What is a Land Development Loan ?
A land-development loan is a loan made to a real estate developer for the purposes of acquiring, subdividing, and making improvements to raw, undeveloped land to make it suitable for building housing, industrial facilities, and the like. The finished lots, complete with utilities, access roads or streets, and other on- and off-site improvements, are then sold to builders who, with the aid of construction loans, construct the buildings on the lot. The buildings are then eventually sold to the users, who finance their purchase via permanent loans.
As improvements are completed and in place, disbursements are made. However, although the amount and timing of construction loan repayment are assured by the terms of the takeout commitment, land-development loan repayment occurs as lots are sold. As a result, land-development loans tend to be the riskiest of all real estate loans because of the uncertainties associated with the development and sale of the finished lots.
