$18,750,000 250,000 SF Ground Up, Sacramento, CA

Overview

Commercial Lending Solutions arranged $18,750,000 in construction financing for the ground-up development of a 250,000 square foot speculative industrial warehouse in Sacramento, California. The deal closed with a regional bank on a partial recourse structure, sized to absorb lease-up risk without forcing the sponsor into mezzanine capital or pre-leasing commitments that would have undermined the project's core thesis.

The Deal

The sponsor controlled a well-located industrial parcel in Sacramento's logistics and distribution corridor and wanted to deliver a large-format spec warehouse without an anchor tenant in place. The site's value was partly a function of timing: moving quickly to groundbreaking was essential, and any requirement to pre-lease before closing would have eroded that advantage. The borrower needed a construction loan sized to execute on their schedule, with a clear path to a permanent takeout once the building stabilized and leased.

The loan request was $18,750,000, with loan-to-cost the central structuring question. The build program was straightforward for the product type, but the lease-up environment was not. Sacramento's industrial market absorbed a significant wave of large-format supply in 2023 and 2024, and vacancy in the big-box segment drifted into the high single digits before beginning to compress again. The sponsor's pro forma reflected an optimistic absorption timeline. The lender's underwriting would not.

The Challenge

Spec industrial construction financing at this size runs into the same structural problem on nearly every deal: lenders default to a 60 to 65 percent loan-to-cost ceiling on unleased product, and for good reason. On a 250,000 square foot building with no signed tenants, all of the execution risk sits between certificate of occupancy and a stabilized rent roll. Pushing past that band without pre-leasing would have meant either debt fund pricing at spreads that made the deal's return profile look significantly worse, or a mezzanine tranche that added cost and complexity the sponsor had no appetite for.

The Sacramento market context made the conversation harder. A lender looking at this deal in early underwriting could point to real vacancy data and ask a reasonable question: what is the absorption case if the market takes longer than expected to clear the existing supply overhang? That question required a credible answer, not a pro forma that assumed best-case timing.

Environmental diligence added another layer. Sacramento County's outlying industrial parcels frequently sit adjacent to vernal pool and seasonal wetland habitat, which carries genuine entitlement risk. A clean Phase I and documented mitigation completion are not formalities on these sites. They are conditions that protect the build schedule from a mid-construction stop work order, and lenders who have seen that scenario play out on a stabilized construction draw treat the diligence accordingly.

The Solution

The structuring work centered on two things: sizing the loan against a conservative 12 to 18 month absorption case rather than the sponsor's underwriting, and presenting the environmental diligence in a way that gave the lender's credit committee a complete picture before the first question came back from committee.

On leverage, keeping loan-to-cost within the range a regional bank construction desk could underwrite on partial recourse was the goal from the start. That meant the loan was sized below what the sponsor could theoretically have extracted, but it kept the deal away from debt fund pricing and preserved the two-step execution structure that spec industrial of this scale requires: a construction period with a defined term, interest reserve sized for the conservative lease-up case, and a clear conversion path to a life company or permanent lender takeout once the building is occupied and stabilized. The construction loan was structured with a floating rate tied to a benchmark index, an initial term covering the build period plus a lease-up extension option, and interest-only through stabilization.

On entitlement, the Phase I was clean and the mitigation work was documented and complete. Presenting that clearly, with supporting materials organized for a credit audience rather than a development audience, removed a meaningful source of underwriting friction before it became a re-trade conversation.

A regional bank ultimately provided the construction piece on a partial recourse basis, with the structure designed from the outset to accommodate a life company takeout on the permanent side.

The Outcome

The sponsor closed $18,750,000 in construction financing on a timeline consistent with their site strategy, without pre-leasing and without mezzanine capital. The loan was sized against a realistic absorption scenario, which meant the lender's credit committee had a defensible underwrite and the borrower had a structure they could actually execute against. The permanent takeout path is built into the loan documents. When the building leases, the next financing step does not require starting over.

The deal worked because it was underwritten on construction risk, priced and structured accordingly, and closed with a lender whose credit appetite matched what the deal actually was.