Before that occurs, there tends to be no available cash flow to service any debt registered against the property, requiring debt service to either be built in at the start of a loan in the form of prepaid interest, or having the borrower retain a portion of the loan proceeds advanced to make scheduled loan payments.
Subdivision development financing can occur in a number of different stages, depending on the length of time it takes to obtain a final approved plan of subdivision, and on the increases in market value that occur at different stages of the pre planning process.
A common scenario would see the developer(s) acquire the land for cash or up to 50% of the purchase price to complete the initial round of financing.
Then, as time goes by and a draft plan approval, or its equivalent is obtained, the land is goes up in value. This is crystallized for lending purposed through a commercial appraisal from an AACI appraiser. The new value is then used to refinance the initial mortgage in order to provide incremental funds for the development process.
Once the project gets to plan approval, the market value will likely increase again, allowing for all or part of the equity required to secure a larger loan for land servicing and potentially building construction if a developer is retaining all the property for build out.
At this stage, the exit strategy for loan repayment from future sales is also going to be important as up to this point, the loan repayment strategy had basically been through refinancing over time.
Regardless of how many refinancing events take place, the subdivision development financing options available are going to be equity based, likely from private mortgage lenders, or quasi institutional lenders, who have a good working knowledge of the development process, and are prepared to step in an either complete the development or sell it off if the borrower is unable to either complete the project themselves, or does not meet the financial obligations of the construction loan financing facility.
If you require subdivision development financing for a project you’re planning or are in the middle of, I suggest that you give me a call so we can go through your financing requirements together and review relevant construction site development loan options.