Many lenders are concerned about the flow of capital into real estate development, noting that more money is chasing fewer good deals. With the real estate recovery underway, opportunities may be returning to a previous normal.
Here are some of the considerations for this type of loan:
- Loan to Value First mortgage land loans may be made for up to 50 percent of the value of the property as determined by an independent appraisal.
If the borrower can put up additional collateral, the loan-to-value ratio might be increased by an additional corresponding amount. Where an existing first mortgage already exists, some lenders will consider taking a junior position, but the total of both loans will not usually exceed 50% of total value.
- Interest Rate. The interest rate on this type of loan will be high. Sometimes state usury laws applicable to individual borrowers can be violated. The borrower must be incorporated in this case. See attorney for assistance.
- Typically, vacant land will produce no cash flow, so amortization is not required.
- Release Price. The owner of the land is commonly given the right to obtain the release of a portion of the premises from the mortgage lien (so it can be developed and sold) on payment of a larger-than-pro-rata portion of the loan, e.g. 125 percent or more of the ratio of the value of the released premises to that of the whole parcel. This is a form of amortization and increases the security on the remaining portion of the land.
- Personal Guaranty. This can be required, depending on the transaction.
- Developer’s Strength. The experience, reputation, background and financial stability of the developer is very important. A developer with a history of success in this type of project will go far in justifying the requested loan.
- Existing demand for the planned develop- ment must be proved. This may require a market analysis by outside experts.
Type of Improvement. A “location-oriented business” such as a bowling alley, motel or restaurant may not qualify the land for a loan, whereas an apartment or office building may do so because of the stability of the rental income once the building is completed.