Private Construction Loans

When private construction capital fits

Banks remain the lowest-cost construction lenders, but their credit boxes are narrow and their approval processes are slow. Private capital fits when the project sits outside that box or the timeline will not wait. The right question is what the bank constraint costs the project, and whether private terms still leave the returns intact.

Sponsors typically turn to private construction lenders in a handful of recurring situations. Each comes with a different lender profile, so the reason for going private shapes the search.

• A land contract or permit window requires a faster close than a bank can deliver
• The capital plan asks for higher loan-to-cost than bank limits allow
• Heavy-lift projects such as conversions, major redevelopments, or complex sites
• Sponsor gaps: limited track record, thin liquidity, credit events, or foreign-national borrowers
• Bank concentration limits in the asset type or market
• A construction loan that must be recapitalized mid-project after a lender pulls back

Understanding the cost trade-offs

Private construction debt costs more on every line: rate, origination fees, exit fees, and sometimes extension fees and minimum interest provisions. What matters is the all-in cost over the realistic hold period, measured against what the capital does for the project. Paying more for a loan that closes on time and funds the full budget can produce a better outcome than cheaper debt that forces a partner buyout or a delayed start.

Sponsors should model the full interest carry, including the reserve, and test how the takeout sizes against the higher balance. The commercial mortgage calculator helps compare monthly carry across options. Private lenders also differ widely on prepayment terms, which matters when the plan is to refinance early.

Draw administration on a private loan

Private lenders fund construction through draws, like banks, but the mechanics vary more from lender to lender. Some fund the full loan into a controlled account at closing, while others advance each draw directly. Sponsors should understand which structure applies, how interest accrues on undrawn funds, how quickly draw requests are reviewed, and what documentation each draw requires.

Most private construction lenders use a third-party inspector to confirm work in place before releasing funds. Expect requirements for conditional and unconditional lien waivers, updated budgets, change order approvals, and retainage. Moving money between budget lines, especially out of contingency, usually needs lender consent. Slow or disputed draws are a real risk with smaller lenders, so draw performance is worth checking before choosing a lender on price alone.

Completion guaranties and recourse

Private construction lenders almost always require a completion guaranty from the sponsor or a creditworthy guarantor. The guarantor promises to finish the project and fund cost overruns, which puts the guarantor's balance sheet directly behind the budget. Lenders also commonly require carry guaranties covering interest, taxes, and insurance until completion, and bad-boy carve-out guaranties for fraud and similar acts.

Guarantor strength often determines whether a private lender will stretch on proceeds. Liquidity and net worth statements, schedules of real estate owned, and contingent liabilities from other guaranties all get reviewed. When the sponsor's own balance sheet is thin, joint-venture equity partners sometimes provide the guaranty in exchange for a larger share of the deal.

Planning the refinance takeout

Private construction debt is short-term capital, so the refinance plan has to be in place from the start. Most projects move to a bank or agency permanent loan, a life company loan, or a bridge loan for lease-up once construction is complete. The higher private balance needs to fit inside what the takeout lender will size against stabilized income. Private lenders will ask for a takeout analysis showing projected income, likely refinance sizing, and how any shortfall would be covered.

Kevin Heisser was a Bank of America portfolio manager responsible for a $10B commercial construction loan portfolio in 2009, and Capital Partners weighs private and bank structures with that lender-side view. Compare options on the private commercial lenders page, then submit the project for a principal to review.

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