Multifamily construction lending has a structural mismatch built into it. The construction loan is sized as a percentage of what the project costs. The permanent loan that repays it is sized as a multiple of what the finished property earns. Those are different numbers, and nobody finds out how different until lease-up.
This guide covers how construction loans are sized, what the takeout gap actually looks like on a real deal, and the two structures that eliminate it before a shovel moves.
How do multifamily construction loans work?
A construction loan funds a percentage of total development cost — typically 60-75% loan-to-cost — and disburses in draws against completed work rather than in a lump sum at closing. Interest accrues only on the drawn balance and is usually funded from a capitalized interest reserve inside the loan. Terms run 18-36 months, interest-only, and repay from a permanent loan or a sale.
The mechanics that distinguish it from any other commercial loan:
- Draws, not proceeds. Funds release monthly against inspected, completed work, usually with a 5-10% retainage held until completion. Your general contractor is effectively financing the gap between doing work and being paid for it.
- Equity goes in first. Nearly every construction lender requires the sponsor's equity fully deployed before the first loan draw.
- A capitalized interest reserve. The property earns nothing during construction, so the loan funds its own debt service. That reserve is loan proceeds you never spend on the building.
- Recourse is the negotiation. Banks typically want completion and repayment guarantees; debt funds go non-recourse beyond carve-outs at lower leverage and a wider spread.
What does a multifamily construction loan cost to build?
Sizing runs off total development cost, and that denominator includes items early models routinely omit. A worked 100-unit deal:
| Line | Amount |
|---|---|
| Total development cost | $22,000,000 |
| Construction loan at 70% LTC | $15,400,000 |
| Sponsor equity (funded first) | $6,600,000 |
| Stabilized gross potential rent (100 units at $1,750) | $2,100,000 |
| Less vacancy and collection loss, 7% | $1,953,000 |
| Less operating expenses, ~38% | — |
| Stabilized NOI | $1,210,860 |
Total development cost must include land at basis, hard costs under a guaranteed maximum price contract, soft costs, a 5-10% contingency, and the interest reserve. Understate any of them and the lender will re-size the loan for you, usually late.
What is the takeout gap, and how big is it?
The takeout gap is the difference between the construction loan balance and the permanent loan the stabilized income supports. Construction debt sizes on cost; permanent debt sizes on DSCR. When income-based sizing lands lower, the sponsor funds the difference in cash at maturity.
Run the agency takeout on the same deal. At a 1.25x minimum DSCR, stabilized NOI of $1,210,860 supports annual debt service of $968,688. At 5.75% on a 30-year amortization, that debt service funds approximately $13,832,700 of permanent debt.
Against a $15,400,000 construction balance, that is a $1,567,300 gap — cash due at maturity, or covered by a supplemental loan, a rate buydown, or a sale.
The gap is not a mistake by either lender. Both sized correctly against different variables. It is a structural feature of building with debt, and it is entirely predictable at underwriting — which is why the next section exists.
How do you lock the takeout before you break ground?
Two structures eliminate the re-underwriting and rate risk, and both are decided before construction starts rather than after. Neither creates cash: if stabilised income supports less than the construction balance, that shortfall is still funded with equity, mezzanine or a supplemental — what these structures remove is the uncertainty about how big it will be.
A forward commitment. An agency lender (Fannie Mae or Freddie Mac) commits today to fund a permanent loan on the completed property at a specified rate and structure, subject to the property hitting agreed occupancy and debt-service thresholds. You pay for it — a fee, and usually a rate slightly above the spot market — and what you buy is the elimination of interest-rate risk across a 24-month build. If rates rise 150 basis points during construction, the forward commitment is the difference between a financeable project and a capital call.
Construction-to-permanent. A single loan converts from construction to permanent at completion without a new underwriting cycle. HUD's 221(d)(4) program is the best-known version: it funds construction and rolls into a 40-year fully amortizing, non-recourse permanent loan at high leverage. The trade is process — 221(d)(4) is materially slower and more document-intensive than a bank construction loan, and Davis-Bacon prevailing wage requirements apply.
Which one fits depends on how much rate risk you are willing to carry and how much time you have. Testing the takeout at several rate and cap-rate scenarios in the underwriting calculator before the construction loan is signed is the cheapest hour of work in the whole project.
Who lends on multifamily construction?
Regional and national banks, debt funds, life insurance companies on larger projects with institutional exits, and HUD through 221(d)(4). Banks price lowest and want recourse plus a deposit relationship; debt funds go higher on leverage and non-recourse at a wider spread; HUD is cheapest and slowest.
Appetite here is narrower and moves faster than in any other part of the capital stack. A bank active in multifamily construction last quarter may be at its concentration limit this quarter, and none of that is published. Matching a packaged deal against current program criteria surfaces it in one pass.
YieldStack is a commercial mortgage broker and financing marketplace — not a lender. One submission is pre-screened for bankability and matched at the program level against 5,000+ loan programs, and the deal team packages the credit narrative construction lenders require: the GC's résumé, the absorption case, and the takeout analysis. The median time to a first lender offer is under an hour, with $0 upfront and a 0.50-1.00% success fee only when the loan closes. Every credit decision is made by the participating lender.
The bottom line
Multifamily construction loans fund 60-75% of cost through inspected draws with a capitalized interest reserve. Their permanent takeout sizes on income instead — on a $22M, 100-unit project that is a $1.57M gap. A forward commitment or a construction-to-permanent structure lets you size and price that gap before you break ground, which is the only time it is cheap to plan for. Neither supplies the missing cash.
Submit your construction deal at YieldStack. $0 upfront — 0.50-1.00% at closing only.