Rules of the Road for Land Financing in 2009

For the last two years, I have seen flyers and rate sheets cross my desk that had a funder's matrix of loans and rates. At the bottom of the sheet in large, bold, red letters I would read, "No Raw Land Submissions." This simply meant that funders were not funding land transactions under any circumstances. No cash-out refinances, no purchases....they just had no appetite for land transactions. Fortunately, we have seen a change in the recent weeks and funders have opened their doors again to funding land transactions.

Funding them is good news. The terms, however, are very narrow and specific. In efforts to manage everyone's expectations, I will give you a broad view of what types of transactions are within our funder's proverbial "strike zone." For US and International properties, the maximum loan-to-value is 65%, which means you would need to put 35% down on a purchase. Additionally, the funder wants to see a business plan showing that you have intentions of improving the property and developing it immediately. The logic behind this is that raw land doesn't generate enough revenue to service the debt payment. Knowing this, the funder is going to allow deferred payments for up to two years.

By deferring payments, they simply bump the loan amount by 24 months of payments, put it into an escrow account and payments are made for you. Yes, you borrowed the money for the payments, but it would be impossible to make payments on land that isn't producing any revenue for you. What happens most often is the funder also lends you enough money to put the infrastructure of your development in, which will increase the value the property by a factor of 30-50%.

Once the developer has the infrastructure in place, he can the go get a construction loan and pay off the land. The good news is lenders are lending again on land. You just need to be prepared to have a strong business plan and begin your project immediately.