Acquiring and developing raw land projects comes with its own particular set of advantages and challenges. As the property values for developed commercial properties in Colorado rise, the cap rates on income-producing properties are decreased (check out our blog on Cap Rates for more on this). For those with development experience or wanting to become more experienced in development, raw land deals may offer a better return on investment if you know how to avoid or reduce the risks that come along with these kinds of projects.

One of the biggest challenges with undeveloped land deals is securing financing. Banks and other conventional lenders view land loans as high risk and typically are not willing to fund them.  To make matters even more difficult there are few private capital and hard money lenders that are willing to fund this type of loan. It’s important to do your due diligence and find a lender who has experience with these types of deals, understands the risks and the benefits (to lender and borrower), is familiar with the permitting and development process, and is willing to finance such projects.  Spoiler alert, Montegra Capital funds a number of loans secured by land.

There are three main considerations to keep in mind as a developer looking to finance a raw land deal:

1. Expect lower LTV rates: Although private lenders typically offer a loan to value (LTV) of up to 65% developed properties, borrowers should not expect more than a 50% LTV rate on land. Borrowers must expect to show that they will have significant skin in the game to ameliorate the high risk for the lender. Some lenders, including Montegra, only lend on land that has its entitlements and zoning and all infrastructure to the site. Lenders that lend against land without these qualifications are few and far between.
2. Make progress on entitlements and permitting: Working your way through the entitlement and permitting process doesn’t just decrease the project risk in a lender’s eyes, it also shows your lender that you know what you’re doing and that you have a concrete, feasible vision for the land and an exit strategy for the loan. Even if you’re only able to get your property to a “partially permitted” status, it is still likely to improve the loan terms a private lender can offer as well as improving your chance of getting approved for financing. When discussing the progress on your project with your lender, be upfront and honest about any issues that arise during the permitting, even if it’s a potentially negative issue. Private lenders want to know that their borrowers have good character and they may have experience that can help you deal with potential issues so that they don’t become major hurdles. Remember, you are not applying for a construction loan.  You simply have to show the lender that moving from the land acquisition stage to the construction loan stage (which will pay off the land lender) is realistic.
3. Don’t expect non-recourse loans: The increased risk of land loans means that private lenders will look more closely at borrower financial documents and want to see proof of your ability to repay the loan. Unless you are an experienced developer with a track record, your lender may want to see that you have a partner or management team with more experience in development. It is uncommon even in the private lending market to find non-recourse land loans, so be prepared to have a guarantor on this type of hard money loan.

If you have a development deal that needs financing, contact Montegra at loans@montegra.com or 303-377-4181 for more information about our private capital loan programs.