Ground Up Construction Loans: Building a Solid Foundation for Your Small Business

Ground up construction is an impressive undertaking. As the name implies, it starts with an empty space and ends with a beautiful, occupied, new building. Because of the scope of activities that go into ground up construction, a few forms of financing are often used between a building’s groundbreaking and its occupancy. The Small Business Administration (SBA) 504 loan can be an invaluable addition to this financing mix due to its simplicity, flexibility and accessibility.

Ground up construction is ideal for when a facility needs to conform to very intricate specifications, or when a business owner has a very specific vision of what they want—if you want it done right, you have to do it yourself, and with the right financing, you can.

Choosing the Right Construction Loan

The purchase of the land for construction is often included in the construction financing package. The traditional financing formula for ground up construction is to take out at least two loans: a short-term construction loan (which is refinanced once construction is completed and the building is occupied) and a long-term mortgage (referred to as the “permanent” financing). Any delays or shortfalls in financing can be covered by bridge loans or so-called mini-perm loans.

A construction loan is granted for a short term to cover construction costs. It is most often made by a local bank, with market rates and a 20-40% down payment. After initial partial funding to cover closing and other costs, disbursements are made monthly to cover costs as they are incurred, and interest is charged only when money is used.

The construction lender will want to examine the applicant’s building plans very closely. The applicant’s previous experience with construction projects, if any, will be taken into account by the lender. Once the building is completed and occupied, it can be refinanced in the traditional manner.

Mini-perm loans or bridge loans can be used between construction and refinancing. Mini-perm loans are also short-term loans, but they have better conditions, so they are sustainable for longer periods than bridge loans. They also have standard payment conditions (not interest only), which establishes a credit record for the building, making it more attractive to permanent lenders.

Using the SBA 504 Loan for Construction

Some loans are specifically designed for the construction financing of owner-occupied buildings. The SBA’s 504 loan is one of the best options out there for small businesses.  It can be used to:

  • purchase land or buildings
  • construct, upgrade, or renovate buildings
  • purchase equipment with a service life of ten years or more
  • refinance conventional debt

A 504 loan can be used to finance construction costs as well as closing costs and soft costs such as architectural fees, engineering fees, surveys and title insurance. The borrower can lease out up to 40% of a building constructed with 504 loan financing.

The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender to provide a loan in three parts:

  • The first is a loan from a conventional lender—a bank or a credit union—for 50% of the total project amount. The amount and conditions of that loan are determined separately, and it becomes the first mortgage. TMC can help match the borrower with the perfect banking partner for this loan, if requested.
  • The CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. Manufacturing projects or projects eligible for the SBA’s Green Energy Program can receive up to $5.5 million. This is the second mortgage.
  • Then the borrower contributes 10% to the loan as down payment. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment. These include businesses such as hotels, gas stations, medical facilities and vineyards and wineries.

The 504 loan has a 10- or 20-year term, with a 25-year option coming soon. It is fully amortized (so there are no balloon payments).

Financing Your Ground Up Construction Today

Since there is no upper limit on the size of the loan the borrower secures from the conventional lender in a 504 loan, projects financed with the loan can be quite large. For example, TMC Financing’s largest project, the Rush Creek resort hotel, came in at over $40 million. This potential, combined with a low down payment of 10-15%, makes the 504 loan an exceptional opportunity for a small business to receive accessible, affordable financing and use their resources to their best advantage. In the sometimes complex mix of financing sources that goes into ground up construction, this can be a tremendous boon.

You can find out more about using the 504 loan for ground up construction from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.


Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison