Construction-to-Permanent Financing: A Strategic Shift Toward Long-Term Stability

By Jason Wang, Assistant Vice President and Rich Davidson, Senior Vice President, Slatt Capital 

In today’s volatile interest rate environment, developers are increasingly turning to construction-to-permanent (C2P) loans as a strategic alternative to traditional short-term construction financing. This shift reflects a broader market preference for long-term financial certainty, especially as short-term rates remain elevated and cap rate compression continues to challenge underwriting assumptions. 

Why Construction-to-Perm? 

• Short-term rates  can be  often higher than long-term rates, making floating-rate debt less attractive. 

• Locking in a fixed rate upfront mitigates refinance risk. 

• Unpredictable exit cap rates have made it harder to underwrite take-out scenarios, especially for speculative projects. 

• Slower deal cycles and reduced liquidity in stabilized assets are pushing developers to plan for longer-term ownership. 

• Borrowers previously assumed long-term interest rates would drop significantly in the near future. That is no longer the prevailing market expectation, making early rate locks more appealing. 

Construction-to-Perm Financing Options 

1. Life Insurance Companies 

Life companies offer long-term fixed-rate construction-to-perm loans with the following parameters: 

• Minimum loan size typically starts at $15 million 

• Moderate leverage, around 55% loan-to-cost (LTC) 

• Fixed terms of 5–15 years, with amortization up to 30 years 

• Interest-only periods during construction 

• Non-recourse or partial recourse structures 

• Prepayment is generally structured as yield maintenance, with step-down options near the end of the term 

These loans are ideal for institutional-quality projects seeking rate certainty and minimal refinance risk. 

2. Community Banks via Forward Rate Swap 

Banks can structure construction-to-perm loans using forward-starting interest rate swaps. This allows borrowers to float during construction and lock in a fixed permanent rate at closing. Parameters include the following: 

• Loan Size: Typically $5M and up;  

• Depository Requirement: Borrowers are often required to establish a depository relationship 

• Prepayment Penalty: Involves unwinding the swap contract 

• Recourse: These loans are usually full recourse, with personal guarantees required 

• Underwriting Sensitivity: Banks require high certainty on future cash flow, making this structure best suited for fully pre-leased commercial or multifamily projects 

This structure is best for borrowers seeking rate certainty with predictable income streams. 

3. C-PACE (Commercial Property Assessed Clean Energy) 

C-PACE financing can be used as a primary or supplemental source of capital for construction-to-perm structures, particularly for projects with energy efficiency, renewable energy, or resiliency components. Here are some parameters: 

• Structure: Repaid through a property tax assessment, which gives it priority over the senior mortgage 

• Prepayment Penalty: Typically applies during the first 5–10 years, depending on jurisdiction and lender 

• Lender Acceptance: More banks are beginning to accept C-PACE in the capital stack 

• Leverage Efficiency: When combined with senior debt, C-PACE can help achieve a higher total loan amount while maintaining the same DSCR 

C-PACE is particularly attractive for projects with sustainability goals or those seeking to optimize leverage without adding mezzanine debt. 

4. HUD 221(d)(4) for Multifamily 

This FHA-insured program is designed for new construction or substantial rehabilitation of multifamily properties. While it offers attractive long-term financing, the process is highly rigorous and time-intensive. Consider the following: 

• Underwriting: Very strict guidelines, requiring detailed financials, market studies, and third-party reports  

• Timeline: Can take up to 12 months to close 

• Regional Oversight: Governed by HUD regional offices, with varying requirements 

• Labor Requirements: Some regions require union labor and/or prevailing wages, which can significantly increase construction costs 

Despite the complexity, HUD 221(d)(4) remains a powerful tool for developers focused on long-term ownership and affordability. 

Conclusion 

Each construction-to-permanent financing option comes with its own advantages, limitations, and structuring nuances. To determine the best fit for your project, please contact Slatt Capital for tailored guidance and lender insights.