Construction Financing for Commercial Properties, Hotels and Apartment Buildings
How construction loans work: equity first, draws and holdbacks, guarantees, interest reserves and take-out financing, plus Canadian programs for rental projects.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A construction loan funds the building of a property in stages, as the work is done, and is repaid when the project is finished, usually by a long-term mortgage or a sale. Because the lender is advancing money against a building that does not yet exist and earns nothing, construction loans are more expensive, more closely monitored and more heavily guaranteed than loans on finished properties.
This guide is for developers of commercial buildings, hotels and apartment buildings. It explains how construction loans are structured, how money is advanced, what the lender will ask the developer to guarantee, how the loan is repaid, and how to raise the equity that has to go in first. It includes the Canadian programs that apply to rental housing.
How a construction loan is structured
A construction lender sizes its loan against the total project cost and the expected value on completion, and it lends only part of either. The developer’s equity fills the rest and is usually spent first: the lender starts advancing only once the equity is in.
The main features of a typical construction loan:
- Loan-to-cost. The loan as a share of the full budget: land, hard costs, soft costs, contingency, financing costs and, for hotels, furniture and equipment and pre-opening costs.
- Interest-only, with an interest reserve. Interest is often paid from a reserve built into the loan budget, because the project has no income to pay it.
- Floating or fixed rate. Many construction loans float; some programs lock in a fixed rate.
- Short term. Long enough to build and lease up or stabilize, then the loan must be repaid.
- Recourse and guarantees. Unlike many loans on stabilized buildings, construction loans almost always require guarantees from the developer or its owners.
How money is advanced: draws and holdbacks
A typical draw cycle
Contractor submits a progress claim
Usually monthly, for work completed and materials delivered.
Cost consultant reviews it
The lender’s quantity surveyor or cost consultant inspects the site and confirms the work is in place and the remaining budget is enough to finish.
Lien and title checks
The lender confirms no liens or other claims have been registered against the property since the last advance.
Holdback is deducted
A percentage of each payment to the contractor is held back, as required by provincial lien law, and released after the lien period ends.
Lender advances the draw
Funds go to pay the contractor and other approved costs, less the holdback.
Holdbacks protect subcontractors and suppliers. In Nova Scotia, the Builders’ Lien Act requires the person primarily liable under a contract to retain 10% of the value of the work, services and materials as they are supplied, for 60 days after the contract is substantially performed.[1] Other provinces and U.S. states have their own lien and retention rules; ask your lawyer which apply.
If the cost consultant finds the remaining loan and equity are not enough to finish, the lender will stop advancing until the developer puts in more money. That rebalancing requirement is the most common source of a cash crunch mid-project.
What the developer is asked to guarantee
| Guarantee | What it covers | Why the lender asks for it |
|---|---|---|
| Completion guarantee | Finishing the project on time and to the approved plans | A half-built building is worth far less than the loan |
| Cost overrun guarantee | Paying any costs above the approved budget | Overruns would otherwise come out of the lender’s security |
| Interest or carry guarantee | Paying interest, taxes and insurance until the project stabilizes | Covers the period before income starts |
| Repayment guarantee | All or part of the loan itself | Common with banks and smaller developers |
| Environmental indemnity | Costs of contamination found on the site | Environmental liability can exceed the property value |
Before signing, model what each guarantee could cost in a bad case, and agree with any joint venture partner who shares that exposure. Our guide to structuring a joint venture covers how partners allocate guarantees.
How the loan is repaid: take-out financing
Construction lenders want to see how they will be repaid before they lend. For a rental apartment building the usual answer is a long-term mortgage once the building is leased up; for a hotel, a hotel loan once operations stabilize; for a condominium or for-sale project, unit sales.
For Canadian rental housing, CMHC plays a large role at both stages:
- CMHC-insured construction financing. CMHC’s standard multi-unit insurance can be used to build rental housing, with loan advances of up to 85% of the lending value during construction and amortization of up to 50 years for new construction. It requires at least five rental units.[2]
- Apartment Construction Loan Program (ACLP). CMHC lends directly to build rental housing, with a fixed rate locked at first advance, up to 50-year amortization, and up to 100% loan-to-cost for the residential space (up to 75% for non-residential space). Interest-only payments are financed by the loan during construction, and the borrower pays them from occupancy until 12 consecutive months of stabilized income. Projects need at least five units and a loan of at least $1 million, must meet an affordability requirement for at least 10 years, and must arrange take-out financing with a CMHC-approved lender at the end of the term.[3]
Canadian construction financing figures to know
Tax matters too. The Canada Revenue Agency’s purpose-built rental housing rebate returns 100% of the GST, or the federal part of the HST, on qualifying new rental buildings with at least four units with their own kitchen, bath and living areas (or at least 10 residential units), where construction began after September 13, 2023 and before 2031 and is substantially completed before 2036. A 100% rebate of the provincial part of the HST is also available in Nova Scotia, Ontario and Newfoundland and Labrador.[4] These programs apply to rental housing, not hotels or commercial buildings.
Raising the equity
The equity has to be raised before the loan can be drawn. It usually comes from the developer, a landowner who contributes the site, and one or more joint venture partners such as family offices or funds. Raising equity from passive investors is a sale of securities: in Nova Scotia it requires a prospectus or an exemption under National Instrument 45-106, such as the accredited investor or offering memorandum exemptions.[5]
Investors in a construction project will ask for the same things the lender does: an approved site, a budget reviewed by a cost consultant, a qualified contractor, a market study, the debt term sheet and the take-out plan. They will also want to know what happens if costs rise, and who pays.
For hotel-specific budgets and funding, see securing funding for a hotel development; for the wider choice between debt and equity, see debt vs equity financing.
Sources
- Builders’ Lien Act, R.S.N.S. 1989, c. 277 (section 13) — Nova Scotia House of Assembly. Checked 2026-10-12.
- Mortgage Loan Insurance for Standard Rental Housing — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
- Apartment Construction Loan Program: Standard Rental Housing — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
- RC4231 GST/HST New Residential Rental Property Rebate — Canada Revenue Agency. Checked 2026-10-12.
- Rule 45-501: Statutory Liability for Misrepresentations in an Offering Memorandum under Certain Exemptions from the Prospectus Requirement — Nova Scotia Securities Commission, Effective October 7, 2013. Checked 2026-10-12.
