New Construction
By David Jones, MAI, CCIM · Published 2026 · 9 min read
Ground-up construction is the most complex scenario a feasibility study can evaluate. Unlike an acquisition, where historical financial performance provides a baseline, new construction has zero operating history. Every revenue assumption is a projection. Every expense estimate is a benchmark. The property does not exist, the customers have not arrived, and the competitive landscape that will exist at opening may differ meaningfully from the landscape observed today. This combination of uncertainty is why SBA processing centers treat new construction as a near-automatic feasibility study trigger regardless of property type.
This guide covers the construction-specific elements a feasibility study must address, from cost estimation integration to lease-up modeling to SBA construction loan disbursement mechanics.
Three risks converge in any new construction project that do not coexist in established-business acquisitions.
Ground-up projects carry the heaviest ramp-up risk. Our hotel feasibility studies model stabilization periods for new-build flags, car wash feasibility studies model membership ramp for new tunnels, as shown in the Round Rock express car wash case study, and multifamily feasibility studies address lease-up on owner-occupied mixed-use construction.
Construction risk. Projects run over budget and schedule. Commercial construction cost overruns average 5% to 15% above initial estimates, and timeline extensions of 3 to 6 months are common. If the construction loan disburses against interim valuations and the project exceeds those valuations, the borrower must bring additional equity or the project stalls.
Absorption risk. After construction completes, the property must fill up. A new self-storage facility takes 24 to 36 months to reach stabilized occupancy. A new hotel takes 18 to 36 months. A new multifamily property takes 12 to 18 months. During this lease-up period, the property generates below-stabilized NOI, which means the DSCR is below threshold. The feasibility study must document the absorption trajectory and demonstrate the borrower has working capital to cover the gap.
Market timing risk. The market that supports the project today may look different 12 to 24 months from now when the property opens. Competing projects in the pipeline, economic cycle shifts, and demographic changes can all move between the feasibility study date and the stabilized operations date. The study must account for the market as it will exist at opening, not just as it exists today.
The feasibility study does not prepare construction cost estimates. A licensed general contractor, construction manager, or cost estimator produces the hard cost estimate. The feasibility study integrates that estimate into the total project cost and tests whether the resulting capital stack supports an adequate DSCR.
| Cost Category | Typical % of Total Project | Documentation Source | Feasibility Study Treatment |
|---|---|---|---|
| Land acquisition | 15% to 30% | Purchase contract or appraisal | Incorporated at documented cost; basis for LTV if land is collateral |
| Hard construction costs | 50% to 70% | GC bid or construction manager estimate | Verified against regional construction cost benchmarks (RSMeans, Marshall & Swift) |
| FF&E (furniture, fixtures, equipment) | 5% to 15% | Vendor quotes or franchisor package | Depreciation schedule affects expense model; tax basis affects ongoing tax liability |
| Soft costs (architectural, engineering, permits, legal) | 8% to 15% | Professional service agreements | Capitalized into project; does not generate revenue |
| Construction contingency | 5% to 10% | Industry standard | Must be included; its absence is a red flag for construction risk |
| Working capital / pre-opening | 5% to 15% | Feasibility study and operating projections | Covers the ramp-up period until stabilized NOI is reached |
| Interest reserve (construction period) | 3% to 8% | Loan terms and projected draw schedule | Interest accruing during construction; capitalized into project cost |
The working capital line is where many new construction feasibility studies fall short. A new hotel projected to reach stabilized occupancy in Month 24 will not generate adequate NOI to cover debt service for the first 18 to 20 months. The working capital requirement is the accumulated shortfall during that ramp-up period plus operating reserves. For a $4 million hotel construction project, working capital needs can reach $400,000 to $800,000. If the capital stack does not include this amount, the project runs out of operating cash before reaching stabilization, and a technically feasible project fails in execution.
Every new construction project follows a ramp-up curve from opening to stabilized operations. The feasibility study must model this curve with enough precision that the lender understands when DSCR crosses the threshold and how much capital is consumed before that point.
| Property Type | Typical Stabilization Period | Absorption Pattern |
|---|---|---|
| Hotel (select-service) | 18 to 30 months | Gradual occupancy build from 35-45% in Year 1 to 65-72% at stabilization |
| Self-storage | 24 to 42 months | Linear lease-up; typically 3-4% occupancy gained per month |
| Multifamily (garden-style) | 12 to 18 months | Rapid initial leasing then tapering; 65% by Month 6, 90%+ by Month 12-15 |
| Gas station / c-store | 12 to 24 months | Fuel volume grows through word-of-mouth and signage recognition; slower ramp than retail |
| Restaurant (full service) | 6 to 18 months | Honeymoon effect then correction; stabilization often occurs in second year |
| Car wash (express tunnel) | 18 to 36 months | Membership base builds gradually; transient volume depends on traffic pattern |
| Daycare center | 12 to 24 months | Enrollment ramps with class cohorts; seasonal September and January surges |
| Medical office (new practice) | 18 to 30 months | Patient panel builds through referral networks; insurance credentialing takes 3-6 months |
| Fitness center | 9 to 18 months | Membership acquisition is marketing-intensive; retention is the long-term driver |
| Brewery / distillery | 18 to 30 months | Production scales with distribution relationships; taproom is immediate but lower volume |
The feasibility study models the absorption curve in the monthly Year 1 pro forma (not just annual averages) because the timing of DSCR achievement matters. A hotel that reaches 65% occupancy in Month 18 produces a very different working capital requirement than one that reaches 65% in Month 30, even if both ultimately stabilize at the same level.
Construction delays push the opening date back, extend the interest reserve requirement, delay the revenue ramp, and compress the window for reaching stabilized DSCR. The feasibility study cannot eliminate construction risk but can quantify its financial impact so the borrower and lender understand the downside.
| Delay Scenario | Financial Impact | Typical Probability |
|---|---|---|
| 3-month delay | Interest reserve extended 3 months; opening in different seasonal demand period; minor working capital impact | High (30-40% of projects) |
| 6-month delay | Interest reserve fully consumed; additional equity or extended loan term required; revenue ramp offset by 6 months | Moderate (15-25% of projects) |
| 12-month delay | Project may require refinancing of construction loan; working capital requirement grows significantly; market conditions may have shifted | Lower (5-10%), often driven by permitting issues or contractor disputes |
| Abandonment | Total capital loss or significant recovery loss; partial construction has limited resale value | Rare (1-3%), typically due to financing failure or major market shift |
The feasibility study should include at minimum a 6-month construction delay scenario in its sensitivity analysis. The scenario tests whether the borrower has sufficient liquidity to survive a delay, whether the working capital reserve is adequate, and whether the DSCR still reaches the program threshold if opening is pushed back by two seasonal cycles. Projects that pass this test have meaningful construction risk tolerance. Projects that fail it require additional equity or contingency reserves before the loan should proceed.
The stabilized occupancy or utilization rate is the end-state metric that drives the long-term DSCR. For new construction, this projection carries more weight than for acquisitions because it cannot be validated against historical performance at the subject property.
A credible stabilized projection triangulates three data sources. First, the subject market's existing comparable properties: what occupancy do they run? Second, the pipeline supply: how will new competition affect market equilibrium? Third, the subject property's competitive positioning: will it perform above, at, or below the market average?
The stabilized projection for a new self-storage facility might reference submarket occupancy running at 92%, pipeline supply that will add 8% to 12% capacity over the next 24 months, and the subject's positioning as a Class A facility that will compete at the top of the market. This might support a stabilized projection of 88% to 90% after the pipeline absorbs. A projection of 95% in the same environment would be aggressive and difficult to defend. A projection of 82% might be overly conservative. The study's work shows the triangulation and arrives at a defensible range.
SBA-guaranteed construction loans (most commonly under the 7(a) program, occasionally under 504) disburse in stages tied to construction progress. The feasibility study does not control disbursement but must understand the mechanics because they affect the capital stack timing.
| Disbursement Stage | Typical Timing | Lender Verification |
|---|---|---|
| Initial draw (land / pre-construction) | At or near closing | Purchase contract, soft cost invoices, permit applications |
| Progress draws (monthly) | Against percentage completion | Inspector reports, lien waivers, contractor pay applications (AIA G702/G703) |
| Substantial completion | At certificate of occupancy or equivalent | Final inspection, as-built drawings, FF&E installation verification |
| Final draw / holdback release | 30 to 60 days after substantial completion | Final lien waivers, punch list completion, warranty documentation |
| Conversion to permanent financing | At or near substantial completion | Certificate of occupancy, stabilization thresholds (for some structures) |
The borrower equity injection comes in first. Most SBA construction loan structures require the borrower to disburse equity contributions before or pari passu with lender disbursements during the early draws. A 20% equity injection on a $3 million project means $600,000 of borrower capital deployed before or alongside the lender's $2.4 million. The feasibility study should confirm that the borrower has this capital available on the required timeline, not just that it exists in total.
Interest accrues during construction. The interest reserve in the capital stack covers this accruing interest. If the construction period extends beyond the interest reserve, the borrower must fund interest out of pocket until stabilization. The feasibility study should test whether the borrower's liquidity supports this scenario in a delayed-construction case.
Five elements distinguish institutional-quality new construction feasibility studies from the ones that fail processing center review.
Integration with the construction budget. The study does not invent construction costs but accurately incorporates the GC estimate and validates it against regional benchmarks. A study that accepts an implausibly low construction budget (for example, $95/SF for a mid-quality restaurant build-out in a high-cost market) fails credibility because it understates total project cost and overstates DSCR.
Monthly Year 1 pro forma with explicit absorption curve. Not annual averages. The absorption pattern from Month 1 through stabilization must be visible and defensible. The lender can see exactly when DSCR hits 1.0x, when it hits the program threshold, and how much working capital is consumed between opening and stabilization.
Pipeline supply inventory dated at projected opening. The competitive landscape is documented not just as of today but projected to the opening date. A study that opens in Q3 2027 and shows only today's competitors is missing 12 to 18 months of potential supply additions. The pipeline inventory should extend through the projected opening date.
Construction delay stress test. At minimum, a 6-month delay scenario with DSCR calculated and working capital requirement updated. Projects that fail the delay test require additional reserves before the loan should proceed.
Working capital line item tied to absorption modeling. The working capital requirement is not a round number pulled from a template. It is calculated from the monthly pro forma as the sum of operating shortfalls during ramp-up plus a liquidity buffer for unforeseen expenses.
For property-type-specific new construction guidance, see our industry pages. For a detailed section-by-section report structure, see our guide on what to expect in an SBA feasibility report.
For a worked example in an asset class where licensing sequences the entire draw schedule, see Inside a Childcare and Early Education Feasibility Study.
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