SBET4522 Property and Project Finance

Chapter 10
Financing Land
Development
Project
Prepared by:
DR WEE SIAW CHUI
Department of Real Estate
Faculty of Built Environment and Surveying
Universiti Teknologi Malaysia
Contents
➢Overview of Land Development

➢Preliminary Feasibility Study – Land

Development

➢Financing and Development

Land Development

• Developer must anticipate and understand the

demand for the final product
• Conduct feasibility study to assess the demand
for end uses that would ultimately be
developed and price ranges for each use
• Completes a preliminary land plan, estimates
the land development cost, and analyzes
whether the tract can be purchased and
developed profitably.
• May be done by consulting firms (land
planners, civil engineers, landscape architects)
and contractors (roads and utility construction
companies).
The Land Development Process –
An Overview
Stage I Stage II Stage III Stage IV
Initial Contact by Land Option Period Development Period Sales Period
Broker
Site inspection Soil studies, engineering Purchase land Implement marketing
program
Preliminary market study Feasibility, appraisal, and Close on land Additional coordination
design strategy development loan with builder

Begin construction of
improvements
Preliminary cost estimates Bidding and/or Implement financial Implement design
negotiating with contracts controls controls with builders
subject to closing
Coordinate with Implement facility
Submit plan for public contractors, consultants, management and/or
approvals, submit public sector begin homeowner
package for financing association
Acquisition of Land - Use of the Option
Contract
• The developer usually negotiates an option contract
because it takes time to accomplish various tasks and
activities prior to the decision to actually purchase
the land.
• An estimate of the project's value upon completion of
development must be made to determine whether it
will be profitable or whether the market value will
exceed the cost of the land plus all improvements,
interest carry, and marketing costs.
• Improvement costs must be estimated by obtaining
bids from contractors, consulting engineers, and land
planners.
Preliminary Feasibility Study –
Land Development
I. Physical Characteristics
1. Goal
(Example: To provide a preliminary development plan and financial analysis to determine
whether a large-scale residential lot development can be built in accordance with
regulatory requirements and sold at market prices sufficiently high enough to justify
construction costs and the cost of land acquisition.
2. Site (size)
3. Asking price for land
4. Project description:
a. Maximum lot density per zoning
b. Net developable area
c. Proposed lot mix
d. Square footage by lot type
e. Etc.
II. Financial Feasibility

1. Pricing based on market study – estimate total sales revenue

2. Less: Average development cost
3. Less: Land asking price
4. Potential gross profit
5. Less: Administration, legal, commissions, advertising, etc.
6. Potential net profit
7. Margin on gross revenue & Return on total cost
8. Conclusion
(Example: Project appears to be feasible; however, return projections do not
include financing, discounting for the time schedule for construction, and
the estimated time/sales rate for finished lots to developer)
Summary of Market Data and Development
Strategy
A. Market Condition

Example:
Based on a survey of three land developments under way in the area, absorption of building sites
appears to be excellent. The surveys indicate a strong desire to purchase sites for future
development. Average lot sizes in competing developments are approximately 8,700 sq. ft.

B. Lot Mix and Development Plan

Example:
Plans to utilize the creek area to enhance the development by configuring the circulation pattern to
accommodate larger lot sizes on both sides of the creek. The lots for cluster-type housing units
would be placed adjacent to the highway frontage as a buffer. These would be complemented with
heavy landscaping. Lot sizes would range from 5,000 to 20,000 sq. ft. within the development, with
the average lot size being 8,712 sq. ft.
C. Deed Restrictions

Example:
Private deed restrictions would be used to ensure that detached housing units with a minimum of
2,000 sq. ft. would be constructed on each lot. Restrictions regarding setbacks, external finish
materials (percent of brick and wood, roof composition), landscaping, fencing, and future additions
to structures would continue to apply after completion of the development to ensure neighborhood
quality.

D. Developable area

Example:
50 acres less 5 acres of creek and floodplain, less an additional 20 percent for circulation (alleys,
streets, amenities, etc.), or 36 net acres. Lot yield should be 3.6 units per gross surface acre.
Setbacks, lot lines, street and alley widths, and utility easements easily meet all city regulatory
requirements.
E. Amenities

Example:
Clubhouse, two swimming pools, eight lighted tennis courts. A homeowners association will assume
management upon completion and sell-out of development.

F. Construction of Land Improvements

Example:
Paving streets, curbing, water mains, hydrants, and all connections to be constructed in accordance
with current city and county standards.

G. Development Restrictions

Example:
Zoning allows an average of 1 unit per 7,500 sq. ft. of net developable area as the maximum density
of development
Estimating Development Cost
1. Land Acquisition and Development Costs

• Many direct costs and acquisition and development costs must be

evaluated when acquiring a site for land development.
• Site acquisition is only one part of these costs. A developer must
also evaluate the hard costs, which include site preparation and
utilities installation, and the soft costs, which include site
engineering, public approval fees, construction interest, and loan
fees.
2. Operating Expenses

• Selling Commissions
• Marketing costs
• Property Taxes
• General and administrative costs

3. Loan and Interest Estimates

• Estimate the loan amount and the interest imposed on the loan
4. Sales and Repayment Rates

• Estimates the sale based on information obtained from market

studies of competing projects and its own recent experience with
similar projects.
• This sales estimate is necessary because the lender is to be repaid
from revenue as lot sales occur.
• The monthly revenue rates are important because as a parcel is
sold, the lender will receive a partial repayment of the loan that
corresponds to the revenue produced from each sale.
Common Financing Alternatives for Land
Development
1. The developer may purchase the land for cash. The developer may then
obtain a loan for the cost of improvements and interest carry.

2. The developer may purchase the land by making a down payment only.
The seller finances all or a portion of the land sale by taking back a
purchase-money mortgage from the developer. The developer then
acquires a loan for improvements only.

3. The developer purchases the land by making a down payment and

obtaining one loan based on a percentage of the appraised value of land
plus improvement costs.
General Loan Submission and Closing
Requirements
A. General requirements for loan submission package

1. Project information
a. Project description: all details for land use plan, aerials, soil reports,
amenities, environmental impact statement
b. Preliminary plan for improvements and specifications
c. Project cost breakdown
d. Identification of architect, land planner, and contractors for your
development
2. Financial data
a. Requested loan terms: amount, rate, maturity period, proposed release
schedule
b. Financial statements of borrowers and development background
c. Feasibility study, including market comparables, appraisals, operating
statement, schedule of estimated selling prices

3. Government and regulatory information

a. Statement of zoning status: current zoning status and disclosure of any
zoning changes required before undertaking development

4. Legal documentation
a. Legal documents, including corporate charters, partnership agreements
b. Statement of land cost and proof of ownership (deed) or impending
ownership, as evidenced by an option or purchase agreement
c. Detailed description of any deed restrictions regarding land use
B. General requirements for loan closing

1. Project information: land site plan containing platting, renderings, circulation,

utility lines, landscaping, etc.
2. Market and financial data: statement that borrowers have had no adverse
impact in financial condition since the initial loan submission
3. Government and regulatory information
a. Copies of all permits from all relevant agencies and jurisdictions; includes
building permits, approved zoning variances needed, health, water, sewer,
environmental impact statement, etc.
b. Availability of utilities: letters from appropriate municipal or county
departments indicating extent of utilities available to the site. Any off-site
utility extensions must be detailed and the extension cost disclosed
4. Legal documentation
a. Detail on contracts to be let with general contractor and all subcontractors,
including size of contracts
b. Evidence of contractor performance and payment bond
c. Agreement from general contractor, architect, and land planner to perform
for the lender in the event of developer default
d. Evidence of all casualty, hazard, and other insurance policies naming the
lender as loss payee
e. Evidence of all liability and workman's compensation coverage needed by
the developer
C. Final commitment and agreements

1. Mortgage note
2. Loan commitment and terms: requirements for lender approval of draws,
prepayment options, and any extension agreement
3. Borrower's personal guarantee for repayment of loan
Thank you!