Ground Up Construction Financing: What Developers Need to Know
Building from scratch is a different game than acquiring and repositioning an existing asset. The capital structure, the underwriting logic, and the execution risk are all different. Ground up construction financing is built specifically for new development, and understanding how it works before you break ground can be the difference between a project that executes cleanly and one that stalls mid-draw.
This guide covers everything a developer needs to know: how the loan is structured, how draws work, what lenders actually evaluate, how to build a budget that survives lender scrutiny, and what exit options look like at the other end.
What Is Ground Up Construction Financing?
Ground-up construction financing is a short-term financing structure used to fund the development of a new property, often from an unimproved site or from a site where existing improvements will be demolished and replaced. It covers all costs associated with vertical construction, from site preparation and foundation work through framing, mechanical systems, finishes, and certificate of occupancy.
Unlike a traditional mortgage or permanent loan, funds are not released in a single lump sum at closing. Instead, capital is disbursed in draws tied to specific construction milestones. The lender reviews progress at each stage before releasing the next tranche. This protects the lender’s position and ensures capital is deployed only as verified work is completed.
These loans are often structured as short-term bridge or construction loans with terms designed around the project timeline, which may fall in a range such as 12 to 24 months for many projects but can vary based on scope, asset type, permitting, construction complexity, and exit strategy.
Brora Capital provides private bridge financing for qualifying construction and development projects, with loan sizes generally ranging from $4 million to $40 million across commercial, multifamily, mixed-use, and residential investment properties in Florida and the Southeast.
How Ground Up Construction Financing Is Structured
Loan-to-Cost and Loan-to-Value
Lenders underwrite ground up construction loans using two primary metrics. Loan-to-cost (LTC) measures what percentage of the total project cost the lender will finance. Loan-to-value (LTV) measures the loan against the projected value of the completed asset, sometimes called the as-completed value or after-construction value.
In many private construction lending scenarios, lenders may size the loan using both loan-to-cost and as-completed loan-to-value constraints. LTC and LTV thresholds vary by lender, market, asset type, sponsor experience, collateral quality, budget credibility, and exit strategy. Borrowers should expect to contribute meaningful equity, and the final loan amount is usually determined by the most conservative applicable constraint.
The Draw Schedule
The draw schedule is the operational backbone of a construction loan. It maps each funding tranche to a specific construction milestone, agreed upon at loan origination. Common milestones include demolition or site clearing, foundation completion, framing completion, rough-in work (mechanical, electrical, plumbing), drywall and exterior, and final completion.
Inspection clearance is typically one of the key conditions for a draw release, but disbursement also depends on lender review, complete documentation, lien waiver or release requirements, title/escrow requirements if applicable, and satisfaction of the loan documents.
Interest Reserves
Many ground-up construction bridge loans include an interest reserve, either funded through loan proceeds or borrower equity, to cover interest during part of the construction period. Reserve coverage varies by project timeline, draw schedule, loan structure, income profile, and lender policy. An interest reserve may reduce or defer out-of-pocket monthly interest payments, but the mechanics depend on the loan documents.
The interest reserve is calculated based on the anticipated loan balance at each stage of the draw schedule and the applicable interest rate. Because the loan balance increases with each draw, interest accrues on a larger balance over time. Lenders build this ramp into the reserve calculation. Developers should verify that the reserve covers the realistic construction timeline, including a buffer for delays.
Understanding Hard Costs vs. Soft Costs
One of the most common budget errors in ground up construction projects is underestimating soft costs. Lenders evaluate both, and a budget that is short on soft cost coverage creates problems at underwriting and during construction.
Hard Costs
Hard costs vary widely by asset type, height, materials, labor availability, site conditions, finish level, insurance requirements, and municipality. For that reason, developers should avoid relying on generic cost-per-square-foot assumptions and should support budgets with current GC bids, quantity takeoffs, and market-specific cost data.
Soft Costs
Soft costs can represent a meaningful share of total project cost and should be modeled explicitly. The percentage varies based on design complexity, entitlement requirements, permitting and impact fees, financing costs, legal/title costs, insurance, and marketing or pre-leasing needs. Key soft cost categories include:
- Architecture and engineering fees: vary by project type, design complexity, jurisdictional requirements, and consultant scope
- Permitting and impact fees: highly variable by municipality; can be significant in Florida’s larger cities
- Legal and title costs: loan origination, closing costs, and construction contract review
- Project management and developer overhead: often 3 to 5 percent of total project cost
- Marketing and pre-leasing costs: for projects where lease-up begins before completion
- Financing costs: loan origination fees, interest reserves, and lender due diligence fees
A realistic pro forma accounts for soft costs in full before presenting to a lender. Lenders will identify gaps in soft cost budgeting during underwriting and will either require the borrower to cover them from equity or adjust the loan structure to account for the risk.
Contingency
A construction contingency is generally expected in a lender-ready budget. The appropriate amount depends on project complexity, site conditions, design completion, contractor pricing, materials volatility, and sponsor experience.
What Lenders Actually Evaluate
Ground up construction financing carries more underwriting complexity than acquisition or stabilized asset lending because the primary collateral does not yet exist. Lenders evaluate these factors closely:
Development Track Record
The single most important non-financial factor a lender evaluates is whether the borrower has successfully completed comparable projects. For a first-time developer, this means partnering with an experienced co-sponsor or general contractor with a verifiable track record. Private lenders tend to be more flexible here than banks, but experience still matters because it directly affects the probability of project completion.
General Contractor Quality
The general contractor is the lender’s execution risk. A licensed, bonded, insured contractor with a portfolio of completed comparable projects is a significant underwriting positive. Lenders may review the GC’s license status, insurance, relevant project experience, references, capacity, contract terms, and, where applicable, bonding capacity or financial strength. A weak GC on a strong project creates more lender concern than a strong GC on a challenging project.
Project Feasibility and Exit Strategy
Does the project pencil? The lender’s underwriting team will independently evaluate the budget, the as-completed value, and the exit strategy. Developers need a clear, realistic answer to the question of how the loan gets repaid. The three primary exit strategies are sale upon completion, refinance into permanent financing, and hold for rental income. Each requires a different analysis and has different implications for loan structure.
Sponsor Liquidity
Lenders often want to see liquidity beyond the equity contributed to the project so the borrower can address cost overruns, delays, carrying costs, or change orders. The appropriate liquidity cushion varies by deal size, project complexity, leverage, sponsor experience, and lender policy.
Exit Strategy Options and How They Affect Loan Structure
The exit strategy is not just a formality. It directly affects how the lender structures the loan and what terms are offered.
|
Exit Strategy |
How It Works |
Lender Implication |
|---|---|---|
|
Sale upon completion |
Sell the completed asset to a third-party buyer. Loan is repaid from sale proceeds. |
Lenders may require a presale agreement or strong market comps supporting projected sale price. |
|
Refinance to permanent debt |
Once the asset is stabilized (occupied and cash-flowing), refinance into a long-term commercial loan at lower rates. |
Lender evaluates as-stabilized DSCR and projected permanent loan eligibility. Bridge term must provide enough runway. |
|
Hold for rental income |
Retain the asset as an income-producing investment. Permanent loan services debt from rental income. |
Lender underwrites to stabilized NOI and occupancy projections. Conservative vacancy assumptions matter. |
|
Condo or unit sell-off |
Sell individual units within a larger development (condos, townhomes) as they complete. |
Lender structures partial release provisions tied to individual unit sales. More complex but common in South Florida condo development. |
Types of Lenders for Ground Up Construction
Not all construction financing comes from the same source. Understanding the lender landscape helps developers match their project to the right capital source.
|
Lender Type |
Best Fit For |
|---|---|
|
National/regional bank |
Well-capitalized sponsors with strong relationships, conventional asset types, and longer approval timelines acceptable. |
|
Community bank or credit union |
Smaller projects, local sponsor relationships, straightforward asset types, longer approval processes |
|
Private bridge lender |
Speed-sensitive transactions, experienced sponsors, non-conventional structures, and projects where flexible underwriting and efficient internal review are important. Closing timelines vary based on borrower preparation, title, insurance, valuation, permits, legal documentation, third-party reports, and lender approval. |
|
Construction-to-permanent lender |
Projects where a single lender handles both the construction phase and the permanent takeout, reducing execution risk at refinance |
|
Family office or private equity |
Larger projects exceeding conventional bridge loan thresholds, equity-heavy structures, longer relationships |
Common Mistakes Developers Make with Construction Financing
Most problems in ground up construction financing are avoidable with better preparation. These are the issues that create the most friction:
- Underestimating soft costs: presenting a budget with 8 percent soft costs when the realistic number is 18 percent creates a credibility problem with lenders from the start
- No contingency: lenders interpret a budget without contingency as inexperience or as a sign that the hard costs are already inflated
- Weak GC documentation: not having a signed contract, a detailed scope of work, and the GC’s licensing and insurance documentation ready at application
- Misaligned draw schedule and cash flow: a draw schedule that does not match the contractor’s payment needs creates project delays
- Underestimating the permit timeline in Florida: in some municipalities, permitting adds 60 to 120 days to a project before a shovel hits the ground, and this needs to be in the schedule
- Presenting without a clear exit: if the exit strategy is unclear, lenders may request additional documentation, reduce proceeds, require more reserves or equity, adjust structure, or decline the request.
Frequently Asked Questions
What is ground up construction financing?
Ground up construction financing is a short-term loan, typically 12 to 24 months, used to fund new property development on an unimproved site. Funds are disbursed in draws tied to construction milestones rather than in a lump sum. The loan is repaid or refinanced into permanent financing once the project is complete.
How much of my project costs will a lender cover?
Private bridge lenders typically finance 70 to 80 percent of total project cost based on loan-to-cost (LTC) underwriting, with the borrower contributing 20 to 30 percent as equity. As-completed loan-to-value is a secondary check, with most lenders capping at 65 to 70 percent of projected stabilized value.
What is the difference between hard costs and soft costs in construction financing?
Hard costs are direct physical construction expenses: site work, foundation, framing, finishes, and mechanical systems. Soft costs are indirect project expenses including architecture, engineering, permitting, legal fees, and financing costs. Soft costs typically represent 15 to 25 percent of total project cost and are frequently underbudgeted by less experienced developers.
How fast can a ground up construction bridge loan close?
Closing timelines vary by transaction. A prepared borrower with complete documentation, clear site control, a credible budget, an experienced GC, clean title, appropriate insurance, and no major third-party delays may be able to move faster with a private lender than with conventional bank financing. Ground-up construction loans are more complex than simple acquisition bridges, so borrowers should avoid assuming a fixed 10-, 14-, or 21-day timeline.
Do I need to make interest payments during construction?
Most ground up construction bridge loans include an interest reserve built into the loan amount at closing, covering 6 to 12 months of interest payments. This eliminates out-of-pocket interest during the build phase. The reserve is drawn against monthly as interest accrues and reduces the available loan balance.
Ground Up Construction Financing in Florida
Florida’s development market moves at a pace that institutional lending timelines often cannot match. Land control windows are short, competitive projects cannot wait 90 days for a bank approval, and permit timelines vary significantly by municipality. Ground up construction bridge financing is built for this environment.
Florida continues to experience significant population growth, with recent state and Census-related reporting showing the state surpassing 23 million residents and adding hundreds of thousands of residents annually. This long-term population growth continues to support development demand across many Florida markets, although demand varies by asset type, submarket, affordability, insurance costs, and supply conditions
How Brora Capital Approaches Ground Up Construction Financing
Brora Capital is a Florida-based private bridge lender specializing in short-term real estate financing for developers, investors, and brokers. For qualifying ground-up construction projects, Brora evaluates each request based on the specific transaction, including asset type, location, site control, construction budget, contractor quality, sponsor experience, liquidity, draw structure, and exit strategy.
Loan sizes generally range from $4 million to $40 million across Florida and the Southeast, covering commercial, multifamily, mixed-use, and residential investment projects. The process starts with understanding the deal, not fitting it into a rigid program. If you are evaluating financing for a new build, the right starting point is a direct conversation about your project’s scope, timeline, budget, and exit.
This article is for informational purposes only and does not constitute a loan offer, commitment to lend, legal advice, construction advice, tax advice, insurance advice, or investment advice. Loan terms, proceeds, rates, fees, reserves, draw structures, closing timelines, documentation requirements, and eligibility are subject to underwriting, due diligence, inspection results, title review, insurance availability, borrower qualifications, loan documentation, lender approval, market conditions, and applicable law.
Explore Brora’s construction bridge loan structure or connect with the team to discuss your project.