The work that turns raw land into buildable lots: grading, streets, sewer and water lines and utilities, before any building goes up.
Builders call site work horizontal and buildings vertical. Bank rules use a different name for the same thing. The real estate lending rule defines a land development loan as an extension of credit for the purpose of improving unimproved real property prior to the erection of structures, which may include sewers, water pipes, utility cables, streets and other infrastructure needed for future development. The OCC handbook adds grading to that list.
The supervisory loan-to-value limit for land development is 75 percent, between raw land at 65 percent and construction at 80 or 85 percent.
Repayment comes from the lots. The handbook says the source may be lot sales to other builders or a construction loan to the same developer, and that development and construction are usually separate facilities, with the lots repaid from the first draw of the construction loan.
For value, a bank may ask the appraiser for a market value upon completion of the land improvements.
How it shows up in the data here
Bank call reports do not separate land development from other construction and land balances held, so a bank's horizontal lending cannot be isolated. Lenders compared for lot and tract work are under residential development comps, and state lists are at construction lenders. No loan-level records of development loans exist for banks. Credit unions report construction loans made in the period, without this split.
Go further
- Residential development lenders: Lenders compared for lot and tract development.
- LTV and LTC calculator: Loan to value and loan to cost, the equity a lender will ask for, and the federal supervisory limit for the property type.
- Residential development loan package checklist: Lots and houses are repaid one sale at a time. A lender on a subdivision or a group of homes is underwriting how fast those sales will come and what happens to the loan if they slow down.
- Supervisory loan to value limits and HVCRE, explained: Two federal rules shape how much a bank will lend against real estate: a table of loan to value ceilings, and a capital rule that makes some construction loans cost the bank more to hold.
Related terms
- A&D loan: One loan that pays to buy land and to develop it into finished lots.
- Finished lots: Lots with streets and utilities in place, ready for a building to be started.
- Land loan: A loan to buy land that has not been developed, repaid from other income or from a later sale or development loan.
- Entitlements: The government permissions a site needs before it can be built on, such as zoning, plan sign-offs and permits.
- Lot takedown: A builder's purchase of finished lots from a developer in batches on a set schedule, in place of buying them all at once.
- Construction loan: A short-term loan that pays for building or renovating a property, advanced in stages as work is finished and repaid from a sale or a permanent loan.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.