Why Getting a 100% Leverage Land Loan is Tricky & How StackSource Tackled It
We Did The Impossible - 100% Leverage for a Land Purchase
It’s now June of 2022 and risk is everywhere. It’s hard to watch any financial news outlet without hearing the topic of recession being discussed. As the Federal Reserve continues hiking interest rates to battle inflation, many tech companies are freezing their hiring and even considering layoffs. Many investment decision-makers have adopted a “flight-to-safety” or “wait-and-see” approach.
In light of all this noise, StackSource just closed a deal that provided 100% leverage (100% of the purchase price) for our client to acquire a loan for land in Denver, CO. Land is considered one of the riskiest asset classes, and finding a lender to provide a loan to cover 100% of the purchase price is typically considered impossible.
- Why is land considered risky?
- What are typical financing terms for land acquisitions?
- How did we get 100% leverage (aka 100% Loan-to-Cost)?
There are certain types of commercial real estate deals where getting maximum leverage (close or near close to 100% loan-to-cost) is possible and our previous blog discusses these investment plays. Land is typically NOT one of those types!
Why is land considered risky?
Land is considered risky because it usually produces zero income. Investors buy it and either hope to develop it someday or hope that someone will come along in the future and offer a higher price for it. Hoping that someone will offer a higher price is a big bet, and developing property comes with a whole host of risks:
- Market timing
- Material cost increases
- Labor cost increases
- Changing regulatory environment
- Experience / track record
- Construction management
- Community opposition
What are typical financing terms for land acquisitions?
Historically, financing terms for land acquisition have been between 40% and 60% of the purchase price. To put this into numbers, if you were buying a plot of land for $1 million, lenders would historically lend somewhere in between $400,000 and $600,000 likely with an interest rate above 8%.
Recently, StackSource has seen lenders becoming more comfortable with leverage points between 55% and 75%. This range may seem wide only because there are many factors to consider such as location, business plan, and sponsorship track record.
The overall theme is that lenders are getting more aggressive, but you almost never see a 100% leverage. Lenders always want the sponsor to have some “skin in the game”.
How did we get 100% leverage (LTC)?
One of the value propositions of StackSource is the numerous lending relationships that we have with the capital markets community. We underwrite and pitch deals on behalf of our clients, and leverage our relationships with lenders to find the best deals.
StackSource was able to source a lender for this deal that understood how fast market dynamics were appreciating in this Denver submarket. This creative lender considered the appraised value to be a more appropriate metric over the purchase price. When the appraisal report was completed, we were excited to find that the appraiser valued the land much higher than the purchase price. Thus, the loan-to-value ratio was only 55% of the appraised value, while the loan-to-cost ratio was 100% of the purchase price.
Here is our deal but replaced with hypothetical numbers:
- Purchase Price = $1,000,000
- Appraised Value = $1,800,000
- Loan Amount = $1,000,000
- Loan-to-Cost (aka Loan-to-Purchase Price) = 100%
- Loan-to-Value = 55%
Anything is possible! We are in a market where the unprecedented is now the precedent. StackSource continues to build relationships with these creative capital providers and we thoroughly enjoy teaming with our clients to help accomplish their dreams.