CRE Construction Lending 101: What Borrowers Need to Know in 2025

By Thomas Preston, Managing Director 

In today’s commercial real estate (CRE) environment, construction lending has become more complex and selective than ever. As interest rates remain elevated and lenders grow increasingly cautious, understanding the fundamentals of CRE construction financing is essential for developers and investors looking to bring projects to life. 

At its core, construction lending provides short-term financing to cover the costs of building a commercial property. These loans are typically interest-only during the construction phase and are repaid or refinanced once the project is stabilized. But in 2025, securing this type of financing requires more than just a solid business plan—it demands creativity, strong sponsorship, and a well-structured capital stack. 

Take, for example, a recent Slatt Capital transaction in Florida. A developer with a mixed-use project had everything in place: a signed guaranteed maximum price (GMP) contract, 30% presales, and full permitting. Yet, traditional banks would only offer 60% loan-to-cost (LTC). To bridge the gap, Slatt structured a bifurcated capital stack, combining senior debt from a regional bank with preferred equity from a family office familiar with the submarket. This approach added $7 million in leverage without diluting the developer’s ownership—a win-win in a tight lending climate. 

Another example involved a boutique hotel repositioning. Initial bridge loan offers came in at 65% LTC with double-digit interest rates and heavy reserves. Slatt helped the sponsor reframe the deal by presenting confirmed event contracts, local tourism data, and a clear 9-month stabilization-to-sale plan. The result? A revised offer at 70% LTC with a lower rate and more favorable terms. 

Use Cases Across Development Stages 

Construction lending now encompasses a variety of use cases, each requiring tailored strategies: 

• Ground-Up Development: New builds from the foundation up—including multifamily, retail, and industrial projects. 

• Light/Medium Rehab: Cosmetic or moderate renovations to existing assets. 

• Heavy Rehab: Major structural improvements or repositioning of properties. 

• Adaptive Reuse: Conversion of obsolete or underutilized buildings into new asset classes. 

Predevelopment Financing 

Developers often seek financing for predevelopment expenses after acquiring, or while acquiring, land. Predevelopment costs are generally soft costs—architectural, engineering, permits, and entitlements. Larger developers frequently pay these out of pocket, sometimes leveraging debt for the land itself. Once entitlements are approved, land valuation typically increases. Lenders scrutinize the developer’s cost basis—comprised of land acquisition value minus debt plus soft costs—before proceeding with financing. 

Entitlements 

Entitlements are essential and vary by jurisdiction and project type. Common construction entitlements include: 

• Zoning Approvals: Determine allowable land use per local regulations. 

• Building Permits: Authorize construction and validate code compliance. 

• Environmental Impact Assessments: Analyze the potential environmental effects of a project. 

• Variances: Approve exceptions to specific zoning requirements. 

• Conditional Use Permits: Allow atypical land use, often with stipulations. 

• Utility Approvals: Required for utility connections or installations. 

• Road Approvals: Necessary for new roads or modifications linked to the project. 

Budgeting: Soft and Hard Costs 

Successful projects require a detailed budget, clearly delineating: 

• Soft Costs: Architectural, engineering, plans, permits, environmental reviews, accounting, surveys, finance, insurance, marketing, sales, and legal fees. 

• Hard Costs: Materials (lumber, concrete, steel, windows, doors, insulation), labor, equipment/tools, systems (plumbing, electrical, solar), and FF&E—furniture, fixtures, and equipment. 

Asset Class Underwriting 

Underwriting standards differ by asset class: 

• Multifamily: Focus on pro forma projections. 

• Retail: Pro forma required, often with preleasing commitments. 

• NNN (Triple Net Lease): Requires lease-in-tow agreements. 

• SFR Spec (Single-Family Residential Speculative): Considered highly speculative. 

• Special Use: Includes restaurants, hospitality, gas stations, and other unique properties. 

Financing Structures 

The capital stack for CRE projects is multifaceted, often including: 

• Senior Debt 

• General Partner (GP) Equity 

• Limited Partner (LP) Equity 

• Preferred Equity/Mezzanine Debt 

• C-PACE (Commercial Property Assessed Clean Energy) Financing 

• Subordinate or Seller Financing 

Developers may also leverage sources such as banks, debt funds, HUD, and life insurance companies to structure the optimal financing package. 

Underwriting and Risk Assessment 

Modern underwriting incorporates: 

• Interest rate benchmarks (SOFR, WSJ Prime) 

• LTC (Loan-to-Cost) vs LTV (Loan-to-Value) analysis 

• Developer experience and track record 

• Exit pro forma supported by market research 

• GP/LP sponsorship, with equity invested ahead of debt 

• Interest reserve accounts for interest-only payments during construction 

• Yield on Cost (YOC): Lenders look for YOC 7.0%+ depending on project/asset 

• Stabilized DSCR (Debt Service Coverage Ratio) and debt yield metrics 

• Completion guarantees and interest rate caps 

• Budget contingencies to buffer unforeseen expenses 

Risk Evaluation 

Lenders and developers must diligently evaluate risks, including: 

• Historical performance of the general contractor 

• Sponsor liquidity and financial strength 

• Commodity price risk (concrete, steel, lumber, copper) 

• Fluctuating interest rates 

• Labor market challenges (union vs. non-union labor) 

• Lender solvency and reliability 

• City/county inspections and regulatory reviews 

• General economic factors: local employment, key industries, educational anchors 

Trends Shaping CRE Construction Lending in 2025 

The CRE lending landscape in 2025 is being shaped by several key trends: 

• Liquidity Crunch: A tight liquidity environment is forcing lenders to be more selective. Borrowers with strong balance sheets and proven track records are more likely to secure favorable terms. 

• Creative Capital Stacks: With traditional banks pulling back, developers are increasingly turning to non-bank lenders, preferred equity, and mezzanine debt to fill funding gaps. 

• Data-Driven Risk Mitigation: Lenders are demanding more robust underwriting, including third-party market studies, pre-leasing commitments, and detailed exit strategies. 

• Focus on Resilient Asset Classes: Industrial, multifamily, and data centers continue to attract capital, while office and retail remain under scrutiny. 

• Regional Nuances: Markets with strong job growth, housing demand, and infrastructure investment—like parts of Texas, Florida, and the Southeast—are seeing more lender interest. 

Construction lending in 2025 requires more sophistication than ever before. Understanding the nuances of use cases, entitlements, budgeting, asset class underwriting, capital stack structuring, and risk assessment is critical. By leveraging strategic guidance from experienced advisors, developers can navigate this complex environment and successfully bring new projects to market—even in a challenging lending climate.