“Buy Land, They’re Not Making It Anymore”
Why Financing Land and Land Development Requires a Different Lending Strategy
There is a famous line widely attributed to Mark Twain:
“Buy land, they’re not making it anymore.”
Whether Twain actually said it or not, the observation captures something fundamental about real estate: land is finite.
But owning land and successfully developing land are two very different things.
A parcel may look extraordinarily valuable on paper. It may be located in the path of growth, surrounded by new housing or commercial development, or have the potential for residential lots, apartments, build-to-rent housing, retail, industrial or mixed-use development.
The challenge is turning that potential into reality.
And that is exactly why land and land-development financing are different from financing an existing home, apartment building or commercial property.
Land Doesn’t Necessarily Produce Income
When a lender finances an occupied apartment building, retail center, warehouse or office property, there is generally an existing asset producing—or capable of producing—income.
Raw land may produce nothing.
The lender therefore isn’t simply underwriting what exists today. It is underwriting what the borrower intends to create tomorrow.
That means asking a very different set of questions:
- What can legally be built?
- Have the necessary entitlements been obtained?
- What infrastructure is required?
- How much will development actually cost?
- How long will it take?
- Is there demonstrated demand for the finished product?
- What happens if costs increase or the project is delayed?
- And, perhaps most importantly, does the developer have the experience and financial capacity to finish what they start?
The farther a property is from being construction-ready, the more uncertainty a lender generally has to evaluate.
Raw Land, Entitled Land and Finished Lots Are Not the Same Thing
One of the first things I want to understand when discussing a land financing opportunity is where the property is in the development process.
Raw land with no entitlements, utilities or infrastructure represents a very different lending risk from land that has been entitled for a specific development.
And entitled land is different again from finished lots with streets, utilities and other improvements already completed.
Think of development as a progression:
Raw Land → Entitlements → Site Development → Finished Lots/Pads → Vertical Construction → Completed Project
At each stage, value may be created—but capital is also required, and different lenders may become interested at different points in the process.
A lender that has no appetite for speculative raw land might be very interested once a project is fully entitled. Another lender may specialize in horizontal development. A construction lender may enter once finished lots or pads are ready for vertical construction.
The right financing source can therefore change as the project progresses.
What Lenders Look for in a Land Development Loan
1. The Development Plan
A lender wants to understand exactly what the borrower intends to accomplish.
That may require:
- Site plans and engineering reports
- Zoning and entitlement information
- Grading and infrastructure plans
- Utility requirements
- Development budgets
- Construction estimates
- Soft costs, including engineering, planning, permits, fees and inspections
- Project timelines
- Interest and financing costs
- Contingency reserves
- Market and feasibility studies
The lender isn’t merely financing dirt. It is financing a business plan attached to real estate.
And the numbers have to make sense.
2. The Exit Strategy
Every development loan needs an exit.
Will the developed lots be sold to homebuilders?
Will the borrower move into a vertical construction loan?
Will completed buildings be sold?
Will the finished project be retained and refinanced with permanent financing?
A development loan that makes sense for 24 or 36 months may not be the appropriate financing once an apartment building, industrial property, retail center or build-to-rent community has been completed.
The lender wants to know how its loan gets repaid.
3. The Borrower’s Experience
Development is not simply construction.
A developer may have to coordinate engineers, architects, contractors, utility companies, municipalities, environmental consultants and numerous other professionals—while simultaneously managing budgets, financing and deadlines.
That is why previous experience can matter substantially.
A lender may look at:
- Similar projects previously completed
- Size and complexity of those projects
- Development team experience
- History with contractors and consultants
- Previous borrowing and repayment history
A first-time developer isn’t necessarily unfinanceable. But the lender may require a stronger development team, additional equity, more liquidity, a guarantor or a different financing structure to compensate for the lack of experience.
4. Liquidity, Net Worth and Global Cash Flow
Development projects have an inconvenient habit of encountering the unexpected.
A permit takes longer.
Utility work costs more.
Site conditions change.
Construction prices increase.
Sales take longer than projected.
That is why lenders care about more than whether the borrower has enough money for the initial equity contribution.
They want to know:
What happens when something goes wrong?
Liquidity, net worth and global cash flow can be extremely important because they demonstrate the borrower’s ability to carry the project through a difficult period rather than relying entirely upon everything going according to the original pro forma.
I saw an excellent example of this on a land-development transaction a colleague of mine closed in the Dallas-Fort Worth market.
The project involved developing lots for future build-to-rent (BTR) construction together with street-front retail pads.
Ordinarily, an interest reserve might have been an important component of the financing. In this particular transaction, however, the bank was comfortable enough with the borrower’s financial strength and global cash flow that it waived the interest reserve requirement.
That is an important lesson:
The property matters. The project matters. But the financial strength of the borrower can matter just as much.
5. How Much Equity Is Required?
This is often one of the first questions a developer asks—and one of the hardest to answer without reviewing the complete transaction.
Land-development lenders rarely finance 100% of a project’s cost.
Depending upon the property, development stage, borrower, lender and risk profile, equity requirements can be substantial. Some lending sources cite ranges around 20%–30% of total project cost, while raw-land financing can require considerably more equity.
But percentages alone don’t tell the whole story.
What If You Already Own the Land?
This can become particularly interesting.
Suppose a developer purchased land years ago for $1 million.
Over time, the surrounding area developed, zoning changed, entitlements were obtained, and the property is now appraised at $2.5 million.
A lender may not necessarily look only at the original $1 million purchase price when determining the borrower’s equity.
Depending upon the lender, loan structure and seasoning of the ownership, some or all of the appreciated land value may potentially count toward the required equity contribution.
That can dramatically change the economics of a development loan.
It is also one of the reasons I prefer to evaluate land-development financing based upon the complete transaction rather than simply quoting a maximum loan-to-value ratio.
6. Entitlements Can Change Everything
Two neighboring parcels of dirt can have dramatically different values.
Why?
One may be raw land with an uncertain development future.
The other may already have approvals allowing 100 residential units.
Entitlements can reduce one of the largest risks facing both developer and lender: uncertainty over what can actually be built.
Lenders may therefore examine:
- Current zoning
- General or specific plan designation
- Approved density
- Conditional-use requirements
- Tentative or final maps
- Environmental approvals
- Building or development permits
- Utility availability
- Access and easements
- Development agreements
The closer a project gets to being “shovel ready,” the easier it may become to identify financing sources interested in the opportunity.
7. Environmental and Site Risk
What is underneath the land can be just as important as what will eventually sit on top of it.
Depending upon the property, lenders may require environmental investigations such as a Phase I Environmental Site Assessment and, where warranted, additional testing.
Other considerations may include soils, drainage, flood zones, wetlands, seismic conditions, access, easements and utility availability.
An inexpensive piece of land can become very expensive if the cost of making it developable was underestimated.
8. The Pro Forma Has to Survive Reality
A development pro forma can look wonderful when every assumption goes right.
Lenders are more interested in what happens when they don’t.
What if:
- Construction costs rise 10%?
- Development takes six months longer?
- Finished lots sell more slowly?
- Rents come in below projections?
- Interest expense is higher than expected?
- The permanent financing market changes?
A credible development budget should therefore include realistic contingencies and conservative assumptions.
The question isn’t simply whether the project works. It is whether the project still works when something doesn’t.
Not Every Land Loan Belongs at a Bank
Banks and credit unions can be excellent sources for certain land-development transactions, particularly when the borrower has substantial experience, liquidity, strong guarantor support and an established banking relationship.
But a bank is not the only option.
Depending upon the project, financing may potentially come from:
- Banks and credit unions
- Debt funds
- Private lenders
- Bridge lenders
- Construction lenders
- Specialized land and development lenders
- Joint-venture or preferred-equity capital
- Seller financing
- A combination of debt and equity sources
A project declined by one lender may not necessarily be a bad project.
It may simply be the wrong project for that lender.
Financing the Vision
“Buy land, they’re not making it anymore” makes a memorable observation about scarcity.
But from a lending perspective, scarcity alone doesn’t make land valuable—and it certainly doesn’t make a development financeable.
Land becomes more valuable when someone can establish what can be built, demonstrate demand for it, determine what it will cost, assemble the right team, provide sufficient capital and execute the plan.
That is ultimately what a land-development lender is underwriting.
Not simply the land.
The vision, the numbers, the borrower—and the ability to turn all three into a completed project.
For developers and investors, that also means the financing conversation should ideally begin well before construction starts. Understanding which lenders are appropriate at each stage—from land acquisition and entitlement through horizontal development, vertical construction and permanent financing—can help avoid trying to fit a complex development into a loan program that was never designed for it.
Sometimes the challenge isn’t finding a lender willing to finance land.
It’s finding the right capital for the particular stage of the land’s transformation.
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This content is provided for informational purposes only and is not a loan commitment or guarantee of financing. Loan programs, rates, terms, and conditions are subject to change and borrower qualification. Individual results may vary.
