Commercial Real Estate News / Investing / Switching Up Your Long-Term Strategy Through Land Loans

Switching Up Your Long-Term Strategy Through Land Loans

Published: 02-28-22 Category: Investing

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The young man doesn’t need to go west anymore, but the spirit of reaching for land is still the same. The feeling of purchasing land is about opportunity and options, and land acquisitions are making the rounds in the commercial real estate world.

Big real estate firms are scooping up land to use as a foundation for their huge projects, which means that they have the power to dramatically transform communities and places that everyone is familiar with.

That power isn’t just for them, of course: all land acquisitions have the potential to change an area, for better or worse.

Joining the Land Rush

While cash offers for land definitely play a role in real estate, they aren’t the only factor. Indeed, financing is certainly here to stay. Many large firms use financing, which means that there are other options for smaller players as well.

Looking to start with some inspiration? Check out AJ Capital Partner’s recent bundle of deals totaling $17.3 million. The focus is on the Litter River area of Miami, a longtime industrial zone that’s experiencing quite a revival.

It gets even better: The Melo Group picked up an entire block of lots in Miami for $105 million. What makes this deal so interesting is that it was a full cash offer.

How do land loans work?

Land loans are designed to buy just the land itself; the idea is that other resources will be used to put structures on the property. Land financing is the start to finding the right location for future business ventures.

Maximizing land revenue is important, but right now the focus is on acquiring the financing to get on the ladder in the first place.

Documentation Matters

Even though the land purchase is pretty straightforward, getting the financing is still a matter of ensuring that all documentation is in place. This would include the following:

Proof of proper business entity structure. This means a corporation in many cases, but LLCs are also popular. While a sole proprietorship on its face wouldn’t be enough to block financing, lenders would wonder about the serious nature of the business enterprise.
Tax returns. Personal and business tax returns are often required for land loans.
Bank statements.
Information about the land itself. Number of acres, exact location, and photos of the property are required. Remember that the lender is making a decision based on a wide variety of factors.
Financial records, like profit and loss statements. Usually the last two years will suffice.

This is only designed as a very short summary; this is far from the only documentation that the lender can request. However, the more documentation that you present in an organized fashion, the more likely it is to get financing for the land purchase.

Improved Land vs. Raw Land

Land basically falls into two main categories: improved land and raw land. Raw land is basically land that doesn’t have any improvements at all.

Now, driving through a property and seeing zero structures doesn’t mean that the property in question is raw land. That’s because in order for land to be raw, it has to lack improvements like water, sewage, and electricity.

Why would raw land spark any interest when there is improved land to acquire? Well, sometimes raw land is so much cheaper that the cost of installing utilities doesn’t outweigh the profits. Yet there’s another pitfall that often goes overlooked: lenders charge more premium for raw land than improved land.

The rate of default is higher on a piece of raw land than its improved counterpart, so lenders plan accordingly. This can mean not just higher interest rates, but also a bigger down payment compared to improved land.

Credit Concerns and Land Loans

Like any other loan, lenders are trying to finance as much as possible while also taking on as little risk as possible.

Bad credit is a red flag for lenders, and with good reason: if there’s evidence that reveals that other loans and credit obligations aren’t being paid back, what guarantee is there that their loan will be treated differently?

Overcoming credit concerns can be done in the world of commercial real estate. For starters, this is why relationships are so important. When others can endorse for viability and a genuine desire to improve the community, it’s much easier to get the funding necessary to get the job done.

Consider a Co-Signer

Many a joint venture sprang into creation because one party had vision, but the other party had cash. Building a joint venture that can help bring positive credit history into play means higher chances of getting approved.

The other party will have to bring the same level of documentation, but these delays are worth it in the long run. The co-signer has to also trust that the loan will be paid back, because the lender will pursue them in the event of default.

Offer More Down Payment

What if there’s no co-signer available, but there are additional cash reserves? Provide them as an increased down payment in order to acquire the land.

While every deal is different, sometimes there are extra resources that can be used to get the financing sought for the land purchase.

Seek Local Sources

Reaching out the rural business development offices in the area the land is located in is a wise step. Even if there’s no financing directly offered, the business development team has a wide network.

Private money can come into play, and some investors are perfectly fine with remaining silent while not having to mess with the day-to-day operations.

The Road Ahead

Switching up long-term strategy through land loans unlocks a lot of options. After the loan is paid off, the ability to use the property as collateral for bigger deals is on the table.

The biggest takeaway here is to not only get a good land loan, but also to ensure that every land acquisition lines up with the ultimate goal in mind. Without purpose, the land is just sitting there taking instead of giving to a portfolio.

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