Construction Loan

A construction loan is short-term financing used to pay for building or substantially renovating a property. Unlike a standard mortgage, it is not handed over as a lump sum. The lender releases money in tranches, called draws, as the work is inspected and verified - foundation poured, framing up, roof on - which limits how much is at risk at any one stage.

Construction loans are usually interest-only during the build, and borrowers pay interest only on the amount drawn so far, not the full commitment. A typical loan might run 12-24 months and carry a higher rate than a permanent mortgage because an unfinished building is weaker collateral. When the project completes, the loan is repaid by selling the asset or refinancing into a long-term "takeout" loan.

A quick example: a developer with a $10M project might fund it with a $7M construction loan and $3M of equity. If the lender advances money across six draws tied to milestones, interest accrues only on each draw once it is pulled, so early-stage carrying costs stay low.

Construction debt sits at the top of the capital stack - it gets repaid first - which is why developer equity and preferred equity absorb losses before the lender does. In a tokenized deal, construction financing is a natural fit for tokenized private credit: investors fund the loan on-chain and receive interest, while the draw schedule and collateral are tracked off-chain. Many ground-up deals raised through a real-estate syndication pair this senior debt with pooled investor equity.

The main risk is completion risk: cost overruns, delays, or a soft market at delivery can leave a project unable to repay or refinance on schedule.

Source: U.S. Small Business Administration (sba.gov) and Mortgage Bankers Association, as of 2026.