How to Finance a Building Lot

Vacant construction lot

Obtaining lot financing is a critical first step in the building construction process. Very few construction projects can proceed until building lot financing has been obtained. Obtaining building lot financing can be tricky, because banks are being asked to lend against a project before the income-generating potential of the project can be verified. But taking the right information to the bank will help secure that financing.

Things You'll Need

• Land assessment
• Construction permits
• Preconstruction leases
• Financial analysis

Instructions

1. Hire a land assessor to estimate the fair market value of the lot you intend to purchase. The value of the land will be an important piece of information for the banks to consider when determining whether to provide building lot financing.

2. Obtain the necessary construction permits from the city or county in which your project is located. Your lawyer can assist you in filling out the necessary forms. The required building permits will typically cost $50 to $150.

3. Obtain several preconstruction leases from interested tenants. You will need to provide graphical illustrations of the building as well as detailed information about the building to prospective tenants. Banks will not provide building lot financing without proof that tenants are interested in your project.

4. Conduct a financial analysis of your project. The financial analysis will include an estimate of the revenue your project will generate (which will be based on the lease rates agreed to by your preconstruction tenants) as well as the estimated costs of operating the building (maintenance costs and utilities).

5. Present the land assessment, construction permits, preconstruction leases and your financial analysis to a number of different banks. Working with numerous banks will ensure that you receive the best possible terms for your building lot loan.

Tips & Warnings

• If you are unsuccessful in obtaining building lot financing after following the above steps, you may want to consider finding an alternative source of capital, such as an equity investor, to provide some of the financing for the building lot. Banks will be more willing to lend if they know that other investors are interested in your project.

• Make sure that your construction permits are correct and complete before attempting to obtain building lot financing. Your lawyer can help. Banks will not provide building lot financing if you have not obtained the necessary permits to proceed with construction.

References

• Construction financing sources

Resources

• Loan Universe: Commercial real estate development