Land Acquisition Finance

Successful property development requires stable funding from the very start, and land acquisition loans are an important element of any construction project

The most vulnerable phase of any development project is the beginning. While the full lifecycle of a construction project might require long-term financial support, and there are a million and one things to take care of, the highest hurdles and most challenging obstacles are found in the first stages of a project. There are any number of issues that can disrupt a project as it’s starting, ranging from insufficient finance to legal disputes, and in order to overcome these obstacles it’s vital for developers to have access to the finances they need to start off on the right foot.

Ensuring that the correct finances are in place to secure land at the start of a project might sound straightforward, but as one of the fundamental elements of a successful build, land acquisition finance should form a strong foundation for the rest of the project. Specialist land purchase lenders are present within the industry and work with developers to source the most appropriate finance for a variety of situations, and for property developers beginning a new project it’s crucial to seek the support of one of these specialist lenders.

Land loans are a necessary element of any new-build project, because they are the only way of purchasing a site on which to begin construction. Mortgages are inappropriate for this purpose, and banks are unable to provide funding for these projects - land purchase finance has to come from dedicated lenders. We’ll discuss how these loans work and how they’re well-suited to the needs of property developers, but it’s also important to keep in mind that while land loans are necessary, they should be carefully considered before taking on. An affordable land acquisition package is a key building block in a successful development project, so developers must seek professional financial advice before making any commitments in this respect.

What are land loans for?

A land acquisition loan is, as the name implies, used to finance the purchase of land. Real estate developers need to be able to invest quickly and easily in new projects, and with the use of land acquisition finance they are able to move swiftly and seize new opportunities as they arise. This differs significantly from many other areas of development finance in that the loan is not being used to purchase a finished property or even to finance the building of a new home; the value of the loan is entirely dedicated to purchasing the land itself, and therefore requires a specialist eye in order to correctly gauge its worth.

Property developers need land purchase finance because they often can’t use their own capital to finance these purchases, and non-specialist lenders can’t really work in the way that property development demands. For instance, banks are wary of lending against anything other than fully-finished property, and won’t be able to provide finance to buy undeveloped land. Land loans therefore fill a vital niche in allowing development to begin on schedule and on budget, a good first step towards a profitable project. Land loan providers are also able to work much faster than banks, often turning loans around in a period of days rather than weeks (or even months).

Generally speaking a land acquisition loan will be arranged in a similar way to a mortgage, with the borrower putting up a fairly large deposit in order to secure the land. Before any money is transferred, the lender will visit the site to conduct a valuation, and if the property has been correctly valued they will then proceed with the loan process. Of course, buying the land is only the first step on the road to construction, and land loans only constitute a single aspect of this large undertaking. It’s important, therefore, that land purchase loans play well with the other forms of finance that will be used to complete the project, so land acquisition lenders must be flexible and adaptable to a wide variety of circumstances.

Terms of a land loan

Land purchase loans are a vital element of the property development pathway that leads to a successful, profitable development. As the very first link in this chain, it’s absolutely crucial to ensure that the correct type of finance is used, and that the terms and conditions of the loan meet the needs of the borrower. In this respect, land purchase lenders are exceptionally well-equipped to meet the needs of their clients; many lenders can alter and adapt the terms of their loans to suit a variety of circumstances, so no matter what the needs of a particular client are they’ll be able to create a lending package that suits them. This extends to lending on undeveloped and part-developed land, valuing at appraised and market value and even to fee and term flexibility; many of the costs of a land loan can be deferred until the loan completes, keeping development costs at a minimum until the project’s completion.

Land acquisition finance is, like many other types of development lending, a secured loan. This means that the borrower is using the land itself (or another asset) as collateral for the loan, so that if the money isn’t repaid on time the lender is able to repossess and sell it. This helps to mitigate the risk to the lender of providing a large amount of funding, because they have a “Plan B” if the loan goes unpaid. Neither borrower nor lender particularly wants this, though, and in many cases it’s possible to arrange a refinance deal instead of allowing the land to be repossessed.

Land acquisition loans and property development

A development project can easily be sunk before it begins by a lack of stable finances. Without the means to quickly and confidently secure land as and when it’s needed, property developers will be unable to make the most of opportunities as they come along; it’s therefore vital for developers to fully grasp the abilities of land acquisition lenders and how these specialists can work to enable highly profitable development projects.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

What is a development finance used for?

Development finance can be offered against both residential and commercial property. Development loans are designed to help developers fund refurbishments, renovations, or conversions of existing property or to build brand new properties on a ground-up basis.

What are the key areas of development finance?

Development finance can be used for new build projects, commercial and residential developments, renovations, conversions or for the redevelopment of existing properties. Loans can be used for a vast range of different property types.

How do you determine exactly what type of development finance you need?

By assessing how extensive the project is, how long it is likely to take and how much it is likely to cost in a worst and indeed a best-case scenario. Refurbishment bridging loans will cover a majority of light and heavy refurbishment projects but for more extensive development projects including ground-up builds of one or indeed multiple units, development finance can potentially cover both the land purchase and build costs

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