Commercial real estate development (CRED) lending
Commercial real estate development (CRED) lending
Commercial real estate development lending sits at the intersection of construction risk and real estate valuation, financing a property through its riskiest phase, before it exists and before it earns any income, using metrics that look similar to a conventional mortgage but behave very differently in practice.
How it works
CRED financing funds the construction or major renovation of a commercial property, an office building, a multifamily complex, a retail or industrial development, secured against the land, the improvements as they're built, and ultimately the completed property itself. Like project financing generally, capital is drawn in stages tied to construction progress rather than disbursed upfront.
Two ratios anchor how these loans get sized, and the distinction between them matters. Loan-to-cost (LTC) measures the loan against the total cost of construction, land plus hard and soft construction costs, and governs how much of the actual development budget the lender is financing versus how much equity the sponsor has to contribute. Loan-to-value (LTV), calculated against the property's projected value once complete, is a forward-looking estimate rather than a value that exists yet, since the property being valued doesn't exist in its finished form at the time the loan is underwritten.
Draw schedules release capital against completed construction stages (foundation, framing, systems, finishing), typically verified by an independent inspector before each disbursement, mirroring the milestone-based discipline of project financing more broadly. Completion guarantees, whether from the developer, a general contractor, or a third party, provide recourse if the project stalls or runs over budget before it reaches a state where it can be leased, sold, or refinanced into permanent financing.
Why it matters
The gap between loan-to-cost and loan-to-value is where a lot of the real risk in CRED lending actually sits. A loan sized conservatively against cost can still be exposed if the completed property's actual market value comes in below the projection used to underwrite it, because rental rates softened, cap rates expanded, or the local market shifted during the construction period, none of which the loan-to-cost ratio protects against at all.
Construction-phase risk is also qualitatively different from the risk profile once a property is completed and leased. An unfinished building generates no income and has limited resale value as-is; a completed, occupied building has both. That transition, sometimes called the "construction-to-permanent" handoff, is where a CRED loan either gets refinanced into stable, income-backed permanent financing or, if the project underperformed, where the lender's actual recovery prospects get tested.
Where this shows up in Rekord
CRED deals in Rekord's markets are underwritten against both loan-to-cost and projected loan-to-value separately, with draws gated by independent construction verification. For the broader family of long-ramp, milestone-financed deal types, see Project financing: long-ramp construction and infrastructure debt.