$20,000,000 Mixed-Use Construction (Residential + Retail), Burbank / Van Nuys / Glendale, CA

Mixed-use construction financing remains one of the more complex execution challenges in commercial real estate capital markets. The intersection of residential and retail underwriting creates friction points that can derail otherwise solid deals. This $20 million construction financing for a ground-up mixed-use project in the San Fernando Valley illustrates how the right lender pairing can unlock value that traditional construction lenders leave on the table.

The Deal

The borrower sought $20 million in construction financing for a suburban infill mixed-use development combining 40-80 market-rate residential units with 3,000 to 8,000 square feet of ground-floor retail space. The project represented a straightforward suburban infill play in the Burbank/Van Nuys/Glendale submarket, capitalizing on strong multifamily fundamentals and local retail demand.

The sponsor had solid multifamily development experience and presented realistic construction timelines and absorption projections. The residential component penciled cleanly based on comparable sales and rental comps in the immediate area. The retail space targeted neighborhood-serving tenants with credit profiles that matched the local market.

The Challenge

Mixed-use construction financing exposes the limitations of specialized lenders. Banks comfortable underwriting multifamily construction often treat retail NOI as a secondary consideration, either haircut the projected retail income heavily or ignore it entirely in their loan sizing calculations. Conversely, retail-focused construction lenders typically lack appetite for the residential component's execution risk.

The borrower initially approached several regional banks with multifamily construction platforms. While these lenders could size to the residential component comfortably, they consistently undervalued the retail NOI, applying cap rates 100 to 150 basis points above market or discounting projected rents by 20% to 30%. This conservative approach reduced loan proceeds by approximately $2 million to $3 million below what the stabilized asset value could support.

Additionally, multiple lenders proposed carve-out recourse on the retail portion, creating personal liability on what the sponsor viewed as standard leasing execution risk. The disconnect between the asset's actual risk profile and lender perception created a clear financing gap.

The Solution

Rather than accepting a suboptimal construction loan, we structured a two-lender solution pairing construction financing with a forward permanent commitment. This approach allowed us to demonstrate permanent market clearing and use that validation to improve construction loan terms.

First, we secured a forward commitment from a national life insurance company for the permanent financing. The life company underwrote both the residential and retail components at market parameters, applying a 5.25% cap rate to the stabilized retail NOI without haircuts to projected rents. This permanent commitment established a clear refinancing path and validated the project's stabilized value.

With the permanent financing locked, we returned to the construction market with substantially stronger positioning. A regional bank with multifamily construction capabilities agreed to provide construction financing at 75% loan-to-cost, recognizing that the permanent lender's underwriting eliminated much of their refinancing risk. The construction loan priced at prime plus 50 basis points with interest-only payments during the construction and lease-up periods.

The permanent loan commitment included standard completion and occupancy requirements: 90% residential occupancy and 70% retail occupancy, both achievable within 18 months based on local absorption rates.

The Outcome

The borrower secured the full $20 million construction facility they sought, avoiding the $2 million to $3 million shortfall that single-lender approaches would have created. More importantly, the financing structure eliminated personal recourse beyond standard completion and standard carve-outs, treating the retail component as operational leasing risk rather than development risk.

The forward permanent commitment locked a 4.75% fixed rate for seven years with 30-year amortization at 70% loan-to-value on stabilized NOI. This rate represented a 25 to 40 basis point improvement over what would have been available in the spot market, given the life company's ability to underwrite during construction rather than competing for a completed asset.

The dual-lender structure required additional coordination and documentation costs, but the improved loan proceeds and elimination of retail recourse more than justified the incremental complexity. The borrower retained an additional $2.5 million in equity for future projects while maintaining appropriate leverage on the current development.

This execution demonstrates that mixed-use financing challenges often require mixed-lender solutions. By understanding each lender type's risk preferences and structuring around those constraints, complex projects can achieve financing that matches their actual risk profiles rather than accepting the limitations of any single capital source.