Landing Land Loans
Chicago, Illinois, November 8, 2007 – The highest risks and rewards are clearly centered in the land acquisition and development arena. Land is the first development ingredient impacted by economic cycles as is painfully obvious in today’s residential markets. And even in good times, land is burdened with costs and seldom offers income.
And while land development is in the doldrums, should developers abandon this sector for now? And if not, are the capital markets even interested in funding land development?
Developers with strong local market expertise should not give up on the market as long as costs can be controlled over a prolonged timeline. As such, local presence is crucial for success because:
- Land deals may take three or longer before any results are shown. For example, many experts predict the current residential markets will not fully recover until 2010 or longer.
- National firms don’t have the expertise and community relationship skills of local players.
- Communities often mistrust “outsiders,” translating to longer entitlement processes and higher risk of failure.
- Satellite-office operating costs often don’t justify local market presence for all but the largest projects.
- Goodwill – Communities recommend and approve new opportunities in the area.
- Making a difference – the satisfaction of improving a community and offering better standards for its residents.
Capital market sources are also more comfortable with “on the ground” experienced land players, as their developments are focused within a specific area. Funds are available, but on a selective basis. Today’s funding parameters are as follows:
- Overall yields of 25% or more.
- Fifty percent or less of value.
- Floating-rate, pricing of 175 basis points or more over LIBOR (often much higher pricing).
- Recourse financing typically required, unless more equity is available.
- Financial net worth should, at a minimum, be greater than land value.
According to the Real Estate Capital Institute’s research director, Nat Zvislo, “Land development ventures will be one of the best investment opportunities available, particularly broken deals that can be completed by seasoned players with solid financial backing.”