Commercial Mortgage vs. Construction Loan: Compare CRE Financing

Overview

The fundamental difference is simple: commercial real estate loans finance properties that already exist and are income-producing; construction loans finance properties being built or substantially renovated. This distinction drives every difference in underwriting, structure, and risk. A commercial mortgage lender can inspect the property, review its rent rolls and income history, and underwrite based on demonstrated cash flow. A construction lender is underwriting based on projected future cash flows once a building that does not yet exist is completed and leased — a materially higher-risk proposition. Construction loans are therefore more expensive (7–14% vs. 5–9% for conventional mortgages), shorter-term (12–36 months), and require more borrower experience and equity. They are also structured as revolving draw facilities rather than lump-sum loans — the lender controls fund disbursement through a draw process tied to construction progress. Once construction is complete and the property is stabilized (leased and generating income), the construction loan is paid off through a permanent takeout financing — typically a conventional commercial mortgage, CMBS loan, or SBA 504. The developer's financing strategy must plan for both the construction phase and the permanent phase from the outset.

Investor acquiring a fully occupied retail strip mall

Commercial Real Estate Loan Completed, income-producing property is exactly what commercial mortgage lenders underwrite. No construction loan needed.

Developer building a 20,000 sq ft medical office building

Construction Loan, then permanent CRE mortgage Ground-up development requires a construction loan during the build phase, followed by a permanent commercial mortgage once leased and stabilized.

Frequently asked questions

What is a mini-perm loan?

A mini-perm is a short-term commercial mortgage (3–7 years) used to take out a construction loan when the property is completed but not yet fully stabilized. It provides a breathing period between construction payoff and permanent financing eligibility.

Do I need separate lenders for construction and permanent financing?

Not necessarily. Many commercial lenders offer construction-to-permanent (C2P) loans that close once and automatically convert from construction to permanent financing upon project completion. This reduces closing costs and eliminates the take-out risk.