What is a land development loan?
A land development loan is essentially an early payment of funds, held against a mortgage, to finance the production, installing, or constructing of the improvements necessary to convert unimproved land into construction-ready building sites.
How much can be borrowed on a land development loan?
The development loan is generally structured as such, to safeguard and ensure the contribution made by the developers is made of use upfront entirely. With development finance, it is are commonly structured to ensure that the developer’s contribution is utilised up front with the lender providing the greater part, or if not all of the build costs. It is typically 50-70% of the purchase price and 70-100% of the build costs but a maximum of 60% to the gross development value (GDV) .
What fees are expected with a land development loan finance?
When applying for property development finance, developers should be prudent to consider the cost and fees of undertaking such a loan. With this form of lending, the specialist nature of the loan involves that the actual fees are not offered at a fixed rate; however some idea of the costs can be made from what is typically enlisted within the loan below.
Legal fees – These are fees in which solicitors charges a fixed amount in exchange for their legal services when setting up the development loan. It is generally included within the loan.
Exit fees – Typically priced at 1-2% of the loan amount.
Valuation fees – Scale of these fees will depend on the size of the project.
Broker fees – Typically priced at 1% of the loan amount.
How long is the borrowing term?
The borrowing term typically for a property development loan is six to eighteen months; however it is subject to the size and nature of the project at hand, meaning the borrowing term can vary. Due to flexibility of such finance, all the interest and charges that are accumulated can be rolled up so there are no monthly payments, requiring that the final loan amount to be paid at the end of the term.
What do I need to apply?
- Proof of current value of property
- Proof of finalised planning consent
- Full costing of project
Prior experience a developer who has undertaken many developer projects would serve as an advantage to lenders in the event of securing the loan. It is also considered extremely difficult to obtain financing if there is a lack of relevant documentation and lack of finalised planning consent.