Chapter 17: Financing Land Development Projects

1. Chapter 17: Financing Land Development Projects

2. Financing Land Development Land development Acquire land Construct utilities and surface improvements Resell developed sites to project developers or home builders What is the demand for the final product? Individual lots and pads Is there sufficient land for the development plan?

3. Financing Land Development Land developer may be, but is not always, the builder. All development plans include subdivision of sites within the tract of land. Highly fragmented, competitive, and local business. The developer is a facilitator of the development process.

4. Exhibit 17-1Land Development Process

5. Land Development Process Land acquisition Developer decision: Should the land be purchased? Using an option contract The right to purchase for a specific price. The price may be tied to certain thresholds being achieved, such as obtaining government approvals for a certain level of density. Not an obligation. Set time period and expiration date. Option price paid to land owner to hold the land until the expiration date.

6. Land Development Process Option ties up the land while research is done Cost of excavating and grading Topography, drainage, soil condition, subsurface Demand for potential mix of lots Supply of similar sites

7. Land Development Process Estimate of value upon completion Cost of any improvements to site Bids necessary Obtain regulatory approval of plan Planning commission Arrange financing

8. Land Development Process Financing & Development Three Common Alternatives Purchase land for cash and secure a loan for improvements Down payment on land, seller financing of the balance, loan for improvements Down payment and one loan for land plus improvements

9. Land Development Process Land Improvement Loans Draw down Open end loan Floating rate First lien on land and improvements Loan is paid down as sites are sold Release Schedule

10. Lender Requirements Loan Submission Package Detailed project description Financial data Market information Regulatory and legal information Loan Closing Final Commitment

11. Lender Requirements General Contracts and Subcontracts Payment Bonds Labor and material bonds Completion bonds Title Insurance Holdback Provision Ensure completion of work by subcontractors Extension Agreement Gap financing

12. Land Development Costs Site Acquisition Hard Costs Site preparation and utility installation Soft Costs Site engineering Public approval fees Loan fees Operating Costs

13. Sales & Repayment Sales estimates drawn from market studies Matching sales & repayment Lien release Release price Release schedule Lenders desire a faster repayment rate so that they are paid off before all of the parcels are sold.

14. Financing Land Development Project Feasibility Does market value after development exceed all costs? Net cash flow schedule Project net present value and IRR Should the developer’s profit be included also? If it is, you may be “double counting” the profit.