Acquisition and Development Financing
A Land development loan is an advance of funds, secured by a mortgage, to finance the making, installing, or constructing of the improvements necessary to convert raw land into construction-ready building sites. In other words, a land development loan takes an unimproved parcel and breaks it up into a number of smaller, improved parcels upon which homes or commercial buildings will be constructed.
The total project cost would include the cost of the land, the hard costs for the horizontal improvements, the soft costs (including an interest reserve and sales commissions) and a contingency reserve. The minimum cash contribution of a developer on an A&D loan is usually 25% of the total land development project cost. As a general rule, the minimum cash down payment required for a land developer to purchase a piece of land is 30%. Please note that while many hard money lenders will not exceed 25% to 50% loan-to-value when refinancing a piece of land, many reasonable hard money lenders will finance up to 70% of the purchase price of the land, if the developer is putting down 30% in cash. If anything other than cash is used as the down payment, like a seller-carried second mortgage or some “credit” for work already done, the size of the loan that the typical hard money lender will make will fall precipitously, probably down to the 55% LTV range. The 30% down payment must be in cash.