Lending on Land: Expect the unexpected
From a lending standpoint, banks and commercial real estate have a complicated relationship. Economic cycles are part of that, but so are property types and conditions. Why, for example, are banks hesitant to provide loans for undeveloped land?In reality, land is anything but a simple proposition—it can tangle up transactions because of everything from zoning and approvals, to viability, to development-related costs that can materialize out of thin air—everything from real estate taxes to environmental remediation.“The primary issue for banks is cash flow, or lack of it,” said Kevin Wolfer, president and CEO of Kennedy Funding Financial (KFF).
“Land may be valuable ‘someday’ but until it’s improved, a bank may not readily see the value. And unexpected costs are an important factor as to why a loan to improve a great location may not be forthcoming.” To fill that void, savvy real estate investors increasingly turn to lenders like KFF. “What many don’t understand about banks is they’re not in the business of seeing what you see in a property,” Wolfer said. “Their business model may not work with yours from a profit-and-loss and cash flow standpoint, but there are other options to get a project to fruition. That’s where bridge loans can prove very useful.”Indeed, while banks may avoid raw land deals, they aren’t necessarily completely off the table. But many consider land deals too risky because of that lack of immediate cash flow and the risk of default deemed to be greater.
The key to closing raw land deals in this environment is having the right partners, says Wolfer. Hiring an attorney with experience in closing such deals is critical, and the right lending partner is also key. “There’s no substitute for experience in making raw land loans happen, period,” he said.
An experienced partner like KFF can make the process not only possible, but fast. “With all documentation including titles and deeds clearly provided and required environmental surveys and assessments up-to-date, deals can be closed in under two weeks—but only if the lender is prepared,” he said.
Wolfer also cautions borrowers to be careful when deciding to invest in land. Payment and debt levels must be analyzed to make sure the property can generate income and stable cash flow. While bankers may still say “no deal to land loans,” hard work and experience means they can still happen.Indeed, according to Wolfer, land is only one of the reasons people have turned to KFF, but it’s becoming a bigger part of the business. That commitment has been demonstrated by several recent transactions, including a $1.6 million loan for a 16-acre development site, cleared for 67 residential and commercial units totaling 162,000 s/f in Colchester, CT.
In North Kingston, RI, Kennedy provided $1.8 million for 5.3 acres zoned for a 200,000 s/f mixed-use, transit-oriented development. In Sidney, MT, $1.41 million was provided for 22.6 acres, comprising 18 lots zoned residential and commercial. And Kennedy provided $1.75 million for a 209-acre site zoned for high-density mixed-use in Long Beach, MS.“From our perspective, each site, each borrower and the long-term plans all met our requirements,” said Wolfer. “We remain poised to fund the right project, in the right location, all over the country, and we know we are providing the impetus for projects that might not otherwise meet the banks’ requirements.”