What is a Property Development Loan?

A property development loan allows businesses looking to develop land to gain financing for the projects. These loans are most often used by real estate businesses, but they may be obtained by any company or individual with a plan to develop a portion of land for a residential, commercial or industrial use. They are not home construction loans, however, which are given to individuals planning on building a personal residence. Property development loans are traditionally taken along with some investment funds in order to create a profitable business.

Loan Given Based on Business Plan

The main difference between a property development loan for a business and a personal land construction loan is how the loan is funded. Private lenders giving loans to individual homeowners are concerned with the person's previous financial records. How you have performed on past loans, your credit, is used along with your income in order to determine an appropriate loan size and terms.

With a property development loan to your business, you will be evaluated most in terms of the potential profit your business may recognize through the project. Because future profits are an important factor, you will need to have a quality business plan including financial projections in order to source and fund the loan. Existing businesses will provide financial statements. New ventures will likely need some start up funding in order to give them capital prior to seeking a loan.

Loan is Temporary

A property development loan is temporary, and it is in place for the sole purpose of developing the property to specifications. The loan may include changes that must be made to the land, including rescaling, landscaping, plumbing and drainage issues. The loan may also include the costs of materials and staff required in order for the plans to come to fruition.

These costs tend to be extremely high, and land development loans are very large loans. If you are developing a property that will contribute to a local economy or provide low-income living, you should consider federal loan options for land development. They will come at lower interest rates, saving you thousands of dollars on your loan.

Permanent Financing Required

Once the land is through the development phase, the land development loan will expire. These loans are typically very short, maturing within a few years. In some cases, for large loans and large developments, the loan may mature in seven to ten years. However, you should expect to be making payments while the construction is taking place on the land.

Once the development is finished, you will then need to arrange permanent financing in order to continually expand, improve or otherwise maintain the property. Most large developments will need a line of credit that allows them to pay for immediate and necessary expenses in the beginning, such as repairs to electrical or ventilation systems while the property is in its infancy. The property development loan will not cover these costs, so a permanent loan will be required to keep the business endeavor healthy and able to afford maintenance needs.