If you’re trying to get a land development project either off the ground or refinanced, then you may be looking to acquire a bare land loan against the subject property.
From a construction financing point of view, bare land will be looked upon by the lender in terms of its current market value and its current use classification.
For instance, if you’re looking to purchase a tract of agricultural land for development, if at the time of purchase the land is zoned for agricultural use, then the market value will be established from area sales of similar property. Because the land is zoned agricultural, the loan to value provided by a lender is likely going to be around 50% of the market value or purchase price, whichever is lower. If the land is sitting right up against developed property and development potential is easily established by the lender, the loan to value may increase.
As the builder or developer goes through the process of rezoning the land for residential or commercial use, the value of the land will go up to reflect the change in future potential use. If the market for the change in use is viewed to be strong, the loan to value is also likely going to increase.
For property that is already purchased for development that needs to be refinanced, one of the key things that mortgage lenders will look at is if the initial purchase was an arms length transaction to establish value versus the owner of the property buying it through a related company or separate entity. An arms length transaction will better reflect the market than a purchase within arms length.
Once value and marketability is determined on the subject property, the next step for the lender is to get comfortable with the exit strategy to repay the builder/developer mortgage at the end of the proposed term. A well thought out and supported exit strategy will go a long way to securing the financing you’re looking for as most property lenders are less interested in having to take back security on bare land in the event of default versus developed land.
While institutional lenders can provide bare land loans, over 90% of these types of property mortgages are provided by private lenders who are more prepared to finance on the equity in the property, provided that a solid exit strategy for mortgage repayment exists.