Texas Construction Loans

Growth brings lender appetite and supply risk

Population and job growth across Dallas-Fort Worth, Houston, Austin, and San Antonio keep industrial, multifamily, and build-to-rent development active, and construction lenders compete for well-sponsored projects in those metros. The same growth draws a large pipeline of competing projects. Lenders underwrite lease-up against the new supply delivering nearby, and they will push back on rent and absorption assumptions that ignore it.

Lenders also look closely at the path of growth. A site on the edge of a metro with rooftops approved but not yet built carries more timing risk than an infill site. Build-to-rent communities, in particular, get underwritten on the rental comps and home prices in that specific corridor. Expect questions about lot delivery, utility availability, and how the project compares with the nearest competing communities.

Mechanic's liens, title, and when work starts

Texas mechanic's and materialman's lien rules give unpaid contractors, subcontractors, and suppliers lien rights against the property, and the priority of those liens can relate back to when construction or material delivery began. A construction lender needs its deed of trust recorded before any work starts on the site. Lenders commonly require a site inspection or a no-work-commenced affidavit at closing, and clearing or delivering materials early can create a priority problem that delays funding.

During the build, lenders protect their lien position with each draw. Owners also carry statutory retainage duties that the construction contract and draw process need to reflect. A general contractor who understands the Texas lien process, and a title company experienced with construction draws, reduce friction on every funding.

• Deed of trust recorded before any site work or material delivery
• Conditional and unconditional lien waivers on Texas statutory forms with each draw
• Title updates confirming no intervening liens at each advance
• Retainage handled as required under Texas law
• Payment and performance bonds where the lender requires them

Underwriting property taxes on new construction

A new Texas project moves from a land tax bill to a fully improved tax bill, and in a state with high property taxes that step-up can decide whether the deal works. Appraisal districts value property as of January 1 each year, so partially completed improvements can be taxed during construction, and the stabilized bill arrives once the district values the finished project. Lenders underwrite taxes on the completed value rather than the bill in place when the land was bought.

Land that carried an agricultural or open-space valuation can see its tax treatment change when it converts to commercial or residential use, so the tax history belongs in early diligence and the budget. Check how taxes on the stabilized value affect coverage using the DSCR calculator before sizing the loan.

MUDs, PIDs, and infrastructure districts

Outside city cores, much of Texas development relies on municipal utility districts and public improvement districts to pay for water, sewer, drainage, and roads. The developer typically funds infrastructure up front and is reimbursed later from district bonds, which are repaid through taxes or assessments on the property in the district. Lenders want to see the district's creation documents, the development agreement, and a realistic view of when reimbursements will arrive.

Most construction lenders will not count future reimbursements as a source of repayment, so the sponsor's equity and loan have to carry the infrastructure spend. District taxes and assessments also add to the end user's total tax burden, which lenders consider when underwriting rents on build-to-rent and multifamily projects or sale prices on lots. See land development loans for how lenders finance horizontal work.

Lender types for Texas construction projects

Texas community and regional banks are active construction lenders for local sponsors with deposits and recourse, and they often offer the lowest cost. National banks focus on larger sponsors and projects. Debt funds and private construction lenders fill higher loan-to-cost requests, sponsors new to a market, and projects that need to close quickly, at a higher cost. Mezzanine and preferred equity can reduce required sponsor cash on larger builds.

Kevin Heisser managed a $10B commercial construction loan portfolio as a Bank of America portfolio manager in 2009, and he has been in real estate and development since 1996. Capital Partners arranges construction capital nationwide, including Texas. Bring a budget, GC contract, schedule, pro forma, and equity plan, then submit your deal for a principal's review.

Common questions