Commercial land loans and Land appear to be making a come-back, but it has a long way to go. After an unprecedented drop from 2007 to 2009, land is starting to be talked about again and with good reason: opportunity.
This sometimes over-looked investment really should have never lost its luster. The “Location, Location, Location” mantra has always held true in any market; it was really how they were capitalized that brought so many projects to their knees. The main culprit? Bank Debt!
Being in the leverage business, this may seem odd to accuse debt of being a bad partner, but in the wrong deal, it is a horrible capital partner. Many banks were making loans on property simply off of value, not even giving any consideration to the exit plan. While some of these exit plans did in fact get caught up in a “timing nightmare,” the majority was not well-vetted, and the banks are paying dearly for that with the FDIC.
Fact is, the well-capitalized deals before the crash are still doing fine today. For the well-located projects, it was simply a matter of waiting out the downturn until the exit plan could be executed. While the investors IRR hurdles may not be met, those with the staying power are less likely to take any principal hit.
Unless your land project has a clear and more immediate exit, you are best served by buying it all cash. You can always add some debt down the road as your business plan comes to fruition and a true exit is apparent. Asking a bank to take entitlement risk with you can be a big mistake, so hold off on that until after you have received your approvals.
Pressure from the regulators has forced banks to take hits now, rather than kicking the can down the road. Herein lies the opportunity, however, as many land deals could actually benefit from a little more time. Here in Texas, even after so many banks have rid themselves of these nasty L-A-N-D loans, there are still plenty of good plays. Where so many cash flowing deals have been snapped up, investors trying to get higher yields may want to look at good old land again.
If you are thinking about an investment in land or need help funding a commercial land loan for a project, please fill out the form below and a senior broker will contact you shortly: