How to Secure Finance For Land Development
Land represents a significant component of household wealth in New Zealand with Kiwi having an inherent love for all things property related. It is therefore commonplace for Kiwi to explore ways to maximise value in their single biggest asset class, so understanding how to get financing for land development remains highly topical.
If you have questions about financing for land development, how the process works, and the benefits it delivers, this is the guide for you. Drawing on 30 years of industry expertise, the Fortis Capital team shares the essential insights you need to know to empower your next project.
What is Land Development Financing?
Land development financing is the key to transforming undeveloped land into something valuable. It provides the funds to acquire land, secure necessary land use consents, and to potentially subdivide it.
Lenders typically require a comprehensive plan, detailed timelines, and proof of approvals. They also look for developers with the requisite expertise and an ability to provide a solid financial stake in the project, colloquially referred as “skin in the game”. A developers equity contribution to the overall costs typically range from a 20-35% down payment with a resultant loan-to-value ratio ranging from 60-75%.
In short, it's a collaborative effort between developer and lender to turn unimproved land into future homes, businesses, or other profitable ventures.
What Kinds of Lenders Offer Land Development Financing?
Land development projects can be financed by a variety of lenders, each with its unique strengths and limitations:
Traditional Banks: A solid choice for established developers with a strong track record. They offer competitive rates but often require stricter qualifications and a higher equity contribution.
Non-Bank Lenders: These institutions provide more flexible terms than banks, making them a valuable and viable alternative. More flexible terms and generally result in higher finance costs.
Private Lenders: Trusts, wealthy individuals, or specialised firms offer fast approvals and flexible terms, but often require higher finance costs. Credit appetite in this sector can be highly variable and are often dependant on liquidity.
Mortgage Brokers: While not lenders themselves, brokers provide a critical role as an intermediary between the borrower and the wider lending market. Their ability to tap into various funding sources, and their specialist knowledge allow them to save borrowers both time and effort.
How to Get Financing for Land Development and What to Expect
With a strategic approach and the right planning ahead of time, finding the right financial fit for your project can be simple and stress-free. Here’s how the process could look:
Plan and Analyse: Research your project thoroughly, create a detailed business plan, identify the necessary land use consents, and package your plan in a way that showcases its viability.
Craft a Winning Proposal: Develop a professional document highlighting your project's potential with an executive summary and key personnel resumes, and include a comprehensive feasibility study with contingency plan. Create realistic timelines and budgets with allowances for potential delays or unexpected expenses. Identify all associated risks and provide appropriate mitigation.
Understand Loan Options: Thoroughly explore traditional bank loans, non bank lenders, joint ventures, or specialised mortgages depending on your project's specifics.
Meet Lender Approval Requirements: Demonstrate development experience or partner with someone who does, provide proof of approvals, construction plans, and financial projections, and be prepared to contribute your own funds (20-35% typically) with a contingency buffer.
Navigate Loan Pre-conditions: Development loans are typically paid out in stages based on project milestones, and lenders might require pre-sales, valuations, independent Quantity Surveyors etc. Understand the conditions required to access the capital.
Loan Compliance: Ensure ongoing requirements of the loan are complied with and maintain transparency and good communication between stakeholders.
What are the Benefits of Land Development Financing?
Land development financing unlocks a world of possibilities for developers. It provides the crucial capital needed to transform undeveloped land into something valuable, from acquiring the property to making improvements and constructing buildings. This flexibility allows developers to tackle various project aspects – purchasing land, obtaining permits, and covering construction costs.
What to Look for When Exploring Land Development Financing?
When embarking on a land development project, selecting the right financing partner is crucial. Here's what to consider:
Specialised Funding: Look for a lender with experience in land acquisition and subdivision financing. Their expertise ensures they understand the intricacies of your project and can tailor solutions accordingly.
Flexible Terms: Land development can be subject to unforeseen circumstances. Choose a lender who offers flexible loan terms that can adapt to potential delays without jeopardising the project's success.
Progressive Drawdowns: Access to funding as you progress is critical. Make sure that the milestones required to me met by a lender are clearly defined and achievable. Ensure that when the milestone has been met the funding will be released.
Conclusion: How Fortis Capital Can Empower Your Land Development Project
By prioritising the opportunities and benefits outlined in this guide, you can secure a financing partner who understands your project's unique needs and provides the support necessary to turn your vision into reality.
At Fortis Capital, we work to ensure that financing hurdles never hold you back. We offer specialised expertise in land development financing, with solutions tailored to your project. Contact us today and let's unlock the potential of your land together.