Construction Loans & Draws
A construction loan funds the build. Unlike a mortgage, you don't get the money all at once.
How draws work
- The loan is funded in draws as work is completed.
- Each month you submit a draw request with backup (pay applications, lien waivers, inspections).
- The lender (often via an inspector) verifies progress before releasing funds.
- The lender holds retainage and confirms the project stays "in balance" (enough loan left to finish).
Key terms
- LTC / LTV — loan as a % of cost or value (limits how much they'll lend).
- Interest reserve — borrowed money set aside to pay interest during construction.
- Recourse vs. non-recourse — whether you personally guarantee the loan.
- Takeout / permanent loan — the long-term loan that pays off the construction loan once stabilized.
Cash flow reality
Draws lag the work, and you fund equity first. Manage cash tightly — a draw delay can stall the job.
Going Deeper (Intermediate)
A construction/development loan funds the build, disbursed in draws as work is completed against the budget, is interest-only during construction, and is repaid by sale or a permanent (takeout) loan.
Advanced / Pro-Level
How construction debt actually works:
- Loan sizing by LTC (loan-to-cost, ~65–75%) and LTV; equity typically funds first (or pari passu).
- The draw process: lender inspections, lien waivers, and title updates before each disbursement.
- An interest reserve capitalizes interest during construction (no income yet).
- Recourse vs. non-recourse, and completion guarantees.
- A takeout/permanent loan or the sale repays it. Construction loans carry a risk premium (higher rate) because there's no asset/income until it's built.
Practice Challenge
Why does a construction lender release money in inspected draws with lien waivers, rather than funding the whole loan up front? (Answer: to ensure money only pays for work actually in place and that subs/suppliers are paid (no liens) — protecting the lender's collateral; draws tied to inspections + lien waivers prevent funding work that isn't done or leaving lienable unpaid bills on their security.)
In Practice
A developer funds equity first and the draw lags the work — a cash crunch they didn't plan for. Construction loans pay in arrears; manage the gap.
Common Mistakes to Avoid
- Not planning for draws lagging the work
- Forgetting equity goes in first
- Running out of interest reserve
Takeaway: Draws lag the work and you fund equity first — manage cash tightly.
Educational content — not legal, engineering, or financial advice. Requirements vary by jurisdiction; always confirm with the local authority and your professional team.