CASE STUDY – Land…they are not making more of it

Another big file off our desk this week.  We completed our third transaction for a group that purchases land and then works to increase the value for eventual sale or development.  At a little less than a quarter of an acre the borrower did a great job of negotiating the purchase price and undoubtedly will have a successful development on their hands in the future.  This transaction is interesting for many reasons the least of which is

Land still tough to finance

Land banking, land development, land servicing all continue to be tough deals to get financing for. Banks and lenders are happy to lend you the money if you have enough pre-sales (of completed lots) to cover up to 100% of their loan. Private lenders have too much land sitting in their portfolio and don’t have an appetite for anymore.

Frustrating for borrowers

Land transactions – specifically refinances – have been tough to find financing for since at least mid 2008 and continue to be a struggle. In the past 30 days we have seen half a dozen land transactions just outside of major city centres in Alberta. In three of the cases, the borrowers have managed to hold the land for future residential development through the recent economic downturn and are now looking to capitalize on pre-sales and renewed interest from purchasers in their projects.

Land financing back in play

It would appear that with the limited amount of lending opportunities available in the marketplace that private lenders have been prepared to reconsider their policies for providing mortgages on parcels of land and future development sites. For the past few years it was difficult or nearly impossible to obtain financing for land as most lenders chose to finance income producing real estate that generated the required cash flow to service a mortgage payment. Recently we have seen private lenders being selective about the land deals they finance by limiting the amount they lend (typically less than 50% of what a property is worth) and ensuring the location of the property is strong. With market values having stabilized a private lender can put out their capital with limited exposure and feel confident that they will be able to earn their required return even if they need to foreclose and take a property back. At conservative loan to value levels the chance of them losing their principal and interest is relatively low. While there is still a lot of land in the market that is over financed opportunities still exist for developers (and investment groups) that have not over leveraged their land to now consider developing out and bringing new supply to market.

If you have a land deal you would like to discuss, please email dylan@bridgecap.ca or visit www.bridgecap.ca/dylan