property for commercial purposes. They can be a good option for developers looking to build residential homes, duplexes, units, commercial buildings or even high rise developments. Gradual progress payments ensure that cash flow remains stable throughout the construction process and total interest payable is minimised.

How does it work?

Construction loans differ to business loans or lines of credit in that the funds are disbursed at pre-determined intervals depending on the stage of construction. Prior to loan approval, the bank will work with you and the contractor to determine how much is required at various stages of development. This information will be written into a progress payments schedule, which will then form the basis of the loan structure. For example, you may require an initial $100k for clearing of the site, then a further $150k for the slab, then a further $150k for frame (exterior construction) and so on.

Once the loan has been fully drawn, the loan will convert to a standard loan, usually a variable rate interest only loan. This structure means that interest is only payable on the amount due for the work completed, so less interest is paid over time compared to a straight business loan in which the full amount is drawn at once.

Security and valuation

The security required for a commercial construction loan is usually a standard registered mortgage over the property being developed along with a Director’s Guarantee. Depending on the loan circumstances, the lender may also require a General Security Agreement (GSA) over all your rights and undertakings in relation to the property, including pre-sale deposits.

The security will be valued in two separate ways:

  1. Construction cost plus land value
  2. On completion value

In most cases, the lender will use the lower of the above two options (usually option 1) and lend up to 75% of the value. However, the loan to value ratio for commercial construction loans can be flexible, so you may be able to obtain a higher loan depending on your experience in commercial construction, the area, property type and a number of other factors. A Lendfin commercial construction loans expert will be able to help prepare your application to obtain the highest loan amount possible.

Due diligence

Commercial construction loan applications can be lengthy and require significant paperwork, including council development approvals. Due diligence should be completed before making any commitments (including loans), and at a minimum should include:

  • Government safety regulations and any recent changes, for example the requirement for fire systems or access for people with a disability.
  • Zoning. There are regulations to the type of developments you can make in different zones, and these are subject to change. For example, it would not be permitted to build a factory in a residential zoned area.
  • Future plans for the area. It may be ideal right now to build an apartment complex in your planned area, however there may be future development plans by large corporations that will contribute to an oversupply. Similarly, new roads and transport options could undermine the benefits of street frontage for a store.
  • Experience and testimonials for the builder and construction team. Without solid construction management, your property development is at risk of missing deadlines and other errors that may cost you in future.


Pre-sales for residential apartment developments can be a requirement to secure lending. The lender may set a benchmark that must be met before the loan can be fully approved. For example, if 50% pre-sales is required to clear the debt on the units, the bank may require that you secure deposits for this amount before fully funding the project.

If you are looking to develop any type of commercial property, get in touch with the team at Lendfin and let us help secure a commercial development loan for you.