The right way to compare a private construction loan vs a bank construction loan is not by rate. It’s by how much of your own cash stays trapped in the deal, whether the interest reserve is financed, and how many days it takes a draw to hit your GC’s account. A bank at 70% loan-to-cost and 7.5% can leave you with worse cash-on-cash returns than a private lender at 85% and 9%, because the sale price at the end doesn’t change — only your equity and your carry do.
Shaun Ashkenazy brokered roughly a billion dollars in commercial and residential investment loans through Onyx Funding before launching Lendyx, his own balance-sheet lending arm, where construction loans now make up about 65% of the book and the average loan is around $2.5 million. He sees both sides of the comparison: the term sheets borrowers bring him, and what actually happens after closing.
What follows is the leverage math, the draw-speed question to ask before you negotiate anything, how to vet whether the lender behind the term sheet will still be there at closing, and the structures experienced lenders have learned to refuse.
Key takeaways
- A bank construction loan at ~70% LTC and 7–7.5% leaves 30% plus carry in the deal; a private lender at 85% LTC with financed interest reserves can cut that to 10–15% for roughly 100–150 bps more rate and 1–1.5% in points.
- Ask "tell me about your draw process" before you negotiate the term sheet. Ashkenazy funds draws in two to four days; a bank can take up to three weeks, and your subs feel every day of that.
- A construction or fix-and-flip loan is really 15 smaller loans. Pricing you win once matters less than execution you need 15 times.
- Underwrite the exit, not the appraisal. A $5 million valuation today is not liquidity in two years if rates are higher and inventory is sitting.
- Second-position loans are close to unenforceable without a liquidity event — which is why a lender who has written them once usually won’t again.
From the Real Estate Pros Show
This article draws on an interview with Shaun Ashkenazy of Lendyx (and Onyx Funding) on the Real Estate Pros Show, hosted by Scott Bursey.
Private Construction Loan vs Bank Construction Loan: The Two Term Sheets
Here is the comparison as Ashkenazy lays it out for developers who come to him already holding a bank quote.
- The bank: roughly 70% loan-to-cost, 7% to 7.5% in the current environment, and materially cheaper origination.
- The private lender: 85% leverage, interest reserves financed into the loan, about 100 to 150 basis points higher on the rate, plus another 1% to 1.5% in points.
On a term-sheet-to-term-sheet basis, the bank wins every line. Better rate, cheaper fees, no argument. That is exactly why developers keep choosing it.
But a construction loan is not a product you buy in isolation — it’s one input into a project with a fixed output. As Ashkenazy puts it, the sale price doesn’t change. You are going to sell the finished house for whatever the market pays for the finished house, and neither lender changes that number. What the two term sheets do change is how much of your own money sits in the deal for 12 to 24 months, and how much of the interest you pay out of pocket while it does.
At 70% LTC with an unfinanced interest reserve, you are funding 30% of total cost plus monthly carry from your own balance sheet. At 85% with reserves financed, that drops toward 10% to 15% and the carry comes out of the loan. Same project, same exit, two very different equity positions. That difference is where the return lives, not in the 150 basis points.
Why Cost of Capital on Paper Misses Cash-on-Cash Return
Most developers underwrite the rate. Fewer underwrite the return on their own dollars — and those are different questions with different answers.
“A lot of investors look at cost of capital on paper versus cash-on-cash returns, and a lot of developers miss that specific number,” Ashkenazy says. The mechanics are straightforward once you frame it correctly. Profit on the project is roughly fixed by the exit price and the build cost. Your cash-on-cash return is that profit divided by the cash you actually put in. Cut the cash in half and the return roughly doubles, even if the interest bill went up.
Financed interest reserves compound the effect. When the reserve is inside the loan, monthly interest isn’t a cash call against your operating account — it’s capitalized and settled at the exit. That matters for two reasons beyond the arithmetic: it protects your liquidity for cost overruns, and it frees capital to start a second project instead of parking it in one.
Ashkenazy’s summary of the extra cost: “Those costs are insignificant in the grand scheme of things where you only have 10, 15% in the deal versus 30% plus carry.”
Treat that as a framework, not a promise. Higher leverage narrows your margin for error — if the project runs long or the exit price slips, a thinner equity cushion gets consumed faster, and the higher accrued interest is real money. Run both term sheets through your own model with a realistic timeline and a cost-overrun scenario before you decide which one is actually cheaper.
Any construction loan or fix and flip loan is essentially 15 smaller loans. So the first question flippers and builders should ask your lender is, tell me about your draw process — and then let’s talk about whether we can negotiate terms on the term sheet.
— Shaun Ashkenazy, founder of Onyx Funding and Lendyx
The Draw Process Is the Loan
Ashkenazy’s framing is the most useful thing a builder can take from this: “Any construction loan or fix and flip loan is essentially 15 smaller loans.” You do not close once. You close, then you fund a draw, then another, then another, for the life of the project. Every one of those is a separate execution event where the lender can help you or hold you up.
His firm funds draws in two to four days. A bank, he says, can take up to three weeks. Multiply the gap across a dozen or more draws and the consequences stop being financial and become operational:
- Your GC floats material and labor costs he did not budget to float.
- Subs who don’t get paid on time deprioritize your job for a builder who pays fast.
- Trades fall out of sequence, and re-sequencing costs weeks you never get back.
- The project runs longer, which means more months of carry at whatever rate you were so pleased about.
That last point is why rate shopping in isolation is a trap. A cheaper loan that adds two months to the schedule can cost more in extra carry, extended holding costs, and market risk than the rate saved.
So change the order of your questions. Ashkenazy’s advice: “The first question flippers and builders should ask your lender is, tell me about your draw process — and then let’s talk about whether we can negotiate terms on the term sheet.” Ask who inspects, what triggers funding, average days from request to wire, and who answers the phone when a draw stalls.
Vetting the Lender Behind the Term Sheet
Ashkenazy wrote a piece a few months back titled Certainty Is the New Pricing, and the argument is simple: a term sheet with a quarter point off doesn’t matter if the terms change before closing, or if the lender isn’t around to close at all.
His read on why that risk is elevated right now — and he is clear this is his speculation, not a prediction: there is a lot of new institutional capital entering private lending, and consolidation is already visible. He points to Kiavi selling to Figure for something in the $700 million range, and Velocity acquiring Toorak, along with a loan portfolio of roughly $3 billion in unpaid balances trading to a different investor. Meanwhile transaction volume is down.
The combination creates pressure. Large lenders with headcount to cover need to originate a certain volume regardless of how many good deals exist. “They are offering certain borrowers insane pricing and very low rates, low origination percentages because they have to just keep doing volume,” he says — and in his view that’s hard to sustain when the loans still carry risk. Newer, more aggressive entrants may also approve deals that shouldn’t be approved.
For a borrower, that’s a short-term opportunity worth taking advantage of, which Ashkenazy says he does himself as an investor. But the tail risk is real: “You’ll get a term sheet today and that lender won’t exist to close that deal a few weeks after.”
Diligence accordingly. Ask whether the capital is balance sheet or table-funded, how many deals they closed last quarter, and how often issued terms get re-traded before closing.
Underwriting the Exit, Not Just the Entry
The single biggest underwriting risk on a construction deal right now, in Ashkenazy’s view, is confusing today’s appraisal with tomorrow’s liquidity. “An appraisal today for $5 million doesn’t mean the same thing as liquidity in two years when the project is done, if the rates are higher, if the market is a little slower.”
Entry conditions are genuinely favorable. There are fewer transactions, fewer mortgage applications being filed, more houses on the market, and houses sitting longer. That is a buyer’s market and a real opportunity to get basis right — which he says remains the first thing to audit in any deal structure.
Exit conditions deserve the opposite treatment. Less liquidity in the resale market, mortgage rates potentially higher for longer, and the possibility of further Fed action all argue for stress-testing the sale rather than trusting the as-completed value. Practical version: model your exit at a discount to appraised ARV, extend your timeline assumption, and confirm the deal still works.
Then layer cost risk on top. Ashkenazy flagged an expected near-term increase in mechanical equipment costs of roughly 10% to 12%. On a build with meaningful HVAC and mechanical scope, that is not a rounding error — it’s the kind of overrun that eats a thin equity cushion.
Two adjustments follow. Build a real contingency line rather than a token one, and lock pricing on long-lead mechanical items early where your supplier will let you. Higher leverage makes both of those more important, not less, because you have less of your own cash standing behind the budget.
Structures Experienced Lenders Avoid: The Second-Lien Lesson
Asked for the most expensive lesson of his career, Ashkenazy’s answer was immediate: don’t do second-lien loans.
The situation that produced it is one every operator will recognize. Good clients, long relationships, deals where his firm was already brokering the first-position loan. The borrower needed additional capital, and writing a second lien felt like a favor to someone who had earned it.
The problem is structural, not relational. “It’s almost unenforceable unless there’s a liquidity event,” he says. With a first position ahead of you, a default leaves you with very little practical ability to protect your position — you cannot control the foreclosure timeline, and whatever recovery exists goes to the senior lender first. He didn’t lose money on those loans, but after going through the process a few times, he won’t write them again. His conclusion: it isn’t a viable business as a favor.
There is a related lesson worth as much. Litigation gets very expensive even when you are clearly in the right. Legal fees, time, and management attention often exceed what you were fighting over, which means a negotiated settlement is frequently cheaper than what he calls chasing the righteous path.
Both points cut the same way for borrowers. If a lender declines to write a second lien behind another lender’s first, that is a sign of discipline, not weakness. And when a deal goes sideways mid-construction, the operators who recover fastest are the ones who solve it commercially with their lender instead of escalating to counsel.
Frequently asked questions
Is a higher-rate private construction loan ever cheaper than a bank loan?
Yes, on a cash-on-cash basis it often is. A bank at roughly 70% loan-to-cost and 7–7.5% requires you to fund 30% of total cost plus monthly interest out of pocket. A private lender at 85% loan-to-cost with financed interest reserves can reduce your equity to 10–15% and move the carry into the loan, for roughly 100–150 basis points more rate and another 1–1.5% in points.
The exit price is the same either way, so the return on your own dollars can be higher on the more expensive loan. It depends on your actual numbers, timeline, and risk tolerance — model both.
What should I ask a construction lender before signing a term sheet?
Start with the draw process, not the rate. Ask who performs inspections, what documentation triggers funding, the average number of days from draw request to wire, and who you call when a draw stalls.
Then vet the lender itself: is the capital on their balance sheet, how many deals did they close last quarter, and how often do issued terms change before closing. As Ashkenazy puts it, certainty is the new pricing.
How fast should construction draws fund?
Ashkenazy’s firm funds draws in two to four days, and says a bank can take up to three weeks. Use that as your benchmark range when comparing lenders.
The gap matters because your GC and subcontractors absorb the delay. Slow draws push trades out of sequence, extend the schedule, and add carry months — which can quietly cost more than the rate discount that made the slower lender attractive.
Why do lenders avoid second-position loans?
Because a second lien is nearly unenforceable without a liquidity event. With a first-position lender ahead of you, you cannot control the foreclosure timeline and recovery goes to the senior debt first, so protecting your position after a default is extremely difficult.
Ashkenazy wrote a handful of them as a favor to good clients, didn’t lose money, and still won’t do it again. If a lender turns down a second-position request, read it as underwriting discipline.
What’s the biggest underwriting risk on a construction deal right now?
The exit. An appraisal today does not equal liquidity in two years if rates are higher and the market is slower. With fewer transactions, fewer mortgage applications, and homes sitting longer, entry conditions favor buyers while exit conditions deserve more scrutiny than usual.
Cost overruns are the second risk. Ashkenazy flagged an expected near-term increase of roughly 10–12% in mechanical equipment costs, which argues for a real contingency line and early pricing on long-lead items.
The bottom line
Before you sign either term sheet, run one exercise: model the deal at both leverage levels with the same conservative exit price and an extended timeline, then compare the return on your own cash rather than the rate on the loan. Whichever lender wins that comparison, call their draw department before you call their salesperson.
