Four Things You Need To Know About Applying For A Land Development Loan

When developing commercial real estate, you may need to procure financing to raise the necessary funds for the project. If you are developing raw land (land that does not have electricity, an accessible route, or a working sewer system), one way to cover the costs of developing the land is with a commercial land development loan. Check out a few things you should know about this type of product:

1. There are Two Types of Land Development Loans

As you explore different commercial construction loans, you'll encounter different types of land development loans. A basic land development loan is used solely for developing property that you already own or have already secured financing for. Some of the items that you might use a land development loan for include installing the infrastructure necessary for electricity and paving the surrounding land so that you can access the property. 

The second type of commercial land development loan is known as an acquisition and development loan. You can use an acquisition and development loan to help finance the purchase of the land itself and to pay for the development of the land. Usually, some type of down payment is required; the exact amount depends on your creditworthiness and the terms of your loan.

Since you are using the acquisition and development loan to pay for the land, its terms are usually stricter than those associated with basic land development loans.

2. The Land You are Developing Acts as Collateral for the Loan

Commercial land development loans are secured loan products. The land that you are developing secures the loan; if you stop paying the loan or are unable to make the payments, your lender can seize the land to cover the money that you owe. 

3. You Can Refinance Land Development Loans

During the period that you are repaying your land development loan, interest rates may fall, or you may experience an improvement in your creditworthiness that can secure more favorable loan terms. If either of these events occurs, you have the ability to refinance your existing land development loan with a new product.

4. Zoning Restrictions in the Area Help Determine How Much You Can Borrow

Your lender will take into account the zoning restrictions in your area when deciding how much you can borrow and the maximum loan to value figure. For example, if an area is currently only zoned for agricultural usage, rather than commercial purposes, this can influence the amount that you can potentially borrow.