Land acquisition falls into two categories – that held for the long term for future development and that purchased for immediate development.
Standard financing offers a fixed interest rate and is typically closed to prepayment for the term’s duration. Because land assets do not produce cash flow, standard financing is only considered when the borrower’s plans to hold the land for the long term. Borrowers must prove an ability to cover the mortgage payments from other sources (cash flowing properties or cash reserves).
Bridge financing addresses a borrower’s short-term needs, usually three months to three years. For land assets, short-term financing suits borrowers that intend on developing the land soon after acquisition. The flexibility gives the borrower time to finalize zoning applications, servicing requirements and other considerations prior to beginning construction. Bridge financing typically includes floating interest rates, is interest only and requires the borrower to provide access to alternative cash flows to service the mortgage.
A construction loan helps borrowers manage periodic payments for contract work during the building of a real estate asset. Construction financing is available for condominiums, retail, office, industrial, retirement and purpose-built apartments. An exit strategy for the construction loan is one of the key considerations for funding (i.e. standard financing or individual sale of units).