commercial mortgages

CASE STUDY – Land…they are not making more of it

Another big file off our desk this week.  We completed our third transaction for a group that purchases land and then works to increase the value for eventual sale or development.  At a little less than a quarter of an acre the borrower did a great job of negotiating the purchase price and undoubtedly will have a successful development on their hands in the future.  This transaction is interesting for many reasons the least of which is that land seems to be attractive to investors and lenders – albeit on a selective basis.  Land close to a major city center with sufficient cash (or equity) will attract certain investors and lenders.  Land that is not going to be developed within 12-18 months is still a tough sell for debt financing but most land transactions that we are seeing right now not only have sufficient levels of equity but also (and more importantly) have solid exit strategies through either a sale or interest in the completed project (think finished condominium units or serviced single family lots).  The market in general appears to be strong as it relates to developers finding opportunities that investors and lenders are prepared to fund.  Investors and lenders still need a home for their capital in order to earn a return and land transactions can be an option for them to consider.

It was less than 4 years ago that land fell out of favor when the financial crises hit.  Because land by its very nature is not liquid or easily sold, many investors and lenders ended up with large land positions that they did not know how to work out of.  As a result, much capital was lost but those that participated in the right deal and were able to weather the financial storm now have not only made their money back but are positioned to earn a generous return as land is now being turned over.

I am sure it is only a matter of time until land transactions are the again a “get rich quick scheme” as people forget history and seek to make major profit at the expense of understanding some basic fundamentals.  We are already seeing land positions inside the major centers being moved up through competitive offers and purchases which can only mean one thing – maybe not today –  whatever goes up must come down.  My personality is one that looks for the downside and while select land transactions like the one we have completed appears to have all the right pieces there are many land transactions that seem to be expensive and could end up coming up short should the market soften or stay the same.

The mortgage that we have just closed was funded by some private investors that not only knew the land (and the land owners) and own land in the same area but are capable of holding the land and even developing it should the borrower default.  This is an example of participating in the right deal.  These individuals have decades of real estate experience and should the market soften or not perform as expected, they have the knowledge and capital to do what is necessary to make the most of a non-performing investment.  Not everyone has this luxury and the average person should be cautiously optimistic when consider participating in a transaction where land is involved.

So here is to all the developers out there that have survived and are now coming back into the market with investors and lenders and creating jobs, opportunities and hopefully profit.

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