Construction-to-permanent loans — also known as single-close construction loans, one-time-close loans, or construction-perm loans — combine the construction financing and permanent mortgage into a single loan that closes once. For commercial real estate developers, this structure eliminates the risk and cost of refinancing from a standalone construction loan into separate permanent financing upon project completion.

While not appropriate for every development project, construction-to-permanent loans offer compelling advantages in specific situations. This guide explains how these loans work, current market terms, qualification requirements, and the strategic considerations that determine whether a single-close structure is optimal for your project.

How Construction-to-Permanent Loans Work

A standard commercial development financing structure involves two separate loan closings: a construction loan to fund the build, followed by a permanent loan that replaces the construction debt after the project is completed and stabilized. Each closing involves separate applications, appraisals, underwriting, legal documents, and closing costs.

A construction-to-permanent loan consolidates these two transactions into one. The borrower applies once, closes once, and the loan automatically converts from construction financing to permanent debt upon meeting specified conversion conditions — typically project completion, certificate of occupancy, and achievement of minimum occupancy or debt service coverage thresholds.

Phase 1: Construction Period

  • Funds are advanced in draws as construction progresses, verified by third-party inspectors
  • Interest accrues only on the outstanding (drawn) balance
  • Payments are typically interest-only during construction
  • The interest rate during construction is usually floating (SOFR-based)
  • Duration: 12-36 months depending on project scope

Phase 2: Permanent Period

  • Begins upon loan conversion after meeting specified conditions
  • Interest rate converts to a fixed rate (locked at or before closing)
  • Payments convert to principal-and-interest on an amortization schedule
  • Standard permanent loan terms apply: 5-30 year terms, 25-30 year amortization
  • Prepayment penalties may apply during the permanent period

Current Market Terms (2026)

Multifamily Construction-to-Perm

  • Construction rate: SOFR + 275-425 bps (approximately 6.75-8.25%)
  • Permanent rate: 6.00-7.25% fixed
  • Loan-to-cost: 65-80%
  • Permanent LTV: 70-80% of stabilized value
  • Permanent term: 5-10 years, 25-30 year amortization
  • Minimum DSCR at conversion: 1.20-1.30x

Industrial / Warehouse Construction-to-Perm

  • Construction rate: SOFR + 300-450 bps (approximately 7.00-8.50%)
  • Permanent rate: 6.25-7.50% fixed
  • Loan-to-cost: 60-75%
  • Permanent LTV: 65-75%

Retail / Office / Mixed-Use Construction-to-Perm

  • Construction rate: SOFR + 350-500 bps (approximately 7.50-9.00%)
  • Permanent rate: 6.50-8.00% fixed
  • Loan-to-cost: 55-70%
  • Permanent LTV: 60-70%

Advantages of Construction-to-Permanent Loans

Elimination of Refinancing Risk

The most significant advantage is eliminating the risk that permanent financing will not be available — or will be available only at unfavorable terms — when the construction loan matures. With a construction-to-permanent loan, the permanent rate is locked at closing, providing certainty regardless of market conditions at stabilization.

Reduced Transaction Costs

Closing one loan instead of two eliminates duplicate costs:

  • Appraisal savings: One appraisal instead of two ($5,000-$15,000 savings)
  • Legal cost reduction: One set of loan documents instead of two ($15,000-$40,000 savings)
  • Title insurance: One policy with an endorsement at conversion ($10,000-$30,000 savings)
  • Origination fees: One origination fee instead of two

For a $10 million construction-to-permanent loan, aggregate transaction cost savings typically range from $50,000 to $100,000 compared to a two-close structure.

Simplified Process

One application, one underwriting process, one closing, and one lender relationship for the entire project lifecycle. This eliminates the need to market the project to permanent lenders during the construction period.

Better Rate Certainty for Investor Returns

The ability to lock permanent financing terms at project inception provides meaningful certainty for return projections. Equity investors can underwrite the deal knowing exactly what the long-term debt service will be.

Disadvantages and Limitations

Potentially Higher Construction Period Rates

Some construction-to-permanent lenders price the construction phase 25-75 basis points higher than standalone construction lenders. Over a 24-month construction period on a $10 million loan, this premium could cost an additional $25,000-$75,000 in interest.

Less Competitive Permanent Terms

The permanent financing terms within a construction-to-permanent loan may not be as competitive as what would be available in the open market at stabilization. Standalone permanent lenders — including life insurance companies, CMBS conduits, and agency lenders (Fannie Mae, Freddie Mac) — may offer tighter pricing, higher leverage, or longer terms.

Conversion Conditions and Risk

While the loan eliminates refinancing risk, it does not eliminate conversion risk. Most construction-to-permanent loans include conditions for automatic conversion: project completion within the specified construction period, certificate of occupancy, minimum occupancy threshold (typically 85-95%), minimum DSCR threshold (typically 1.20-1.30x), and no material adverse change.

When to Use Construction-to-Permanent vs. Two-Close

Construction-to-Permanent Is Ideal When:

  • Interest rate volatility creates meaningful refinancing risk
  • The developer wants rate certainty for equity investor return projections
  • The permanent financing market for the property type is limited or uncertain
  • The project has a straightforward lease-up profile with predictable stabilization timeline
  • Minimizing transaction costs and administrative complexity is a priority
  • The developer plans to hold the property long-term after construction

Two-Close Structure Is Preferable When:

  • The developer wants to access the most competitive permanent financing at stabilization (agency, life company, or CMBS execution)
  • The project may be sold shortly after completion
  • Construction period rates from standalone construction lenders are materially lower
  • The developer wants maximum flexibility to evaluate permanent financing options
  • The project involves a longer or less predictable stabilization timeline

Qualifying for a Construction-to-Permanent Loan

Borrower Requirements

  • Development experience: 2-5+ similar projects completed successfully
  • Net worth: Generally equal to or greater than the loan amount
  • Liquidity: 10-15% of the loan amount in post-closing liquid reserves
  • Credit score: 680+ for most bank lenders

Project Requirements

  • Feasibility study or market analysis demonstrating demand
  • Complete construction plans and specifications (permit-ready or near permit-ready)
  • General contractor with bonding capacity
  • Appraisal supporting both the loan-to-cost ratio and the permanent LTV at stabilized value
  • Phase I Environmental Site Assessment at minimum

The Application and Closing Process

  1. Weeks 1-2: Initial application and document submission
  2. Weeks 2-4: Term sheet issuance with construction and permanent terms
  3. Weeks 4-8: Formal underwriting and third-party reports (appraisal, environmental, construction cost review)
  4. Weeks 8-12: Loan committee approval and commitment letter
  5. Weeks 10-14: Legal documentation and closing; construction draws begin

Total timeline from application to closing: 10-14 weeks for most bank construction-to-permanent loans. Debt fund lenders may close faster (6-10 weeks) while FHA construction-to-permanent loans (HUD 221(d)(4)) require 6-12 months.

Working with CLS CRE

CLS CRE arranges construction-to-permanent financing for commercial projects nationwide, with particular expertise in the Los Angeles and Southern California markets. Our relationships with banks, credit unions, and debt funds that offer single-close construction financing allow us to present multiple competitive options for each project.

Apply for construction-to-permanent financing or call 310.758.4042 to discuss your development project.