Land Development Loans: How They Work

What land development financing covers

It can cover land purchase and site work such as clearing, grading, utilities, roads and engineering, up to the point lots or buildings can be sold or built.

Developers use these loans to turn raw acreage into usable lots. Typical costs include surveys, environmental studies, permits, zoning approvals, grading, drainage, water and sewer lines, electricity and roads.

Some loans fund only the acquisition. Others release money in stages as work is completed, with an inspection at each stage. The final goal might be selling finished lots to builders, building on them yourself, or holding for appreciation. Each goal affects the loan structure. For related products, see getting a commercial real estate loan and bridge loans.

Why lenders see these loans as risky

Raw land produces no income, values depend on approvals and market timing, and projects can run over budget. Lenders protect themselves with conservative terms.

Because the land does not generate rent or sales until it is developed, repayment relies on the developer's skill and the market. Expect lenders to require:

• A substantial down payment, often much larger than for a finished building
• Shorter terms and sometimes interest-only periods
• Higher rates than for income-producing property
• Personal guarantees from the principals
• Proof of experience with similar projects

Specific terms vary widely by lender, property type and location, so ask for current requirements rather than relying on general numbers.

What you need to apply

Expect to submit a project plan, budget, timeline, zoning and permit status, appraisal, personal financial statements and an exit strategy.

A lender will want to see:

1. Purchase contract and land survey
2. Zoning confirmation and entitlement or permit status
3. A detailed development budget and schedule
4. An appraisal of the land and, often, the finished value
5. Your resume and track record
6. Personal and business financial statements and tax returns
7. An exit plan: sale of lots, construction loan takeout or refinance

Use the loan application checklist as a starting point, and add real-estate-specific items from your lender.

Costs and risks to model

Include interest carry, fees, contingency, delays and the chance that approvals take longer than planned. A project can fail on timing alone.

Build a budget that includes interest during the build, closing and legal fees, inspection fees, insurance, property taxes and a contingency reserve. Delays are the most common problem, and each extra month adds interest cost with no new income.

In this illustrative example, a $1,000,000 loan at a 9 percent annual rate costs about $7,500 a month in interest alone. A six-month delay adds roughly $45,000. If the plan only works with no delay, it is too tight. Compare ideas in making sense of commercial real estate rates and buying commercial real estate.

Alternatives to consider

Depending on the project, you might use seller financing, a partner, hard money, or an SBA 504 loan for owner-occupied property.

Options include seller financing, joint ventures with an equity partner, or short-term asset-based loans. See hard money lenders and SBA real estate loans for owner-occupied property, and SBA 504 loans.

If you operate a business that will occupy the property, the SBA route can offer lower costs but takes longer and applies only in certain cases. Speak with a commercial lender, a real estate attorney and an accountant before committing.

What ROI Funder can and cannot do

ROI Funder does not place land development loans or commercial real estate mortgages. It can help with working capital or equipment for an established operating business.

To be clear, land development loans and commercial real estate mortgages are not ROI Funder products. The closest fit is an SBA loan when the property will house your own operating business and you can wait for the process. For related needs, our commercial real estate page explains what to look for elsewhere.

Where ROI Funder can help is the business side: equipment financing for machinery used in your trade, or working capital for payroll and materials. Eligibility is 500+ FICO, 6+ months in business and $20,000+ monthly revenue. It is not a fit if you need financing for raw land itself.