Sara Havlena
Land deals have always been tough to finance, but borrowers will see even stricter terms as we enter the new year. Rising rates and the decline in overall liquidity are pushing lenders that had traditionally been in the space to the sidelines. Bank lenders have completely pulled out of the sector. Debt fund lenders — who are usually the best bet — now have more cash-flowing deals coming to the table and will choose less-risky assets.
“Many conventional lenders have stopped lending to new customers,” said David Repka, principal at Bison Financial Group. “They are reserving balance-sheet loans for only their best-in-breed, existing clients. Look for this trend to continue and trickle down from the large global banks to small community banks. Look to debt funds and non-bank lenders to do the majority of new land loan originations for 2022, 2023 and beyond.”
The only way to borrow money from a bank is to prove you have the funds to be able to buy all cash with no leverage required. A conventional lender will only consider low-leverage loans to a best-in-class borrower with no skeletons in the closet, no history of litigation/bad-boy acts, and show the ability to do additional deals as opposed to one and done, Repka said.
“The sponsor will need to have a whopping net worth and more importantly massive liquidity and very strong, very stable, easily documented global cash flow,” he added.
Underwriting and lender requirements will be become even stricter. Lenders will be hyper-focused on their basis and if they are willing to own the property they are being asked to lend on for several years if the borrower’s business plan fails and they default on the loan, said Repka.
Covered land plays in which income can be derived from a current use will get the most attention from conventional lenders. Properties without an in-place income stream to service the debt until entitlements will find it very difficult to obtain financing from conventional lenders and will need to borrow from non-bank lenders.
“Lenders of all varieties will take a deep dive on a borrower’s Schedule of Real Estate Owned and global cash flow before sending a term sheet,” Repka said.
Despite these hurdles, land will still see some available capital, especially sites with an immediate path to development. Parcels that are entitlement for multifamily and single-family rental (SFR) development will see the most lender interest. Land in the “smile” markets with population growth will be considered. Unentitled land will need to be in an area where entitlements are relatively easy to obtain.
Lenders in this space require three things to mitigate their risk: proof of site control of the property to be developed, a fully executed lease with no outs from a tenant they like and a shovel-ready site with all municipal approvals, land use, zoning, entitlements and permitting with no open issues of any kind, Repka said.
