Land Acquisition - Development -
Construction Financing Loans
Before applying for
land acquisition, development / construction
financing loans, you will need to make
sure you have all your ducks in a row. Many lenders and mortgage brokers have
pre-determined requirements on what you need to have prepared in advance, before they will even begin
to start the process of quoting or accepting an application. Land loans
and development construction financing is complex. Funding is only
approved if the project is sound and proven to the lender to be so. Sometimes,
two separate transactions take place. First, the land acquisition loan, then the
development / construction loan. They will usually be the same lender and the
ground purchase lien will usually subordinate to the development / construction
lien. Another approach is to do one construction / development loan where the
first draw is used for financing the ground purchase. This allows for only one
lien and a simplified transaction.
The construction development loans
as well as land acquisition financing must be supported by a reliable source of
repayment. In the case of a residential
multi-family or apartment project this would include the unit presales or
pre lease up. Many think it is easier to just buy the ground, get city and
county approvals, pre-sell or pre-lease the units then apply for the
construction loans. In theory this is good, however many buyers or tenants will
drop out before completion. A good lender partner from the start on a sound
project with an experienced developer is really the best approach.
There must be a planned use for
the property in the next year.
If not, then the request will be considered speculative in nature and will not
offer the most advantageous terms. Financing land acquisition, development and
constructions loans require detailed planning. The reason for this is because
funding the ground purchase is only a temporary vehicle used as a starting point
to get the whole project started. They are underwritten with the proceeds from
the expected construction loan to be the method of repayment.
Location, intended use and how
successful other developer's with similar projects will
also be evaluated. This goes further than proposing to build a
150-unit condominium project in a area that has a lot of unsold condo units
currently. It also addresses making sure that your location is appropriate to
the type of development that you are planning.
Some of the commercial lender requirements are a detailed budget plan, past
personal or corporate financial
statements, tax returns, and an executive project summary. Also many lenders require that
you place at least 40 - 50% down on the requested amount. Raw land loans are not
always easy but if you have the capital, credit,
and the right development plan you have a good chance of being successful. The lender
needs to know the story behind the planned project before they're willing to
lend you money. It's not going to be standardized
like mortgages underwritten to Fannie Mae guidelines. That
said, there are some common features. They typically require interest-only payments during
building phase and become due upon completion.
Apply now for
construction, land acquisition / development loans
which are usually variable-rates priced at a
margin over the prime rate or some other short-term interest rate index. You, the
contractor and the lender establish a draw schedule based on phases of
construction, and interest is charged or accrued on the amount of money drawn to date.
This type funding, unlike most mortgages, isn't meant to be
long term.
If you already own the
ground, then that can be considered "equity" on the construction financing loans.
Many homeowners use programs where the development funding is converted to a mortgage after the
certificate of occupancy of C/O is issued. The advantage is that you one time
close with only one application.
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