As private money lenders in the Northwest, we share relevant real estate news to keep you informed and achieve quality real estate investments in Seattle, Montana, Colorado, Utah, and other markets. At Juniper Capital, we specialize in land development loans, agricultural real estate loans, private construction loans, and more. Contact us today with any questions you may have about the real estate loan process.
Raw land acquisition and development loans present a unique set of opportunities and challenges for borrowers and lenders alike. With sky-high prices and compressed cap rates across the Pacific Northwest, development deals may offer some of the best available returns to investors – but those potential returns are not without risk.
Vacant land and dirt development loans can be particularly challenging for the real estate developer in search of financing. These challenges stem from additional risk from the lender’s perspective, resulting from uncertainty based on zoning, the ability to permit the project, and the lack of cash flow from the property. As a result of the perceived risk of land loans, many lenders, both traditional and private, won’t lend on vacant land.
Here are some important considerations for developers when seeking a lender for a dirt deal:
Current State of Entitlements & Permitting
Progress through the entitlement and permitting process decreases project risk in the eyes of a lender, and will be an important consideration in underwriting. As a result, lenders will likely be able to offer better loan terms on a permitted or partially permitted property than on “raw dirt.” Progress through entitlement and permitting will also bring more clarity regarding the exit strategy from the loan, which is of particular concern to private short-term bridge lenders.
Generally speaking, lenders will be more conservative on land loans, limiting their LTVs to around 50%. As a result, borrowers should be prepared to bring significant equity to the table to get the deal done.
One way for a borrower to create equity, without necessarily needing half of the project cost in cash, is to work through portions of the entitlement and permitting process prior to closing a development loan – this value add may even be possible while under contract, prior to purchasing the subject property.
Greater Lender Emphasis on Sponsor/Guarantor Strength
Due to the increased risk presented by land and development loans, lenders may be more stringent in their review of sponsor/guarantor financials. Non-recourse land loans are particularly uncommon.
Just as lenders will seek experienced developers, developers should seek a lender with proven expertise in lending on vacant land. A lender who understands the permitting and development process can be a huge asset to a developer and may be able to formulate more creative, advantageous loan structures.
At Juniper Capital we pride ourselves on being some of the most knowledgeable, creative lenders in the industry. Our experience and understanding of the development process allow us to structure loans designed to get your project to the finish line. Give us a call today to discuss your land and development financing needs.