Land Development Loans
Funding from a Land Development loan program
can be used for:
The loan proceeds cannot be used for:
- Working capital or inventory
- Consolidating or repaying debt
- Refinancing
- Employee wages, or
- Marketing expenses
When underwriting a land development loan, the underwriter will look carefully at where the property is located in the entitlement process. If the land is zoned agricultural, and the nearby town is anti-growth, a reasonable loan-to-value ratio for a land loan might be just 10% to 25%. If the nearby town is pro-growth and the subject property is located close to the town and in the path of growth, a reasonable loan-to-value ratio might be as much as 40% to 50%, even if the zoning is still agricultural.
A parcel that already enjoys a tentative map for a residential subdivision might be eligible for a refinance in the range of 50% to 60% of value, especially if the current property owner got the property up-zoned. Be careful, however, of the property that is “just a few weeks” from a tentative map. That “few weeks” could easily extend into a "few decades" if the local Board of Supervisors votes against the map.
One of the first things a lender will want to know is, “What is the exit strategy? How are we going to get paid off?” If the borrower is just living off the cash he can pull out of the land until some unlucky hard money lender becomes the biggest fool, the loan is not one many lenders will pursue. But if the land developer has a plan to develop three commercial pads and a condo project pad, each of which he will sell off, a land lender will show much more interest.
Land Development Loans
