Business Loans

Land Development Loan Options

Mar 29, 2023 • 7 min read
Providence, Rhode Island
Table of Contents

      Financing real estate development can be costly and expensive. From clearing the land and grading it, to installing roads and necessary infrastructure, there are a variety of expenses involved that can be cost-prohibitive for both individuals and real estate developers. This is where a land development loan, or a real estate development loan, comes in. It provides the funds needed to get any piece of land ready for development. 

      Dive into land development loans below and learn everything you need to know about them for your next project. 

      What Kind Of Down Payment Is Required With A Land Development Loan? 

      While lenders are willing to fund a land development project, they typically require a larger down payment, since the land does not have that much value. The value could increase once it’s developed, but buyers could default on payments before any significant value has been established. Because of this, lenders often require a down payment between 25% and 30%.

      Can The Land Itself Act As Collateral For A Land Development Loan? 

      The land can act as collateral to secure the land development loan, but there are two things to keep in mind that may prevent this from happening:

      • The development loan is more than the purchase price of the land.
      • The land is still serving as collateral for a land purchase loan. 

      If the development loan is more than the current value of the land, then additional collateral may be needed. 

      For the second scenario, the land will most likely not be able to be used as collateral because it’s already tied up with another loan. Sometimes lenders are willing to take the risk of securing a loan with an asset that has already been collateralized, but it’s not a guarantee. The reason is that, as the second lender, they would not have the first right to the asset if the borrower defaults on their loans. That’s why many lenders are not willing to accept an asset that has already been used as collateral.  

      Lenders that do accept collateralized assets typically already have an existing relationship with the borrower and have confidence in their ability to repay the loan. However, even with a positive history, they are still likely to charge a higher interest rate than they would otherwise.

      What Are The Interest Rates For Land Development Loans?

      The interest rate on property development loans will vary from borrower to borrower, depending on the loan amount, credit score, down payment amount, and collateral used to secure the loan. Overall, land development loan rates are higher than small business term loan rates because of the greater risk. 

      Also, keep in mind that interest rates aren’t the only cost associated with a land development loan. Other costs include:

      • Appraisal fees
      • Loan origination fees
      • Survey fees

      Speak with a loan officer to get a better understanding of land development rates and commercial mortgage rates

      How Long Is The Repayment Period For A Land Development Loan?

      Repayment periods for land development loans are usually between 3 and 10 years, but exact lengths vary between lenders and borrowers.

      Pros and Cons of Land Development Loans

      Pros of Land Development LoansCons of Land Development Loans
      Borrower gets access to needed capital to develop land.

      Lenders are often open to creative loan structures.

      They can lead to great profits if the land is resold once it is developed and made ready for large-scale construction.

      They can help businesses get established in new locations.
      They come with high risk for both the lender and the borrower.
      They may require additional collateral.

      Interest rates tend to be higher than a traditional business or real estate loan.

      Repayment periods can be shorter than normal.

      How Much Does it Typically Cost to Develop Land?

      There are many factors that impact the cost of developing land. Assuming the land has already been purchased, variables that influence how much it will cost to develop land include:

      • Geographic location
      • Size of property
      • Location of property, which may require:
        • Rock removal
        • Tree removal
        • Grading
      • Permits needed, which may include:
        • Zoning
        • Building
        • Environmental
      • Infrastructure needed, which may include:
        • Power lines
        • Sewer lines
        • Water lines
        • Roads
        • Sidewalks
        • Internet

      Depending on what needs to be done and where, land development can range from tens of thousands to millions of dollars. 

      Are There Other Types of Construction Loans? 

      There are several types of construction loans, some of which include mini perm loans, A&D loans, and interim construction loans. Here’s what you need to know about these options.

      • Mini perm loans Typically has a three- to five-year loan term and is used to finance the construction or renovation of a commercial property, often requiring a balloon payment at the end of the term (although this can often be avoided through refinancing)
      • A&D loans Standing for acquisition and development, can be used for both the purchase of land and its development 
      • Interim construction loans Covers the costs of construction, with borrowed money coming in installments, and lenders typically only requiring interest-only payments during the actual construction process  

      A land development loan helps cover the expenses related to getting undeveloped land ready for construction. Land clearing, grading, and installing infrastructure can all be very expensive, and a land development loan helps pay for those costs. However, there are other types of commercial real estate construction loans that may also work, too. Other options include mini perm loans, interim construction loans, and A&D loans. 

      Learn more about commercial property loans today with Lendio. 

      Quickly compare loan offers from multiple lenders.

      Applying is free and won’t impact your credit.

      About the author
      Lauren Ward

      Lauren Ward is a personal finance and tech writer with a passion to help consumers make smart financial decisions. Her work has appeared in a variety of publications, including Time and MSN. When she's not writing, she loves gardening and playing board games with her family.

      Share Article:

      Business insights right to your inbox

      Subscribe to our weekly newsletter for industry news and business strategies and tips

      Subscribe to the newsletter

      Subscribe to our weekly newsletter for industry news and business strategies and tips.