Typically a target property is acquired for cash and/or credit and as work is completed to cover off the regulatory requirements necessary to develop the land into a different use, further financing may be required.
As a land development project meets different regulatory milestones and approvals, the property tends to go up in value, which forms the basis for incremental lending to be made.
This can come in the form of an additional property mortgage registered against the property or a land development refinance of the existing mortgage or mortgages already in place.
Each lender that will consider a land development refinance loan will have their own criteria with respect to the breakdown of the equity in the project in terms of the origin of the equity.
Land equity can either come from cash invested in the acquisition and development of the property and/or property appreciation.
For some lenders, its going to be important that a certain percentage of the equity was created from cash investment, especially for lower risk lenders, as equity lending on purely appreciated value determined by an appraiser is viewed to be less certain than something at least partially based on a transaction where cash changes hands.
But in most land development refinancing scenarios where incremental capital is required, there is an element of property appreciation from a combination of work completed and overall market value appreciation for the type of real estate in question.
One of the keys to land development refinancing is the stage the project is at when a new loan is being sought.
The further the project is towards an approved plan or at least an approved draft plan, the more interest there is likely going to be from available lenders.
Another major consideration is the existing market value of similar land in the area an the expected timeline for resale of similar property. This is an important lender consideration with respect to the value of the security as they want to gain insight as to hard it may be to get their funds out of a property in the event of default.
A third consideration is the land developer’s exit strategy to repay the new loan and the probability of the exit plan to come into fruition within the timelines outlined.
In order to locate and secure land development refinance loans for a given project, the best approach would be to work with an experienced construction mortgage broker in target area.
If you require land development refinancing in Toronto or Southwestern Ontario, I suggest that you give me a call so we can go through your requirements together and discuss land development refinance options available to you.