It has become increasingly difficult, even for hard money lenders, to underwrite land acquisition loans. In this two-part series, we will present nine things that will make it easier for borrowers to acquire financing to purchase land for development purposes:

1. Choose land with entitlements. Pre-entitlement deals have proven to be so unpredictable and risky that even private lenders are rarely willing to finance them, though some may consider them on a case-by-case basis. Typically, your land deal will have a much greater chance of being approved if the land is already entitled (in addition to getting better terms and higher leverage).
2. Provide documentary support of the property’s value. Some hard money lenders require full appraisals. Other private lenders work by consulting with experienced real estate brokers and obtain a Broker’s Opinion of Value (BOV).  If the purchaser/prospective borrower has a copy of an existing appraisal it would be helpful to the lender even if it is out of date.  It will contain the basic facts about the property which shortens the time for the lender to get an updated value.  Most private4 lenders like to see valuations derived from the comparable sales method of research.  Sometimes appraisers will value land based on the assumption that a developer will build (for example) a multi-family building on the land and what price a developer would pay per multi-family unit.  This type of valuation can be interesting, but since there is no guarantee that a developer will actually build on the land, this type of value conclusion is not one that most private lenders will likely use.  Borrowers should be aware that lenders are typically likely to use as-is market values rather than proposed or future market values.  The more information you can provide to your lender that supports what you believe the land’s value to be, the less potential for disagreement during this crucial part of the negotiations.
3. Contribute equity. More and more land lenders are requiring borrowers to front significant funds of their own in addition to the loan amount. Some lenders may accept third-party investor equity or mezzanine financing but, regardless, borrowers should not expect an LTV of more than 60 to 65 percent on a land acquisition loan and should be prepared to make their own contribution to the purchase. The amount of the borrower cash down payment is a very critical factor to most hard money lenders in their underwriting of a land acquisition loan.
4. Don’t expect an interest reserve. Currently, land lenders have been much more reluctant to fund interest reserves for borrowers, though they may still be considered on a case-by-case basis depending on the quality of the property and its LTV ratio. This reluctance towards interest reserves has come about because it’s felt that such reserves enable borrowers to minimize or hide problems that would otherwise come to light much sooner. Lenders need to clearly understand how their borrower is going to make the monthly interest payments on their loan since land is always a non-income producing investment.  This is one of the trickiest parts of negotiating a land loan.
5. Showcase your experience. While private and hard money lenders focus their underwriting process on the value of the collateral, they do look more favorably on borrowers who either have a proven track record developing land or have a partner or team with that kind of experience. While experience is not a guarantee that a deal will succeed, especially in the land development sector, private lenders will show a decided preference to lend to those who show them that they know what they’re doing and are capable of executing their plan and repaying the loan in full and on time.

Check out the second part of this blog for more tips on how to finance your land acquisition loan. Or contact us at Montegra to find out more about our land acquisition loan program.