Build-to-suit industrial construction backed by investment-grade tenants remains one of the most executable financing structures in today's commercial real estate market. This $27 million construction-to-permanent facility in South Phoenix demonstrates how the right combination of credit quality, location, and execution timeline can deliver competitive terms even in a complex rate environment.
The Deal
The sponsor needed $27 million to construct a purpose-built industrial distribution facility in the South Phoenix/Goodyear corridor. The project featured a signed long-term triple-net lease with a national logistics tenant carrying investment-grade credit ratings. The borrower required a construction-to-permanent structure with rate certainty on the permanent financing, given the 18-month construction timeline and volatile interest rate environment.
The 200,000 square foot facility was designed to the tenant's specifications for last-mile distribution operations, with 36-foot clear heights, ESFR sprinkler systems, and 60 dock doors. The location provided immediate access to the I-10 corridor and proximity to Phoenix Sky Harbor, critical factors for the tenant's operational requirements.
The Challenge
While build-to-suit deals with investment-grade tenants appear straightforward, the execution required coordination across multiple moving parts. The sponsor needed rate protection on the permanent financing to maintain project economics, but most construction lenders were reluctant to provide long-term rate locks without significant cost.
The timing presented additional complexity. The tenant required occupancy within 18 months to meet their distribution network expansion timeline. This compressed schedule eliminated slower-moving capital sources and required a construction lender capable of closing within 60 days of application.
Market conditions in early 2026 also created pricing volatility. While industrial fundamentals remained strong in the Phoenix market, construction costs had stabilized but remained elevated from pre-2022 levels. The permanent financing needed to price competitively against the tenant's internal cost of capital for owned versus leased facilities.
The Solution
We structured the financing as a true construction-to-permanent facility with a regional bank providing the construction phase and a national life insurance company forward-committing to the permanent financing. The life company's dedicated industrial desk specialized in build-to-suit transactions and could underwrite based on the tenant credit and lease structure rather than requiring stabilized operations.
The construction phase closed at 75% loan-to-cost with an 18-month term and two six-month extension options. Pricing floated at prime plus 50 basis points with a 1.5% floor, reflecting the strong tenant credit and pre-leased structure. Interest was reserved within the loan amount to minimize equity requirements during construction.
The permanent commitment locked at conversion to a 65% loan-to-value facility based on a 6.5% capitalization rate applied to the first-year net operating income. The life company priced the permanent at 10-year Treasury plus 175 basis points, locked at construction loan closing, with a 25-year amortization schedule.
Critical to execution was the life company's ability to underwrite the transaction based on the executed lease and tenant financials rather than requiring completion and occupancy. This eliminated conversion risk and provided rate certainty from day one of construction.
The Outcome
The construction loan closed 52 days from initial letter of intent, meeting the sponsor's aggressive timeline requirements. The rate lock on the permanent financing protected the borrower against Treasury volatility during the construction period, maintaining project returns within underwriting parameters.
The structure delivered several advantages beyond basic financing needs. The construction lender's local market presence provided faster permitting and inspection coordination. The life company's industrial expertise streamlined the permanent conversion process, eliminating typical construction-to-permanent execution risk.
Perhaps most importantly for the sponsor's long-term strategy, the life company expressed interest in additional build-to-suit opportunities within their industrial portfolio. This relationship provides a pathway for future developments as the tenant's expansion plans continue across other Southwest markets.
The transaction demonstrates how investment-grade build-to-suit industrial remains one of the most attractive risk-adjusted opportunities in commercial real estate financing. With the right tenant credit, experienced sponsor, and properly structured capital stack, these deals continue to attract competitive terms from both construction and permanent lenders despite broader market volatility.