When does a sponsor have to contribute equity on a CRE construction loan?

Three timing scenarios for sponsor equity on construction loans

Closing-day equity: the standard institutional structure requires the sponsor to fund 100% of its committed equity at construction-loan closing, before any loan dollars draw. The cash sits in a controlled account or funds the land acquisition and pre-development costs already incurred. This structure satisfies the HVCRE-ADC contributed-capital test (at least 15% of as-completed appraised value in cash, unencumbered readily marketable assets, paid development expenses, or land at appraised value, contributed before the bank funds) and gives the lender first-loss protection from day one.

Equity-first then loan-pari-passu: a more sponsor-friendly variant funds equity and loan dollars proportionally through the construction draw cycle (e.g., 70% loan / 30% equity on each draw). This preserves sponsor working capital but typically does not qualify for the HVCRE-ADC exemption, the bank pays a higher capital charge and the sponsor pays a wider spread. Net cost-of-capital math usually favors front-funded equity for institutional sponsors.

Mid-construction equity calls (balancing test): when cost overruns exhaust the contingency reserve, the standard loan document requires the sponsor to fund the shortfall with new equity before any further loan draws release. The lender's logic: the loan was sized against a budget; if the budget grows, equity must grow proportionally to keep the loan-to-cost ratio at the original level. Sponsors should model balancing-test exposure into the construction-period capital plan rather than treat it as a tail risk.

Contributed-capital retention: the HVCRE-ADC exemption requires that capital to stay in until the construction facility is converted to permanent financing, sold, or paid in full. It does not stay in for a following permanent-loan term.