Commercial construction loan rates are set deal by deal: a lender adds a spread to a benchmark index, charges interest only on the funds drawn, and layers on fees and reserves. Mission Valley Capital, a San Diego-based commercial finance and business lending company, does not publish a rate sheet. This guide explains how that pricing is built and how to compare offers.
How are commercial construction loan rates structured?
Most construction loans are priced as an index plus a spread. The index is a published market benchmark, such as the Prime Rate or the Secured Overnight Financing Rate (SOFR), and the spread is the lender’s margin added on top. A spread is the fixed percentage a lender adds to the index to set your interest rate.
Because the index moves with the market, most construction loans carry a floating rate. Some lenders set a floor, which is a minimum rate the loan cannot fall below even if the index drops. Others offer a fixed rate for the construction period, often at a higher starting cost than a floating option.
The rate is only one line of the price. Fees, reserves, extension terms and the exit plan can change your total cost as much as the spread does. That is why two term sheets with similar rates can produce very different project budgets.
Commercial loan pricing and terms are structured around the borrower, property, financing request and lender requirements. Contact Mission Valley Capital for a transaction-specific quote.
Do you pay interest on the full construction loan amount?
Usually not. Construction loans fund in draws as work is completed, and interest accrues only on the balance drawn so far. Early in the project, when little has been drawn, monthly interest is low. It rises as the building goes up and more of the loan is outstanding.
Most construction loans are interest-only during the build. You pay no principal until the loan converts to permanent financing or is paid off by a refinance or sale.
Many lenders also require an interest reserve. An interest reserve is a portion of the loan set aside to pay the monthly interest during construction, so the borrower is not paying it out of pocket. The reserve is part of the loan amount, which means you also pay interest on the reserve as it is used. When you compare offers, check how each lender sizes the reserve and whether it is realistic for your schedule. A reserve that runs out before completion becomes a cash call.
What fees come with a construction loan besides the interest rate?
Expect several fees on top of the rate. The common ones are an origination fee at closing, an exit fee at payoff on some private and bridge-style loans, and extension fees if the project needs more time than the initial term allows.
An extension fee is a charge for lengthening the loan term, often paired with conditions such as a minimum completion percentage or updated appraisal. Delays are common in construction, so the extension terms matter. A loan with a lower rate but tight extension conditions can cost more than a slightly higher-priced loan with clear extension options.
There are also project-level costs that lenders pass through: draw inspection fees, construction consultant or budget review fees, appraisal and third-party reports, title and legal costs. Some lenders also charge an unused-line or commitment fee. Ask for every fee in writing, and model them against your timeline rather than looking at the rate alone. Our guide on how to read a commercial loan term sheet walks through where these items usually appear.
What drives the rate a lender offers on a construction project?
Lenders price construction risk. The more certain the project looks, the tighter the pricing tends to be. The main factors are leverage, the sponsor’s track record, pre-leasing or pre-sales, the contractor, the construction contract and the recourse structure.
- Leverage: Lower loan-to-cost and more borrower equity reduce the lender’s exposure. Loan-to-cost is the loan amount divided by the total project cost, including land, hard costs and soft costs.
- Sponsor experience: A developer who has completed similar projects, on budget, is viewed as lower risk than a first-time builder.
- Pre-leasing or pre-sales: Signed leases or sales contracts show demand before the building is finished.
- Contractor: Lenders review the general contractor’s history, financial strength and licensing.
- GMP contract: A GMP contract is a construction contract that caps what the owner pays the contractor for the defined scope of work. Lenders often prefer it to a cost-plus contract because it limits overrun risk.
- Recourse: Full or partial personal recourse and completion commitments from the sponsor usually support better terms than non-recourse structures. See recourse vs. non-recourse commercial loans.
Property type, location, market conditions and the exit strategy also factor in.
How does pricing differ between bank, SBA 504 and private construction loans?
The lending channel shapes the price as much as the project does. Banks, the SBA 504 program and private-money lenders each price construction risk differently and suit different borrowers.
| Channel | Who it usually fits | How pricing tends to work |
|---|---|---|
| Bank construction loan | Experienced sponsors, solid equity, strong financials | Index plus spread, floating; tighter underwriting, often with recourse |
| SBA 504 construction | Owner-occupied businesses building their own facility | A bank first lien plus a second lien through a Certified Development Company (CDC); each piece is priced separately |
| Private money | Deals that need speed, higher leverage or flexible underwriting | Higher pricing and fees in exchange for flexibility and shorter terms |
No channel is better in every case. An investor building a spec project will not qualify for SBA 504, which requires the business to occupy the new building (at least 60% for new construction under 13 CFR 120.131), while a business owner building a facility for its own use may find 504 a strong fit. Private money can make sense when a bank has stalled a deal or the timeline is short. Our construction loans in California page outlines the options we arrange.
How should you compare construction loan term sheets?
Compare the total cost of the loan over your expected timeline, not the headline rate. Build a simple model that applies each lender’s rate, fees and reserve to your draw schedule, then test it against a delay.
Line up these items side by side for each offer:
- Index, spread and any rate floor
- Loan amount, loan-to-cost and required equity
- Interest reserve size and how it is funded
- Origination, exit, extension and draw fees
- Initial term, extension options and their conditions
- Recourse, completion and carry commitments
- Draw process, inspection timing and retainage
- Conversion to permanent financing or refinance requirements
- Prepayment terms (see prepayment penalties on commercial loans)
Illustrative example — not a client transaction and not an offer of terms. A developer receives two offers. Offer A has a lower spread but a small interest reserve and one short extension with a high completion threshold. Offer B has a higher spread, a larger reserve and two extensions with lighter conditions. If the build runs long, Offer A may require a cash infusion or a costly extension, while Offer B absorbs the delay. The cheaper-looking loan is not always the cheaper loan.
Frequently asked questions
Does Mission Valley Capital publish construction loan rates?
No. Commercial loan pricing and terms are structured around the borrower, property, financing request and lender requirements. Contact Mission Valley Capital for a transaction-specific quote. We work through banks, SBA lenders, alternative lenders and private-money sources, so pricing depends on which channel fits the project.
Are construction loan rates higher than permanent loan rates?
Often, yes. A building under construction produces no income and carries completion risk, so lenders usually price construction debt above stabilized permanent debt on the same property. Once the project is complete and leased or occupied, many borrowers refinance into longer-term permanent financing.
Can I lock a fixed rate on a construction loan?
Some lenders offer a fixed rate for the construction period, and some borrowers buy an interest rate cap on a floating loan. Availability depends on the lender and project. Fixed pricing may start higher than a floating option, so compare both against your expected draw schedule and timeline.
How does the interest reserve affect my loan amount?
The interest reserve is usually built into the loan, which raises the total loan amount and the interest you pay. It also reduces how much cash you need during construction. Lenders size it from the projected draw schedule, so an unrealistic schedule can leave the reserve short before completion.
What is the difference between ground-up and renovation construction pricing?
Ground-up projects start from land and carry more entitlement, schedule and cost risk, so lenders often apply more conservative leverage and pricing. Renovation projects start with an existing structure, and sometimes existing income. Our ground-up construction financing page covers new-build requirements in more detail.
If you are planning a build and want to see how lenders would price it, start with our conventional construction loans page or call Mission Valley Capital at (844) 347-1070 to talk through your budget, timeline and exit plan.
All financing is subject to lender approval, underwriting, eligibility requirements, applicable terms and conditions. Rates, leverage, loan amounts and closing timelines vary by transaction. Mission Valley Capital operates under California Finance Lenders License #60DBO-57763.
