First Land Development Deal - Lender First or Property First?
Developer · TX · Member since 2024 · 42 posts · 21 votes
For those who have gone through their first land development deal, how did you approach financing the entitlement phase?
I’m currently working through the acquisition and entitlement strategy for acreage that I intend to take through the entitlement process and ultimately create luxury and estate-style homesites.
One thing I’m still trying to nail down is the timing of the lender relationship. Would you recommend connecting with a lender before putting the property under contract, so I understand what they may be willing to finance and what they would need from me? Or is it generally better to get the acreage under contract first, get the surveys, engineering, and entitlement information together, and then approach the lender with a more concrete project?
I’d especially love to hear how experienced developers handled this with their first deal and anything you wish you had known beforehand.
@Michael Eskenasy's answer is great. You're going to need to fund a good chunk if not all of entitlement through equity, and get the closing on the land contingent on the entitlements. This is good - you don't want to take on debt for something that may or may not happen. Don't take out a sketch loan to get it done. Whether it's your own money or investors is up to you, but get the lenders involved asap. Investors are going to want to know the debt structure. It's a bit chicken and egg but you need to get them both developed in sync. The more you can get defined at the high risk early stages, the better.
I’d talk to lenders before you put the land under contract — but I would not expect them to finance a hypothetical project yet.
What you want first is the lender’s box.
How much sponsor equity do they expect? Will they fund acquisition plus entitlement, or only reimburse soft costs later? What LTC/LTV do they tolerate? Full recourse? Minimum liquidity/net worth? Do they lend on raw land at all? What milestones have to exist before they advance another dollar?
You want to know those answers before you fall in love with a parcel.
Then get the right property under control with as much diligence runway as you can negotiate and start turning the concept into something financeable: survey, civil, utilities, access, preliminary yield, entitlement path, jurisdiction feedback, real soft-cost budget and a credible exit.
For a first development deal, I’d be much more concerned about controlling downside during entitlement than squeezing the cheapest debt out of the capital stack.
The dangerous version is buying the acreage first and discovering six months later that your lender wants 40% equity, full recourse and approvals you’re still 18 months away from getting.
So my sequence would be:
Lender conversations → define financing box → control property → diligence/entitlement work → lender underwriting → close only when the economics still work.
And before signing anything, I’d establish kill criteria. If density drops below X, infrastructure exceeds Y, entitlement goes beyond Z months, or required equity crosses your threshold, you walk.
On a first land deal, the ability to walk away cheaply may be more valuable than the ability to close quickly.
@Michael Eskenasy's answer is great. You're going to need to fund a good chunk if not all of entitlement through equity, and get the closing on the land contingent on the entitlements. This is good - you don't want to take on debt for something that may or may not happen. Don't take out a sketch loan to get it done. Whether it's your own money or investors is up to you, but get the lenders involved asap. Investors are going to want to know the debt structure. It's a bit chicken and egg but you need to get them both developed in sync. The more you can get defined at the high risk early stages, the better.
Get the property tied up first then bring it to lenders. Here's why. No lender is going to give you real terms on a hypothetical piece of dirt. They want an address and a survey and a purchase price and a clear picture of what you're trying to do with it. Until you have those any conversation is theoretical and their answers will be too.
What you should do before you sign anything is structure your contract with enough runway to actually do the work. That means a long feasibility period and I push for 90 to 120 days minimum on entitlement plays plus extensions built in and ideally make it entitlement contingent so you can walk if the rezone or perc or utility work kills the deal. That contract is the asset you take to lenders.
For entitlement itself banks dont want to touch pre entitlement land loans unless you have a strong relationship and real skin in the game. Your realistic options on a first deal are seller financing and you should just ask because you'd be surprised or a local community bank that knows the submarket or a private lender who understands land or covering the entitlement costs out of pocket and financing the horizontal work later once you have approved plans. Entitlement money is the riskiest capital in the whole stack because you don't have any guarantees and don't own the land yet which is why it's the hardest to source.
On luxury and estate lots specifically watch your septic and well assumptions carefully. Perc tests have killed more lot counts (and bedrooms!) than anything else I've seen. If you're outside a sewer district get soil work done during your feasibility period before you spend a dime on engineering the layout because the perc results will dictate your lot sizes and your entire pro forma.
Talk to two or three local banks now just to build the relationship and understand their appetite. But don't wait for a lender's blessing to go tie up the land.
Here is the golden rule to stay out of trouble in land entitlement though...
I would NEVER EVER buy a piece of land until I have my entitlements done.. we put it under contract contingent on getting the approvals from the city.. you dont want to take on that risk yourself especially if you are just starting out.
experienced developers who understand the bureacracy and path ahead can afford to buy something without those approvals in place but most still don't.