Land Acquisition and Development Loans
Land Acquisition - Development - Construction Financing Loans
Before applying for land acquisition, development / construction financing loans, you will need to make sure you have all your ducks in a row. Many lenders and mortgage brokers have pre-determined requirements on what you need to have prepared in advance, before they will even begin to start the process of quoting or accepting an application. Land loans and development construction financing is complex. Funding is only approved if the project is sound and proven to the lender to be so. Sometimes, two separate transactions take place. First, the land acquisition loan, then the development / construction loan. They will usually be the same lender and the ground purchase lien will usually subordinate to the development / construction lien. Another approach is to do one construction / development loan where the first draw is used for financing the ground purchase. This allows for only one lien and a simplified transaction.
The construction development loans as well as land acquisition financing must be supported by a reliable source of repayment. In the case of a residential multi-family or apartment project this would include the unit presales or pre lease up. Many think it is easier to just buy the ground, get city and county approvals, pre-sell or pre-lease the units then apply for the construction loans. In theory this is good, however many buyers or tenants will drop out before completion. A good lender partner from the start on a sound project with an experienced developer is really the best approach.
There must be a planned use for the property in the next year. If not, then the request will be considered speculative in nature and will not offer the most advantageous terms. Financing land acquisition, development and constructions loans require detailed planning. The reason for this is because funding the ground purchase is only a temporary vehicle used as a starting point to get the whole project started. They are underwritten with the proceeds from the expected construction loan to be the method of repayment.
Location, intended use and how successful other developer’s with similar projects will also be evaluated. This goes further than proposing to build a 150-unit condominium project in a area that has a lot of unsold condo units currently. It also addresses making sure that your location is appropriate to the type of development that you are planning.
Some of the commercial lender requirements are a detailed budget plan, past personal or corporate financial statements, tax returns, and an executive project summary. Also many lenders require that you place at least 40 – 50% down on the requested amount. Raw land loans are not always easy but if you have the capital, credit, and the right development plan you have a good chance of being successful. The lender needs to know the story behind the planned project before they’re willing to lend you money. It’s not going to be standardized like mortgages underwritten to Fannie Mae guidelines. That said, there are some common features. They typically require interest-only payments during building phase and become due upon completion.
Apply now for construction, land acquisition / development loans which are usually variable-rates priced at a margin over the prime rate or some other short-term interest rate index. You, the contractor and the lender establish a draw schedule based on phases of construction, and interest is charged or accrued on the amount of money drawn to date. This type funding, unlike most mortgages, isn’t meant to be long term.
If you already own the ground, then that can be considered “equity” on the construction financing loans. Many homeowners use programs where the development funding is converted to a mortgage after the certificate of occupancy of C/O is issued. The advantage is that you one time close with only one application.