Purchasers are confronted with the critical question when financing land acquisitions or developments: should they go with a traditional bank or should they consider commercial land lenders? While banks have been perceived as the places to go for real estate financing, they are not necessarily flexible or quick enough for certain types of projects, especially concerning land that is yet to be developed.
Commercial land lenders are a much more alluring option in that respect. These lenders are recognized for providing more bespoke solutions that banks sometimes decline to consider, especially when there are unusual complications in the land deal. But the flip side presents some serious trade-offs. Thus, it is crucial that you know all the considerations for-and-against working with commercial land lenders before you make a decision that will largely steer your development or investment project.
Traditional banks usually tend to maintain a conservative stance on land deals. The business loan approval process in banks is often rigid and cumbersome. Accordingly, it is carried out following a rather strict chain of criteria. They would prefer stabilized property with known cash flow and would probably not take on raw or undeveloped land.
Commercial land lenders provide loans exclusively for land-related purposes and development. They understand the specific nuisances of land investment and, hence, maintain a more flexible approach to the structuring of the loan. Unlike banks, they may incorporate unconventional revenue streams, changes in zoning over the horizon, or potential developments into their underwriting process.
Almost always, commercial land lenders open doors that banks keep closed on behalf of their clients. From funding a ground-up development to the purchase of raw acreage and the refinancing of a land parcel, the commercial land lender has a slightly different perspective of what the deal truly entails.
Some of the greatest advantages of working with commercial land lenders are the custom solutions available to borrowers. Unlike traditional banks, which usually have a one-size-fits-all approach in dealing with their borrowers, these lenders will meet with the individual to structure a loan to suit that specific project's needs. Stage funding processes, interest-only payment periods during early development, and so on, are all options for assistance. This flexibility is often considered a major benefit.
This customization is valuable when working with commercial land development lenders since land development projects often face unique timelines, regulatory obstacles, and financial demands.
There are times when speed becomes crucial in real estate transactions, and commercial land lenders have been known to deliver just that. Banks may take one or two or sometimes even several months to process a loan request; however, the funding for commercial land loans goes within much lesser timelines—on average. This swiftness can be the difference between winning a bid on a highly desired land parcel and missing out on a lucrative market opportunity.
Because these commercial land loan lenders typically work autonomously or through private funds, they never have to endure the cumbersome bureaucracies the banks have to. Thus, from a developer's and investor's perspective, they are the best option to choose when immediate action is needed.
If you have a project involving rezoning, environmental challenges, or unusual land use plans, banks are not going to waste any time rejecting your application. In contrast, commercial land mortgage lenders are often more willing to support projects that are difficult to fund or unconventional in nature. Their field knowledge allows them to weigh risks more effectively and discover options beyond those banks consider risky.
One major disadvantage that comes with working with commercial properties of land lenders is that they charge higher rates of interest. These lenders charge higher interest rates than your regular bank. By analogy, the higher the risk involved, the higher the costs: a land lender is financing a project that banks will not touch.
Commercial land and property loan lenders tend to keep the down payment requirements pretty high. Down payments can be between 30 and 50 percent, depending on the lender and specifics of the land deal, which is a whole lot more than banks usually ask for.
There is never a straightforward financing solution for land acquisitions or development. Commercial land lenders provide marked advantages to those keen on speed, flexibility, and creativity with financing options, especially when conventional banks are unable to help. Such abilities in land-based lending are genuinely a boon for developers and investors.
These details notwithstanding, there are trade-offs: increased cost, more stringent requirements, shorter repayment terms. One should weigh the merits and demerits equally before committing. Should you have a solid business plan, enough equity, and a well-defined exit strategy, commercial land lenders might just provide the kind of edge you need to finance your project.
