When Land Loans Make Sense for Lenders

SAN DIEGO—Locally based private-money portfolio lender Seattle Funding Group is admittedly light on land loans. The firm's senior underwriter Chuck Salas tells GlobeSt.com exclusively why this is so, and what borrowers should know before approaching a lender for land financing.

GlobeSt.com: You say your firm is light on land loans. Why is this the case?

Salas: Land in general is unimproved, and historically in periods of declining real estate values or slowing markets, those land assets are far more difficult to sell and get back the cash. Recognizing that we are a fund-based lender, we prefer assets that we can sell in the event of a worst-case situation and get back the cash. We don't want to hold real estate any longer than necessary.

GlobeSt.com: When does it make sense for a lender like you to lend on land?

Salas: From our perspective, surely the easy answer is when the market is on the upswing. But we don't know when the market's going to go into a downswing, so we always underwrite and look at things assuming that the market we're in right now is not going to be as strong in the near future. When the market is on an upswing, it goes back to location, whether the development approvals are in place, the sponsorship or strength of the borrower and the numbers. On location, if it's an extremely desirable infill location, then obviously it's going to retain value longer and have a more-sustained demand. If it's ready to build right now, it's an infill lot or a few infill lots, and all of the improvements are in place, then all that really needs to be done is for the product to be designed, whether it's a single-family home, condos or apartments—permits can be pulled quickly. It if has immediate demand in the current cycle, then there are more exit opportunities, and for us—like a lot of short-term lenders—we focus on those exit opportunities. With the sponsorship, we look harder at the quality of the sponsorship when it's a complicated or construction loan. That doesn't mean we don't look at it in a bridge situation.

GlobeSt.com: What should borrowers know before approaching a lender for a land loan?

Salas: The real key is to know that they're going to see a reduced leverage level over other loans on improved properties, a higher loan cost than a similar loan on an improved property, and the lenders are going to want to see very solid exit opportunities typically. None of us wants to own the land, so how are we going to get out once we do this?

GlobeSt.com: What else should our readers know about land loans?

Salas: We've been in the private-money industry for the last 30 years, and this is probably one of the most aggressive times in land loans. The industry itself runs the gamut from the Wild Wild West of lending to what has become the more traditional fund-based lending opportunity to secure land loans of a variety of types and locations and conditions throughout that spectrum. While we are very disciplined and conservative in the land loans we'll consider, there are more-aggressive companies out there that would do loans that we wouldn't. Just because it doesn't fit for one lender doesn't mean it won't fit for another. The more aggressive the loan, the higher the pricing, but there will be a solution out there in most cases.