The fact that private lenders enjoy greater flexibility allows them to consider loan types that banks wouldn’t even touch. A good example is a hard money loan used to acquire a piece of vacant land for development. Banks tend to steer clear of such loans because they consider vacant land too risky. On the other hand, hard money lenders are more open to the idea.
Several options exist for structuring a hard money loan of this type. In most cases, the best way to go is to utilize a bridge loan. The money from the loan is used to obtain the land and hold it until the investor can secure construction loans from a bank. Some of the bank financing would be used to repay the bridge loan.
Entitled and Unentitled Land
A big concern for banks with vacant land is the entitlement issue. Land entitlements essentially determine how a piece of vacant land can be developed. While developers look at both entitled and unentitled properties, those with entitlements already in place are generally easier to fund.
Before a piece of vacant land can be entitled, its current owner has to submit a formal proposal to local authorities. That proposal may have to include a variety of studies along with conceptual plans. Any and all local officials directly involved in planning must sign off on the proposal before entitlements are awarded. Public hearings may be necessary, too.
From a lender’s perspective, it is better to fund projects that already have entitlements. They present a significantly lower risk because the borrower knows what they can do with the land before they obtain it. Unentitled land presents a level of risk that hard money lenders might not be interested in taking on.
Funding with a Bridge Loan
Although every case is different, a bridge loan is often the best tool for helping developers obtain already entitled vacant land. A bridge loan acquires the property quickly, thereby reducing the chances that a developer loses out to another buyer. However, securing a bridge loan on a piece of vacant land requires a solid exit plan.
Some hard money lenders might be willing to add a little extra to bridge funding so as to allow a developer to begin developing the land prior to obtaining bank loans. This may be necessary if the borrower’s bank insists that the land be improved prior to arranging construction loans.
For the record, it is rare for Actium Partners to fund land improvements. The additional funding needed to begin improvements – like clearing the land, bringing electric, water and sewers onto the site, improving roads, etc. – comes from other sources.
Traditional Funding Is Required
In most cases, hard money lenders do not get involved in construction loans. So this sort of scenario would require traditional funding to develop vacant land above and beyond initial acquisition. A bridge loan from a hard money lender would only go as far as to obtain the land and, in rare cases, begin the improvements necessary to obtain construction loans.
Admittedly, acquiring and developing vacant land poses some unique challenges other types of projects do not have to deal with. But that is one of the benefits of working with private lenders. Hard money is more open to the things that make real estate investment what it is.
If you are seeking funding for your next real estate project, we hope you will consider Actium Partners. We provide hard money and bridge loans throughout Utah and beyond. We would be happy to discuss your next project with you.
