Construction Loan vs. Commercial Mortgage: Compare

Overview

Construction loans and commercial mortgages both finance commercial real estate, but they serve opposite ends of the property lifecycle. A construction loan funds the creation of a property that does not yet exist or exist in its intended form; a commercial mortgage finances the purchase or refinance of a property that is already built and operating. Construction loans are structured as revolving credit lines with draws disbursed as construction milestones are met — foundation poured, framing complete, mechanical systems installed. Interest accrues only on drawn amounts, keeping initial payments lower. These are short-term products (12–36 months) that transition to a permanent mortgage (take-out loan) upon completion and stabilization. The complexity of managing draws, inspections, lien releases, and contractor oversight makes construction lending more expensive and more involved than permanent financing. A commercial mortgage is comparatively straightforward — the property exists, generates income (or will shortly), and the lender finances a percentage of its value. Underwriting is driven by DSCR (income vs. debt service) and LTV (loan vs. property value). Terms extend 15–30 years, and while rates are higher than residential, they are significantly lower than construction loan rates. For a developer building a new property, the typical financing path is: construction loan through completion, then refinance into a permanent commercial mortgage once the property is stabilized and leased.

Business buying a fully leased office building

Commercial Mortgage The property is built, income-producing, and ready for permanent financing. A construction loan is irrelevant here.

Developer building a 50,000 sq ft retail center from scratch

Construction Loan, then take-out commercial mortgage Ground-up construction requires a draw-based construction loan. Upon lease-up and stabilization, refinance into permanent CMBS or bank mortgage.

Frequently asked questions

What is a construction-to-permanent loan?

A construction-to-permanent loan (C2P or "one-time close") combines the construction loan and the take-out commercial mortgage into a single closing. You close once, draw during construction, and the loan automatically converts to the permanent mortgage upon completion. Reduces closing costs and eliminates the refinance risk at take-out.

How do construction loan draws work?

The lender releases funds in scheduled draws as construction milestones are completed and verified by an independent inspector. Typical draws might be: 10% at closing, 20% at foundation, 30% at framing/roof, 30% at mechanical/electrical completion, 10% at final inspection. Undrawn amounts do not accrue interest.