Construction-to-permanent financing is a single loan that pays for building a commercial property and then converts into a permanent mortgage when the build is done. You close once, draw funds in stages during construction (paying interest only on what you have drawn), and then the balance rolls into a fully amortizing loan — no second loan, no second closing. It is the cleanest way to finance ground-up construction because it locks in your permanent financing before you ever break ground.
If you are building rather than buying, the financing works differently than a normal commercial mortgage — and getting it wrong can leave you with a finished building and no permanent loan. Construction-to-permanent financing (often called "single-close" or "C2P") solves that by bundling the build loan and the mortgage into one. Here is how it actually works. For a payment estimate, use our construction loan calculator.
How Construction-to-Permanent Financing Works
A traditional path to owning a new building takes two loans: a short-term construction loan to fund the build, then a permanent mortgage to pay off the construction loan once it is done. That means two applications, two closings, two sets of closing costs — and the risk that you cannot qualify for the permanent loan when the time comes.
Construction-to-permanent financing collapses that into one loan with one closing. The lender commits up front to both the construction funding and the permanent mortgage, so your rate and terms for the long haul are set before construction starts.
The Two Phases
Phase 1 — Construction (typically 6–18 months). The lender releases money in draws tied to build milestones (foundation, framing, roof, and so on), often after an inspection confirms each stage. You pay interest only on the balance you have actually drawn, so early payments are small and grow as the project progresses.
Phase 2 — Permanent (conversion). When construction is complete and the property passes final inspection and occupancy, the loan converts to a permanent, amortizing mortgage — principal and interest, on a set term (often 20–25 years). No new application, no new closing costs.
Construction-to-Permanent vs a Standard Construction Loan
| Construction-to-Permanent | Standard Construction Loan | |
|---|---|---|
| Closings | One | Two (construction, then permanent) |
| Permanent financing | Locked at the start | Must qualify again at completion |
| Closing costs | Paid once | Paid twice |
| Best for | Owners who will keep the property | Builders who will sell or refinance |
Construction-to-Permanent vs an SBA 504 for Construction
If you will occupy the building, there is a second single-close route worth comparing: the SBA 504, which can also fund ground-up construction. The differences matter. A conventional construction-to-permanent loan typically wants 15–25% down and prices the permanent leg at a market rate; a 504 can go in with as little as 10% down and fixes its main debenture leg for 20–25 years, which is often the cheaper long-run cost. The trade-offs run the other way on speed and flexibility: the 504 has stricter occupancy rules (you must use the building), more paperwork, and a slower close, and it is limited to owner-occupied property. For an owner-user building a facility to keep, it is usually worth pricing both; for an investor or a project that needs to move fast, the conventional construction-to-permanent loan is often the better fit. The right answer depends on your down payment, your timeline, and whether you will occupy the space.
Rates and Down Payment
During construction, the rate is usually variable (often prime plus a spread) because you are only paying interest on draws. On conversion, the permanent rate may be fixed or adjustable depending on the program. Expect a down payment of 15% to 25% — ground-up construction carries more risk than buying an existing building, so lenders want more equity. Land you already own can count toward that equity. For where rates sit now, see construction financing rates.
Who Construction-to-Permanent Financing Is For
- Business owners building a facility they will occupy and keep (office, warehouse, medical, retail)
- Investors developing a property they intend to hold rather than flip
- Anyone who wants payment certainty and to avoid re-qualifying for a mortgage mid-project
If you are an owner-occupant, the SBA 504 program can also fund construction with as little as 10% down — worth comparing.
The Draw Process and Inspections
During the build, the lender does not hand you the full loan up front — it releases money in draws tied to completed work. A typical project runs on a draw schedule with several stages: site work and foundation, framing, roof and dry-in, mechanicals, and final finishes. Before each draw funds, the lender usually orders an inspection (and, on larger projects, a review by a construction-loan administrator) to confirm the work is actually in place and the budget is on track.
Two practical consequences follow. First, your interest-only payment grows as you draw, because you pay interest only on the money released so far — early payments are small, later ones larger. Second, cash-flow timing matters: contractors often pay for materials or labor before the matching draw clears, so many builders keep a small reserve to bridge the gap between doing the work and getting reimbursed for it. Ask any lender how many draws the schedule allows and how fast inspections turn around, because a lender that is slow to release funds can stall a job.
What You Can Build
Construction-to-permanent financing is most common for owner-occupied commercial property — the office, warehouse, medical suite, retail space, or restaurant you will operate from — because the lender can underwrite both the project and your business as the future occupant. It also funds ground-up investment property a borrower intends to hold and lease, though those deals lean on projected rents and the borrower's experience rather than an operating business. Special-purpose buildings (a hotel, a self-storage facility, a car wash) can be financed too, but expect a larger down payment and tighter underwriting, since a specialized building is harder for the lender to resell if the project stumbles. If you are buying an existing building rather than building one, this is not your product — a standard commercial real estate loan is.
What Lenders Want to See
Because there is no finished collateral yet, a construction lender scrutinizes the plan as much as the borrower:
- A qualified builder — a licensed general contractor with a track record on similar projects; owner-builders face a much higher bar.
- Complete plans and a line-item budget — with a realistic contingency (often 5–10%) for overruns.
- Your equity or land — the 15–25% down payment, which land you already own can help cover.
- Borrower financials — credit, business cash flow, and the ability to carry the permanent payment once the building is done.
A weak spot in any of these — an unproven builder, a thin contingency, a tight budget — is the most common reason a construction loan is declined or re-priced, so tighten them before you apply.
Compare Lenders Before You Commit
Construction lending varies more than almost any other loan type: appetite, draw flexibility, required down payment, and rate can differ sharply between two lenders looking at the same project. Committing to the first lender that says yes can cost you months of draw delays or a needlessly large down payment.
Before you commit, tell us about your project once and compare construction-to-permanent and SBA 504 lenders side by side — matched to the ones that actually fund your property type and stage, so you are not learning a lender's quirks mid-build.
How to Apply
- Line up your project package — plans, budget, builder contract, and timeline.
- Document your finances — business and personal returns, and proof of the down payment or land equity.
- Get matched to the right lender — banks, credit unions, specialty CRE lenders, and the SBA 504 all handle construction differently.
- Close once — then draw funds as the build hits milestones and convert to permanent at completion.
Frequently Asked Questions
What is construction-to-permanent financing?
It is a single loan that funds the construction of a commercial property and then converts into a permanent mortgage once the building is complete. You close once, draw funds in stages during the build (paying interest only on what you have drawn), and then the loan rolls into a fully amortizing mortgage without a second closing.
How does a construction-to-permanent loan work?
In two phases. During the construction phase (typically 6-18 months) the lender releases money in draws tied to build milestones, and you pay interest only on the drawn balance. When construction finishes and the property passes inspection, the loan converts to a permanent, amortizing loan at a set rate and term.
What is the difference between construction-to-permanent and a standard construction loan?
A standard construction loan is short-term and must be paid off or refinanced when the build is done, meaning a second loan and a second closing. A construction-to-permanent loan bundles both into one closing, which saves on closing costs and removes the risk of not qualifying for permanent financing later.
What down payment does construction-to-permanent financing require?
Commercial construction-to-permanent loans usually require 15% to 25% down (or equity in the land), because lenders view ground-up construction as higher risk than buying an existing building. Stronger borrowers and lower-risk property types get to the lower end of that range.
Who offers construction-to-permanent loans?
Banks, credit unions, and specialty commercial lenders. The SBA 504 program can also finance owner-occupied construction. The right lender depends on your property type, occupancy, and timeline, which is where getting matched to the right program saves time.